[Mole351]

I’ve had a few of these…seems some questions put selling/admin in period costs and other (like this) put it to product cost included in the CM:

Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The fol­lowing information pertains to product Maggie for the 10-week period:

Sales price $11 per unit

Materials $3 per unit

Manufacturing conversion costs—Fixed $210,000

Variable $2 per unit

Selling and administrative costs—Fixed $45,000

Variable $1 per unit

Using variable costing, what is Augusta’s budgeted income for the period?

A.

$95,000

B.

$140,000

C.

$305,000

D.

$350,000

FAR - 87 (5/15)
AUD - 93 (8/15)
REG - 86 (2/16)
BEC - 87 (5/16)

[Mole351]

Answer is A (see below for explanation). Answer is easy because it's looking for NI instead of profit, but if they were looking for profit, why would i include selling/admin costs in the contribution margin? I've seen other questions that do not include it. Maybe because they are not variable selling/admin? Is the only thing I can think of…

Variable costing is a method of costing in which fixed costs are charged to expense as period costs when incurred.

Variable cost per unit is $3 for material, $2 for other manufacturing costs, and $1 for selling and administrative, for a total of $6. Since the sales price is $11, the unit contribution margin ($11 − $6) is $5 per unit.

Total contribution margin for the period will be $5 × 70,000 units, or $350,000.

Manufacturing fixed costs are $210,000, while selling and administrative fixed costs are $45,000, for a total of $255,000 for fixed costs.

Subtracting fixed costs of $255,000 from the contribution margin of $350,000 leaves a budget net income of $95,000 for the period.

FAR - 87 (5/15)
AUD - 93 (8/15)
REG - 86 (2/16)
BEC - 87 (5/16)

[Anonymous]

It's because it's variable, yes. Variable costing is trying to see all the costs that vary based on quantity produced. So, even though selling and admin isn't a direct cost, in this example a portion of it is a variable cost.

[monikernc]

Variable costing is a costing method used in comparison to Absorption costing. Contribution margin is not variable costing. CM Is equal to Sales – Variable Costs and is calculated instead of Gross Profit. CM only uses variable costs including variable S&A. Two different things that must be differentiated for the exam.

the formula to remember for absorp profit v. variable profit is: when sales = prod, absorp profit = variable profit. what that means is there no ending inventory to accumulate the difference attributable to fixed mfg ovh costs. this problem tells you that sales will equal production, therefore, all costs will be included in the calculation of profit, which is net income. all of the S&A costs are included because all units were sold.

AUD - 93
BEC - 82
FAR - 76
REG - 88

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[Author]

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