[Aishan]

I am little confused in these two problems:;

1. Problem

Vane Co produced and sold 10,000 units of a product and expenses are following

DM and DL 400,000

VMOH 90,000

FMOH 20,000

Variable Selling cost 10,000

The product’s unit cost under Variable Costing was

a. $49

b. $50

c. $51

d. $52

Ans choice is $49 which doesn’t include Variable Selling cost

2. Problem

In an income statement prepared as an internal report using variable costing method, Variable selling and administrative exp are

a. not used

b. treated the same as fixed S& A exp

c. used in the computation of operating income but not in the computation of CM

d. used in the computation of the contribution margin

Ans choice is D.

Under variable costing we consider product cost as DM DL VOH and VSA,my question is why didn’t we include variable selling cost in the computation of product unit cost in 1st problem. While 2nd problem says that we include VSA in the computation of CM.

Can you guys make it clear when we include VSA in product cost and when not.

[Anonymous]

Under Direct/Variable Costing, Cost of Goods Sold is DM, DL, and Variable Overhead.

Variable Period Cost is then deducted separately to come up with Contribution Margin. Then you deduct Fixed Period Costs separately to arrive at Net Income.

In Problem #1, they're asking you the cost per unit. Again, Cost is DM, DL, and Variable OH. That would be 400,000 (DM & DL) + 90,000 (VMOH) = $490,000. There are 10,000 units. $490,000/10,000 = $49 per unit.

In Problem #2, Variable Selling and Admin Expenses are Variable Period Costs, NOT product costs. Like I said earlier, Variable Period Costs are deducted separately to arrive at Contribution Margin.

[Aishan]

Thanks CPAMan,

Thanks for the explanation, I have tried other problems and it worked.

All the best for Oct 23rd.

[Anonymous]

Cool.

Just to clarify, under Direct/Variable Costing, the calculation goes like this….

Sales

– Variable Cost of Goods Sold (DM, DL, Var OH) <

---

Problem #1

---

Manufacturing CM

– Variable Pd Cost

---

Contribution Margin <

---

Problem #2

-Fixed Pd Cost

---

Net Income

[praying_for_75]

My apologies if this sounds too silly or basic…but I was just wondering that while calculating the net income under variable or absorption costing, do we use the variable or fixed manufacturing overhead that's INCURRED or APPLIED?

I would appreciate a reply from anyone who is absolutely sure of their answer.Thank you.

[Author]

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