# Essay on Manaerial Accounting Chapter 7 Solutions

1010 Words Oct 3rd, 2008 5 Pages
Chapter 7 Homework Solutions

Q7-1
Absorption and variable costing differ in how they handle fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is expensed on the current period’s income statement.
Q7-2
Selling and administrative expenses are treated as period costs under both variable costing and absorption costing.
Q7-3
Under absorption costing, fixed manufacturing overhead costs are included in product costs, along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold by the end of the
This occurs because \$30,000 of fixed manufacturing overhead has been deferred in inventory and does not appear on the income statement prepared using absorption costing.

E7-7
1. a. The unit product cost under absorption costing would be:

Direct materials \$18
Direct labor 7
Total variable manufacturing costs 27
Fixed manufacturing overhead (\$160,000 ÷ 20,000 units) 8
Unit product cost \$35 b. The absorption costing income statement:

Sales (16,000 units × \$50 per unit) \$800,000
Cost of goods sold:
Beginning inventory \$ 0
(20,000 units × \$35 per unit) 700,000
Goods available for sale 700,000
Less ending inventory
(4,000 units × \$35 per unit) 140,000 560,000
Gross margin 240,000
Selling and administrative expenses 190,000 *
Net operating income \$ 50,000

*(16,000 units × \$5 per unit) + \$110,000 = \$190,000.
2. a. The unit product cost under variable costing would