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Polk Company: Variable or Absorption Cost

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I need assistance writing a paper of no more than 500 words after completing Exercise 19-17 in which you respond to the following questions:

- In this case, would it be better to use the variable or absorption costing method, and why?
- What are the benefits of the two methods?
- Which method would lead to the best decision when a competitor is submitting a lower bid for your product?
- Compute product cost and prepare an income statement under variable and absorption costing.

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https://brainmass.com/business/cost-volume-profit-analysis/polk-company-variable-absorption-cost-588105

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Solution Summary

Compute for the product cost under variable and absorption costing methods. Prepare income statement schedule under variable and absorption costing methods.

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Accouting Multiple Choice Questions

1.) The accounting records disclosed the following cost information for 2007:
Direct materials $30,000
Direct labor $40,000
Fixed Manufacturing Overhead $50,000
Variable Manufacturing Overhead $10,000
Assume the company produced 10,000 units of inventory, sold 6,000 of these units in 2007 for $96,000, and that there was no beginning inventory, Under variable costing, the contribution margin for the year would be?
A.) $50,000
B.) $48,000
C.) $20,000
D.) None of the above

2.) The accounting records for Polk Manufacturing Company disclosed the following cost info for 2007:
Direct materials $30,000
Direct labor $40,000
Fixed Manufacturing Overhead $50,000
Variable Manufacturing Overhead $10,000
Assume the Company produced 10,00 units of inventory, sold 6,000 of these units in 2007 for $98,000, and that there was no beginning inventory. What amount of ending inventory will be reported on the balance sheet under absorption costing?
A.) $32,000
B.) $130,000
C.) $48,000
D.) $52,000

3.) Which of the following is a valid reason for using variable costing?
A.) Fixed production cost should be ignored when costing units of inventory since it is not essential to the production process
B.) Absorption costing may motivate managers to overproduce in order to increase profits
C.) Absorption costing recognizes fixed costs as expense regardless of volume of production
D.) Under variable costing managers can increase profitability by increasing the volume of production

4.) All of the following reasons to assign estimated overhead to inventory except:
A.) Managers need cost info as soon after production as possible
B.) Managers need to know if production costs are higher than expected as soon as possible
C.) Managers need to use estimated overhead to control earnings
D.) All of the above are reasons to assign estimated overhead

5.) Bush Company produced 8,000 units of inventory and sold 6,000 of them. The company incurred the following production costs:
Variable Manufacturing cost $6.00 per Unit
Fixed manufacturing overhead cost $30,000
Assuming the company sells its product at a price of $12 per unit, what is the amount of net income under absorption costing?
A.) $58,500
B.) $36,000
C.) $13,500
D.) $6,000

6.) The Grant Company estimates for the 2007 accounting period that its overhead costs will amount to $425,000 and that it will work 85,000 direct labor hours. If actual overhead costs for the year amounted to $465,000 and actual labor hours amounted to 90,000, then overhead would be:
A.) Over applied by $40,000
B.) Under Applied by $15,000
C.) Over Applied by $15,000
D.) Under Applied by $40,000

7.) Harrison Company started the accounting period with the following beginning balance in 2003:
Raw Material Inventory $42,000
Work in Process Inventory $90,000
Finished Goods Inventory $20,000
During the accounting period, the company purchased $60,000 of raw materials and ended the period with $16,000 in raw material inventory. Direct labor costs for the period were $120,000 and $36,000 of manufacturing overhead costs was allocated to work in process. There was no over or underapplied overhead. Ending work in process was $82,000 and ending finished goods inventory was $35,000. Goods were sold during the period for revenue of $350,000. How much gross margin would be reported in 2003?
A.) $100,000
B.) $115,000
C.) $135,000
D.) $161,000

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