Chapter 5
Variable Costing and Segment Reporting:
Tools for Management
Solutions to Questions
overhead is treated as a product cost and hence
is an asset until products are sold. Under
variable costing, fixed manufacturing overhead
5-2 Selling and administrative expenses are
treated as period costs under both variable
product costs, along with direct materials, direct
labor, and variable manufacturing overhead. If
sold, the fixed manufacturing overhead cost that
has been carried over with the units is included
costs with revenues than variable costing. They
argue that all manufacturing costs must be
assigned to products to properly match the costs
variable and fixed manufacturing costs for the
purposes of matching costs and revenues.
made or not, the total fixed manufacturing costs
will be exactly the same. Therefore, how can
one say that these costs are part of the costs of
that period as period costs according to the
matching principle.
production equals sales, inventories do not
increase or decrease and therefore under
5-7 If production exceeds sales, absorption
costing will usually show higher net operating
manufacturing overhead cost of the current
period is deferred in inventory to the next
5-8 If fixed manufacturing overhead cost is
released from inventory, then inventory levels
5-9 Under absorption costing net operating
income can be increased by simply increasing
the level of production without any increase in
manufacturing overhead costs into the inventory
account, reducing the current period’s reported
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Solutions Manual, Chapter 5 193
income between absorption and variable costing
arise because of changing levels of inventory. In
lean production, goods are produced strictly to
customers’ orders. With production geared to
sales, inventories are largely (or entirely)
5-11 A segment is any part or activity of an
organization about which a manager seeks cost,
revenue, or profit data. Examples of segments
include departments, operations, sales
be avoided if the segment were eliminated).
Common costs are not allocated to segments
under the contribution approach.
5-13 A traceable cost of a segment is a cost
or in part to any one of the segments. If the
departments of a company are treated as
segments, then examples of the traceable costs
headquarters building, corporate image
advertising, and periodic depreciation of
machines shared by several departments.
5-14 The contribution margin is the difference
particularly those in which fixed costs don’t
change. The segment margin is useful in
assessing the overall profitability of a segment.
5-15 If common costs were allocated to
were eliminated because of the existence of
arbitrarily allocated common costs, the overall
profit of the company would decline and the
common cost that had been allocated to the
segment would be reallocated to the remaining
become common as that segment is divided into
smaller segment units. For example, the costs of
national TV and print advertising might be
Exercise 5-2 (20 minutes)
1. 2,000 units in ending inventory × R60 fixed manufacturing overhead per
unit = R120,000.
2. The variable costing income statement appears below:
Sales ………………………………………….
R4,000,000
Variable expenses:
Variable cost of goods sold
(8,000 units × R310 per unit) ……..
R2,480,000
Variable selling and administrative
(8,000 units × R20 per unit) ……….
160,000
2,640,000
Contribution margin ……………………….
1,360,000
Fixed expenses:
Fixed manufacturing overhead ……….
600,000
Fixed selling and administrative ……..
400,000
1,000,000
Net operating income …………………….
R 360,000
The difference in net operating income between variable and absorption
costing can be explained by the deferral of fixed manufacturing
overhead cost in inventory that has taken place under the absorption
costing approach. Note from part (1) that R120,000 of fixed
manufacturing overhead cost has been deferred in inventory to the next
period. Thus, net operating income under the absorption costing
approach is R120,000 higher than it is under variable costing.
