Chapter 6
Variable Costing and Segment Reporting:
Tools for Management
Solutions to Questions
6-1 Absorption and variable costing differ in
6-2 Selling and administrative expenses are
labor, and variable manufacturing overhead. If
6-4 Absorption costing advocates argue that
assigned to products to properly match the costs
6-5 Advocates of variable costing argue that
fixed manufacturing costs are not really the cost
the products? These costs are incurred to have
production equals sales, inventories do not
costing will usually show higher net operating
period is immediately expensed under variable
released from inventory, then inventory levels
sales. If production exceeds sales, units of
product are added to inventory. These units
© The McGraw-Hill Companies, Inc., 2015. All rights reserved.
2 Managerial Accounting, 15th Edition
6-10 Differences in reported net operating
income between absorption and variable costing
arise because of changing levels of inventory. In
6-11 A segment is any part or activity of an
organization about which a manager seeks cost,
are assigned to a segment if and only if the
6-13 A traceable cost of a segment is a cost
that arises specifically because of the existence
machines used exclusively by the department,
machines shared by several departments.
6-14 The contribution margin is the difference
between sales revenue and variable expenses.
6-15 If common costs were allocated to
segments, then the costs of segments would be
arbitrarily allocated common costs, the overall
6-16 There are often limits to how far down
an organization a cost can be traced. Therefore,
common fixed expenses to business segments.
The Foundational 15
1. and 2.
The unit product costs under variable costing and absorption costing are
computed as follows:
Variable
Costing
Absorption
Costing
Direct materials …………………………
$24
$24
Direct labor ………………………………
14
14
Variable manufacturing overhead ….
2
2
Fixed manufacturing overhead
($800,000 ÷ 40,000 units) ………..
—
20
Unit product cost ……………………….
$40
$60
3. and 4.
The total contribution margin and net operating income under variable
costing are computed as follows:
Sales ………………………………………….
$2,800,000
Variable expenses:
Variable cost of goods sold
(35,000 units × $40 per unit)………
$1,400,000
Variable selling and administrative
(35,000 units × $4 per unit) ……….
140,000
1,540,000
Contribution margin ……………………….
1,260,000
Fixed expenses:
Fixed manufacturing overhead ……….
800,000
Fixed selling and administrative ……..
496,000
1,296,000
Net operating loss …………………………
The Foundational 15 (continued)
5. and 6.
The total gross margin and net operating income under absorption
costing are computed as follows:
Sales (35,000 units × $80 per unit) ………………………
$2,800,000
Cost of goods sold (35,000 units × $60 per unit) ……..
2,100,000
Gross margin …………………………………………………..
700,000
Selling and administrative expenses
[(35,000 units × $4 per unit) + $496,000] …………..
636,000
Net operating income ………………………………………..
$ 64,000
7. The difference between the absorption and variable costing net
operating incomes is explained as follows:
Manufacturing overhead deferred in (released from) inventory = Fixed
Add fixed manufacturing overhead cost deferred in
Absorption costing net operating income ……………..
= Unit CM × Q − Fixed expenses
= ($80 − $44) × Q − $1,296,000
= ($36) × Q − $1,296,000
= $1,296,000
= 36,000 units
The Foundational 15 (continued)
9. The breakeven point of 36,000 units would remain the same. This
10. and 11.
The variable costing net operating income would be the same as the
answer to question 4 as shown below:
Sales ………………………………………….
$2,800,000
Variable expenses:
Variable cost of goods sold
(35,000 units × $40 per unit)………
$1,400,000
Variable selling and administrative
(35,000 units × $4 per unit) ……….
140,000
1,540,000
Contribution margin ……………………….
1,260,000
Fixed expenses:
Fixed manufacturing overhead ……….
800,000
Fixed selling and administrative ……..
496,000
1,296,000
Net operating loss …………………………
When the number of units produced equals the number of units sold,
absorption costing net operating income equals the variable costing net
operating income. Therefore, the answer to question 11 is that the
absorption costing net operating loss would be $36,000.
12. Absorption costing income will be lower than variable costing income.
The variable costing income statement will only include the fixed
The Foundational 15 (continued)
13. The segment margins for the East and West regions are computed as
follows:
Total
Company
East
West
Sales* …………………………..………
$2,800,000
$2,000,000
$800,000
Variable expenses** …………………
1,540,000
1,100,000
440,000
Contribution margin ……………….…
1,260,000
900,000
360,000
Traceable fixed expenses ………..…
400,000
150,000
250,000
Region segment margin ………….…
860,000
$ 750,000
$110,000
Common fixed expenses not
traceable to regions
($800,000 + $96,000) ……………
896,000
Net operating loss …………………...
$ (36,000)
*
**
East: 25,000 packs × $80 per pack = $2,000,000;
West: 10,000 packs × $80 per pack= $800,000.
East: 25,000 packs × $44 per pack = $1,100,000;
West: 10,000 packs × $44 per pack= $440,000.
14. Diego has apparently determined that the total
gross margin
in the
West region equals $200,000. As computed in requirement 1, the unit
product cost under absorption costing is $60; therefore the gross
Forgone segment margin in the West region ………….
$(110,000)
Additional contribution margin in East region* ……….
45,000
Decrease in profits if the West region is dropped …….
$ (65,000)
* $900,000 × 5% = $45,000.
The Foundational 15 (continued)
15. The profit impact is computed as follows:
Additional advertising ……………………………………….
$(30,000)
Additional contribution margin in the West region*….
72,000
Increase in profits …………………………………………...
$ 42,000
* $360,000 × 20% = $72,000.