Exercise 6-11 (20 minutes)
1.
Division
Total
Company
East
Central
West
Sales …………………………
$1,000,000
$250,000
$400,000
$350,000
Variable expenses ………..
390,000
130,000
120,000
140,000
Contribution margin ……..
610,000
120,000
280,000
210,000
Traceable fixed expenses .
535,000
160,000
200,000
175,000
Divisional segment
margin…………………….
75,000
$(40,000)
$ 80,000
$ 35,000
Common fixed expenses
not traceable to
divisions* ………………..
90,000
Net operating loss ………..
$ (15,000)
*$625,000 – $535,000 = $90,000.
2.
Incremental sales ($350,000 × 20%) …….
Contribution margin ratio
($210,000 ÷ $350,000) …………………….
Incremental contribution margin …………..
Less incremental advertising expense …….
Incremental net operating income …………
Yes, the advertising program should be initiated.
Exercise 6-12 (20 minutes)
1.
Sales (35,000 units × $25 per unit) …………….
$875,000
Variable expenses:
Variable cost of goods sold
(35,000 units × $12 per unit*) ………………
$420,000
Variable selling and administrative expenses
(35,000 units × $2 per unit) …………………
70,000
490,000
Contribution margin …………………………………
385,000
Fixed expenses:
Fixed manufacturing overhead …………………
160,000
Fixed selling and administrative expenses …..
210,000
370,000
Net operating income …………………………..….
$ 15,000
*
Direct materials ………………………..
$ 5
Direct labor ……………………………..
6
Variable manufacturing overhead ….
1
Total variable manufacturing cost ….
$12
2. The difference in net operating income can be explained by the $20,000
in fixed manufacturing overhead deferred in inventory under the
absorption costing method:
Units in ending inventory = Units in beginning inventory + Units
Variable costing net operating income ………………….
$15,000
Add fixed manufacturing overhead cost deferred in
inventory under absorption costing ……………………
20,000
Absorption costing net operating income ………………
$35,000
Exercise 6-13 (20 minutes)
1. The company is using variable costing. The computations are:
Variable
Costing
Absorption
Costing
Direct materials ………………………
$ 9
$ 9
Direct labor …………………………...
10
10
Variable manufacturing overhead .
5
5
Fixed manufacturing overhead
($150,000 ÷ 25,000 units) ……..
—
6
Unit product cost …………………….
$24
$30
Total cost, 3,000 units ……………..
$72,000
$90,000
2. a. No, $72,000 is not the correct figure to use because variable costing
is not generally accepted for external reporting purposes or for tax
purposes.
b. The Finished Goods inventory account should be stated at $90,000,
Exercise 6-14 (30 minutes)
1. Under variable costing, only the variable manufacturing costs are
included in product costs.
Direct materials……………………….
$ 50
Direct labor…………………………….
80
Variable manufacturing overhead ..
20
Variable costing unit product cost ..
$150
Note that selling and administrative expenses are not treated as product
costs; that is, they are not included in the costs that are inventoried.
These expenses are always treated as period costs.
2. The variable costing income statement appears below:
Sales …………………………………………………..
$3,990,000
Variable expenses:
Variable cost of goods sold (19,000 units ×
$150 per unit) …………………………………..
$2,850,000
Variable selling and administrative expenses
(19,000 units × $10 per unit) ……………….
190,000
3,040,000
Contribution margin ………………………………..
950,000
Fixed expenses:
Fixed manufacturing overhead ………………..
700,000
Fixed selling and administrative expenses ….
285,000
985,000
Net operating loss ………………………………….
$ (35,000)
3. The break-even point in units sold can be computed using the
contribution margin per unit as follows:
Selling price per unit …………..
$210
Variable cost per unit ………….
160
Contribution margin per unit ..
$ 50
Fixed expenses
Unit sales to break even = Unit contribution margin
$985,000
= = 19,700 units
$50 per unit
Exercise 6-15 (20 minutes)
1. Under absorption costing, all manufacturing costs (variable and fixed)
are included in product costs.
Direct materials ………………………………………
$ 50
Direct labor ……………………………………………
80
Variable manufacturing overhead ……………….
20
Fixed manufacturing overhead
($700,000 ÷ 20,000 units) ……………………..
35
Absorption costing unit product cost ……………
$185
2. The absorption costing income statement appears below:
Sales (19,000 units × $210 per unit) ………………….
$3,990,000
Cost of goods sold (19,000 units × $185 per unit) …
3,515,000
Gross margin ………………………………………………..
475,000
Selling and administrative expenses
[$285,000 + (19,000 units × $10 per unit)] ………
475,000
Net operating income …………………………..…………
$ 0
Note: The company has a zero net operating income even though its
sales are below the break-even point computed in Exercise 6-14. This
occurs because $35,000 of fixed manufacturing overhead has been
deferred in inventory and does not appear on the income statement
prepared using absorption costing.
Exercise 6-16 (20 minutes)
1. The companywide break-even point is computed as follows:
Dollar sales for company
to break even
=
Traceable fixed expenses + Common fixed expenses
Overall CM ratio
=
$126,000 + $63,000
0.50
=
$189,000
0.50
=
$378,000
The break-even point for the Chicago office is computed as follows:
Dollar sales for a
segment to break even
=
Segment traceable fixed expenses
Segment CM ratio
=
$78,000
0.70
=
$111,429 (rounded)
Exercise 6-16 (continued)
Exercise 6-16 (continued)
3. a. The segmented income statement follows:
Segments
Total Company
Chicago
Minneapolis
Amount
%
Amount
%
Amount
%
Sales ……………………..
$500,000
100.0
$200,000
100
$300,000
100
Variable expenses …….
240,000
48.0
60,000
30
180,000
60
Contribution margin ….
260,000
52.0
140,000
70
120,000
40
Traceable fixed
expenses ……………..
126,000
25.2
78,000
39
48,000
16
Office segment
margin…………………
134,000
26.8
$ 62,000
31
$ 72,000
24
Common fixed
expenses not
traceable to
segments ……………..
63,000
12.6
Net operating income ..
$ 71,000
14.2
b. The segment margin ratio rises and falls as sales rise and fall due to
the presence of fixed costs. The fixed costs are spread over a larger
base as sales increase.
In contrast to the segment ratio, the contribution margin ratio is
stable so long as there is no change in either the variable expenses or
the selling price per unit of service.
Exercise 6-17 (15 minutes)
1. The company should focus its campaign on the Dental market. The
computations are:
Medical
Dental
Increased sales ………………………………………
$40,000
$35,000
Market CM ratio ………………………………………
× 36%
× 48%
Incremental contribution margin …………………
$14,400
$16,800
Less cost of the campaign …………………………
5,000
5,000
Increased segment margin and net operating
income for the company as a whole ………….
$ 9,400
$11,800
2. The $48,000 in traceable fixed expenses in the previous exercise is now
partly traceable and partly common. When we segment Minneapolis by
market, only $33,000 remains a traceable fixed expense. This amount
Problem 6-18A (45 minutes)
1. The break-even point in units sold can be computed using the
contribution margin per unit as follows:
Selling price per unit …………………
$58
Variable cost per unit ………………..
38
Contribution margin per unit ………
$20
Break-even unit sales = Fixed expenses ÷ Unit contribution margin
= $1,200,000 ÷ $20 per unit
= 60,000 units
2 a. Under variable costing, only the variable manufacturing costs are
included in product costs.
Year 1
Year 2
Year 3
Direct materials ………………………………
$20
$20
$20
Direct labor ……………………………………
12
12
12
Variable manufacturing overhead ……….
4
4
4
Variable costing unit product cost ……….
$36
$36
$36
Note that selling and administrative expenses are not treated as
product costs; that is, they are not included in the costs that are
inventoried. These expenses are always treated as period costs.
Problem 6-18A (continued)
2 b. The variable costing income statements appear below:
Year 1
Year 2
Year 3
Sales ………………………………………………………………
$3,480,000
$2,900,000
$3,770,000
Variable expenses:
Variable cost of goods sold @ $36 per unit …………..
2,160,000
1,800,000
2,340,000
Variable selling and administrative @ $2 per unit …..
120,000
100,000
130,000
Total variable expenses ………………………………………
2,280,000
1,900,000
2,470,000
Contribution margin …………………………………………..
1,200,000
1,000,000
1,300,000
Fixed expenses:
Fixed manufacturing overhead …………………………..
960,000
960,000
960,000
Fixed selling and administrative ………………………….
240,000
240,000
240,000
Total fixed expenses ………………………………………….
1,200,000
1,200,000
1,200,000
Net operating income (loss) ………………………………..
$ 0
$ (200,000)
$ 100,000
3 a. The unit product costs under absorption costing:
Year 1
Year 2
Year 3
Direct materials ………………………………
$20
$20.00
$20
Direct labor ……………………………………
12
12.00
12
Variable manufacturing overhead ……….
4
4.00
4
Fixed manufacturing overhead …………..
*16
**12.80
***24
Absorption costing unit product cost ……
$52
$48.80
$60
* $960,000 ÷ 60,000 units = $16 per unit.
** $960,000 ÷ 75,000 units = $12.80 per unit.
*** $960,000 ÷ 40,000 units = $24 per unit.
Problem 6-18A (continued)
3 b. The absorption costing income statements appears below:
Year 1
Year 2
Year 3
Sales ……………………………………………..
$3,480,000
$2,900,000
$3,770,000
Cost of goods sold…………………………….
3,120,000
2,440,000
3,620,000
Gross margin …………………………………..
360,000
460,000
150,000
Selling and administrative expenses ……..
360,000
340,000
370,000
Net operating income (loss) ………………..
$ 0
$ 120,000
$ (220,000)
Cost of goods sold computations:
Year 1: 60,000 units × $52 per unit = $3,120,000
Year 2: 50,000 units × $48.80 per unit = $2,440,000
Year 3: (25,000 × $48.80 per unit) + (40,000 × $60 per unit) = $3,620,000
4.
Year 1
Year 2
Year 3
Units sold …………………………………………………..
60,000
50,000
65,000
Break-even point in units ……………………………….
60,000
60,000
60,000
Units above (below) break-even point ………………
0
(10,000)
5,000
Variable costing net operating income (loss) ………
$0
$(200,000)
$ 100,000
Absorption costing net operating income (loss) …..
$0
$ 120,000
$(220,000)
The absorption costing net operating incomes in years 2 and 3 are counter-intuitive. In year 2, the
number of units sold is below the break-even point; however, absorption costing reports a net
operating income greater than zero. In year 3, the number of units sold is above the break-even
point; however, absorption costing reports a net operating income less than zero.
Problem 6-19A (30 minutes)
1. The unit product cost under variable costing is computed as follows:
Direct materials ……………………..
$ 4
Direct labor …………………………..
7
Variable manufacturing overhead
1
Variable costing unit product cost
$12
Unit sales ……………………………………………
40,000 units
Sales …………………………………………………
Variable expenses:
Total variable expenses ………………………….
Contribution margin ………………………………
440,000
Fixed expenses:
Total fixed expenses ……………………………..
Net operating income …………………………...
Problem 6-19A (continued)
2. The reconciliation of absorption and variable costing follows:
Year 1
Year 2
Units in beginning inventory ……………………
0
5,000
+ Units produced …………………………..…….
45,000
45,000
− Units sold ………………………………………..
40,000
50,000
= Units in ending inventory …………………….
5,000
0
Year 1
Year 2
Fixed manufacturing overhead in ending
inventory (5,000 units × $6 per unit) ……..
$30,000
$ 0
− Fixed manufacturing overhead in
beginning inventory (5,000 units × $6 per
unit) ……………………………………………….
30,000
= Manufacturing overhead deferred in
(released from) inventory …………………….
$30,000
$(30,000)
Year 1
Year 2
Variable costing net operating income (loss)
$40,000
$150,000
Add: Fixed manufacturing overhead cost
deferred in inventory under absorption
costing …………………………………………….
30,000
Deduct: Fixed manufacturing overhead cost
released from inventory under absorption
costing …………………………………………….
(30,000)
Absorption costing net operating income …..
$70,000
$120,000
Problem 6-20A (45 minutes)
1. a. The unit product cost under absorption costing is:
Direct materials …………………………..…
$20
Direct labor …………………………………..
8
Variable manufacturing overhead ……….
2
Fixed manufacturing overhead
($100,000 ÷ 10,000 units) …………….
10
Absorption costing unit product cost …..
$40
Sales (8,000 units × $75 per unit)……………………..
$600,000
Cost of goods sold (8,000 units × $40 per unit) ……
320,000
Gross margin ………………………………………………..
280,000
Selling and administrative expenses
[$200,000 + (8,000 units × $6 per unit)] ………….
248,000
Net operating income ……………………………………..
$ 32,000
2. a. The unit product cost under variable costing is:
Direct materials ……………………….
$20
Direct labor …………………………....
8
Variable manufacturing overhead …
2
Variable costing unit product cost…
$30
b. The variable costing income statement is:
Sales (8,000 units × $75 per unit) ………………
$600,000
Variable expenses:
Variable cost of goods sold
(8,000 units × $30 per unit) ………………….
$240,000
Variable selling expenses
(8,000 units × $6 per unit) ……………………
48,000
288,000
Contribution margin …………………………………
312,000
Fixed expenses:
Fixed manufacturing overhead …………………
100,000
Fixed selling and administrative expenses …..
200,000
300,000
Net operating income ……………………………….
$ 12,000
Problem 6-20A (continued)
3. The difference in the ending inventory relates to a difference in the
handling of fixed manufacturing overhead costs. Under variable costing,
these costs have been expensed in full as period costs. Under
absorption costing, these costs have been added to units of product at
(2).
Problem 6-21A (30 minutes)
1.
Sales Territory
Total Company
Northern
Southern
Amount
%
Amount
%
Amount
%
Sales ………………………………………..
$750,000
100.0
$300,000
100
$450,000
100
Variable expenses ………………………..
336,000
44.8
156,000
52
180,000
40
Contribution margin ……………………..
414,000
55.2
144,000
48
270,000
60
Traceable fixed expenses ………………
228,000
30.4
120,000
40
108,000
24
Territorial segment margin …………….
186,000
24.8
$ 24,000
8
$162,000
36
Common fixed expenses* ……………..
150,000
20.0
Net operating income …………………..
$ 36,000
4.8
*378,000 – $228,000 = $150,000
Product Line
Northern Territory
Paks
Tibs
Amount
%
Amount
%
Amount
%
Sales ……………………………………….
$300,000
100.0
$50,000
100
$250,000
100
Variable expenses ……………………….
156,000
52.0
11,000
22
145,000
58
Contribution margin …………………….
144,000
48.0
39,000
78
105,000
42
Traceable fixed expenses ……………..
70,000
23.3
30,000
60
40,000
16
Product line segment margin …………
74,000
24.7
$ 9,000
18
$ 65,000
26
Common fixed expenses* …………….
50,000
16.7
Sales territory segment margin ……..
$ 24,000
8.0
*$120,000 – $70,000 = $50,000
Problem 6-21A (continued)
2. Two insights should be brought to the attention of management. First,
compared to the Southern territory, the Northern territory has a low
3. Again, two insights should be brought to the attention of management.
First, the Northern territory has a poor sales mix. Note that the territory
sells very little of the Paks product, which has a high contribution margin
Problem 6-22A (45 minutes)
1.
a. and b.
Absorption
Costing
Variable
Costing
Direct materials ………………………………
$ 7
$ 7
Direct labor ……………………………………
10
10
Variable manufacturing overhead ……….
5
5
Fixed manufacturing overhead
($315,000 ÷ 17,500 units) ……………..
18
—
Unit product cost …………………………….
$40
$22
2.
July
August
Unit sales ………………………………………………
15,000
20,000
Sales ……………………………………………………
$900,000
$1,200,000
Variable expenses:
Variable cost of goods sold @ $22 per unit …
330,000
440,000
Variable selling and administrative
expenses @ $3 per unit ……………………….
45,000
60,000
Total variable expenses …………………………….
375,000
500,000
Contribution margin…………………………………
525,000
700,000
Fixed expenses:
Fixed manufacturing overhead …………………
315,000
315,000
Fixed selling and administrative expenses ….
245,000
245,000
Total fixed expenses ………………………………..
560,000
560,000
Net operating income (loss) ………………………
$ (35,000)
$ 140,000
3.
July
August
Units in beginning inventory ……………………
0
2,500
+ Units produced ………………………………….
17,500
17,500
− Units sold…………………………………………
15,000
20,000
= Units in ending inventory …………………….
2,500
0
Fixed manufacturing overhead in ending
inventory (2,500 units × $18 per unit) …..
$45,000
$ 0
− Fixed manufacturing overhead in
beginning inventory (2,500 units × $18
per unit) …………………………………………..
0
45,000
= Manufacturing overhead deferred in
(released from) inventory ……………………
$45,000
$(45,000)
Problem 6-22A (continued)
July
August
Variable costing net operating income
(loss) ……………………………………………….
$ (35,000)
$ 140,000
Add fixed manufacturing overhead cost
deferred in inventory under absorption
costing …………………………………………….
45,000
Deduct fixed manufacturing overhead cost
released from inventory under absorption
costing …………………………………………….
(45,000)
Absorption costing net operating income ……
$ 10,000
$ 95,000
4. As shown in the reconciliation in part (3) above, $45,000 of fixed
manufacturing overhead cost was deferred in inventory under
absorption costing at the end of July because $18 of fixed
manufacturing overhead cost “attached” to each of the 2,500 unsold