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Problem 6-23A (60 minutes)
1. a. Absorption costing unit product cost is:
Direct materials ..................................
$ 3.50
Direct labor ........................................
12.00
Variable manufacturing overhead ........
1.00
Fixed manufacturing overhead
($300,000 ÷ 30,000 units) ...............
10.00
Absorption costing unit product cost ....
$26.50
b. The absorption costing income statement is:
Sales (28,000 units) ..............................................
$1,120,000
Cost of goods sold (28,000 units × $26.50 per unit)
742,000
Gross margin ........................................................
378,000
Selling and administrative expenses
[$200,000 + (28,000 units × $6.00 per unit)] ......
368,000
Net operating income ............................................
$ 10,000
c. The reconciliation is as follows:
Units in ending inventory = Units in beginning inventory + Units
produced – Units sold = 0 units +30,000 units – 28,000 units
= 2,000 units
Manufacturing overhead deferred in (released from) inventory = Fixed
manufacturing overhead in ending inventory – Fixed manufacturing
overhead in beginning inventory = (2,000 units × $10 per unit) – $0
= $20,000
Variable costing net loss ........................................
$(10,000)
Add fixed manufacturing overhead cost deferred in
inventory under absorption costing ......................
20,000
Absorption costing net operating income ................
$ 10,000
Problem 6-23A (continued)
2. Under absorption costing, the company did earn a profit for the quarter.
However, before the question can really be answered, one must first
define what is meant by a “profit.” The central issue here relates to
timing
of release of fixed manufacturing overhead costs to expense.
Advocates of variable costing argue that all such costs should be
3. a. The variable costing income statement is:
Sales (32,000 units × $40 per unit) ............
$1,280,000
Variable expenses:
Variable cost of goods sold
(32,000 units × $16.50 per unit) ...........
$528,000
Variable selling and administrative
expenses (32,000 units × $6 per unit) ..
192,000
720,000
Contribution margin ..................................
560,000
Fixed expenses:
Fixed manufacturing overhead.................
300,000
Fixed selling and administrative expense ..
200,000
500,000
Net operating income ................................
$ 60,000
Problem 6-23A (continued)
b. The absorption costing income statement would be constructed as
follows:
The absorption costing unit product cost will remain at $26.50, the
same as in part (1).
Sales (32,000 units × $40 per unit) ...........................
$1,280,000
Cost of goods sold (32,000 units × $26.50 per unit) ...
848,000
Gross margin ...........................................................
432,000
Selling and administrative expenses
[$200,000 + (32,000 units × $6.00 per unit)] .........
392,000
Net operating income ...............................................
$ 40,000
c. The reconciliation of variable costing and absorption costing income
is:
Units in ending inventory = Units in beginning inventory + Units
produced – Units sold = 2,000 units +30,000 units – 32,000 units
= 0 units
Manufacturing overhead deferred in (released from) inventory = Fixed
manufacturing overhead in ending inventory – Fixed manufacturing
overhead in beginning inventory = (0 units × $10 per unit) – (2,000
units × $10 per unit) = -$20,000
Variable costing net operating income ....................
$ 60,000
Deduct fixed manufacturing overhead cost released
from inventory under absorption costing ..............
(20,000)
Absorption costing net operating income ................
$ 40,000
Problem 6-24A (45 minutes)
1. The intern’s decision to use the absorption format for her segmented
income statements is a bad idea because it does not focus on cost
2. To answer this question, students must understand that cost of goods
sold for a merchandiser is a variable cost. Thus, all of the company’s
fixed costs plus its sales commissions are reported as part of selling and
administrative expenses. The amount of common fixed expenses
allocated to each segment is computed as follows:
Total
Commercial
Residential
Total selling and administrative
expense (a) ................................
$240,000
$104,000
$136,000
Traceable fixed expenses .................
93,000
55,000
38,000
Sales commissions
(10% of sales) .............................
75,000
25,000
50,000
Selling and administrative
expenses accounted for (b) ...........
168,000
80,000
88,000
Common fixed expenses (a) – (b) ....
$ 72,000
$ 24,000
$48,000
The amount of common fixed expenses allocated to Residential
($48,000) is twice as much as the amount of common fixed expenses
allocated to Commercial ($24,000). Because the Residential sales
($500,000) are twice as much as the Commercial sales ($250,000), it
appears that the common fixed expenses were allocated to segments
based on sales dollars.
Allocating common fixed expenses is a bad idea because these costs are
not traceable to segments and they are not affected by segment-level
decisions.
Problem 6-24A (continued)
3. The contribution format segmented income statements would appear as
follows:
Total
Company
Commercial
Residential
Sales ....................................
$750,000
$250,000
$500,000
Variable expenses:
Cost of goods sold ..............
500,000
140,000
360,000
Sales commissions (10%) ...
75,000
25,000
50,000
Total variable expenses ..........
575,000
165,000
410,000
Contribution margin ...............
175,000
85,000
90,000
Traceable fixed expenses .......
93,000
55,000
38,000
Segment margin ....................
82,000
$ 30,000
$ 52,000
Common fixed expenses ........
72,000
Net operating income ............
$ 10,000
Problem 6-24A (continued)
4. 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
=
$93,000 + $72,000
0.233 (rounded)
=
$165,000
0.233
=
$708,155 (rounded)
5. The break-even point for the Commercial Division is computed as follows:
Dollar sales for a
segment to break even
=
Segment traceable fixed expenses
Segment CM ratio
=
$55,000
0.34
=
$161,765 (rounded)
Problem 6-24A (continued)
The break-even point for the Residential Division is computed as follows:
Dollar sales for a
segment to break even
=
Segment traceable fixed expenses
Segment CM ratio
=
$38,000
0.18
=
$211,111 (rounded)
6. The new break-even point for the Commercial Division is computed as
follows:
Dollar sales for a
segment to break even
=
Segment traceable fixed expenses
Segment CM ratio
=
$70,000
0.39
=
$179,487 (rounded)
The new break-even point for the Residential Division is computed as
follows:
Dollar sales for a
segment to break even
=
Segment traceable fixed expenses
Segment CM ratio
=
$68,000
0.23
=
$295,652 (rounded)
Problem 6-25A (75 minutes)
1.
Year 1
Year 2
Year 3
Unit sales ....................................
50,000
40,000
50,000
Sales ..........................................
$800,000
$ 640,000
$800,000
Variable expenses:
Variable cost of goods sold
@ $2 per unit ........................
100,000
80,000
100,000
Variable selling and
administrative expenses
@ $1 per unit ........................
50,000
40,000
50,000
Total variable expenses ................
150,000
120,000
150,000
Contribution margin .....................
650,000
520,000
650,000
Fixed expenses:
Fixed manufacturing overhead ...
480,000
480,000
480,000
Fixed selling and administrative
expenses ...............................
140,000
140,000
140,000
Total fixed expenses ....................
620,000
620,000
620,000
Net operating income (loss) .........
$ 30,000
$(100,000)
$ 30,000
Problem 6-25A (continued)
2.
a.
Year 1
Year 2
Year 3
Variable manufacturing cost ................
$ 2.00
$ 2.00
$ 2.00
Fixed manufacturing cost:
$480,000 ÷ 50,000 units ..................
9.60
$480,000 ÷ 60,000 units ..................
8.00
$480,000 ÷ 40,000 units ..................
12.00
Absorption costing unit product cost ....
$11.60
$10.00
$14.00
b.
Units in beginning inventory ................
0
0
20,000
+ Units produced ................................
50,000
60,000
40,000
− Units sold .......................................
50,000
40,000
50,000
= Units in ending inventory .................
0
20,000
10,000
Fixed manufacturing overhead in
ending inventory ..............................
$ 0
$160,000
$120,000
− Fixed manufacturing overhead in
beginning inventory ..........................
0
0
160,000
= Manufacturing overhead deferred in
(released from) inventory .................
$ 0
$160,000
$(40,000)
Variable costing net operating income
(loss) ...............................................
$30,000
$(100,000)
$ 30,000
Add fixed manufacturing overhead
deferred in inventory ........................
160,000
Deduct fixed manufacturing overhead
cost released from inventory .............
(40,000)
Absorption costing net operating
income (loss) ...................................
$30,000
$ 60,000
$(10,000)
3. Production went up sharply in Year 2, thereby reducing the unit product
cost, as shown in (2a) above. This reduction in cost per unit, combined
4. The fixed manufacturing overhead deferred in inventory from Year 2
Problem 6-25A (continued)
manufacturing overhead costs were deferred in inventory to future
5. a. With lean production, production would have been tied to sales in
each year so that little or no inventory of finished goods would have
been built up in either Year 2 or Year 3.
b. If lean production had been in use, the net operating income under
absorption costing would have been the same as under variable
Problem 6-26A (60 minutes)
1. The disadvantages or weaknesses of the company’s version of a
segmented income statement are as follows:
a. The company should include a column showing the combined results
2. Corporate advertising expenses have been allocated on the basis of
sales dollars; the general administrative expenses have been allocated
evenly among the three regions. Such allocations can be misleading to
segment.
Problem 6-26A (continued)
3.
Total Company
West
Central
East
Sales .....................................
$2,000,000
100.0
$450,000
100
$800,000
100
$750,000
100
Variable expenses:
Cost of goods sold ...............
819,400
41.0
162,900
36
280,000
35
376,500
50
Shipping expense .................
77,600
3.9
17,100
4
32,000
4
28,500
4
Total variable expenses ...........
897,000
44.9
180,000
40
312,000
39
405,000
54
Contribution margin ................
1,103,000
55.1
270,000
60
488,000
61
345,000
46
Traceable fixed expenses:
Salaries ...............................
313,000
15.6
90,000
20
88,000
11
135,000
18
Utilities ................................
40,500
2.0
13,500
3
12,000
1
15,000
2
Advertising ..........................
518,000
25.9
108,000
24
200,000
25
210,000
28
Depreciation ........................
85,000
4.3
27,000
6
28,000
4
30,000
4
Total traceable fixed expenses .
956,500
47.8
238,500
53
328,000
41
390,000
52
Regional segment margin ........
146,500
7.3
$ 31,500
7
$160,000
20
$ (45,000)
(6)
Common fixed expenses:
Advertising (general) ............
80,000
4.0
General administration .........
150,000
7.5
Total common fixed expense ...
230,000
11.5
Net operating loss ..................
$ (83,500)
( 4.2)
Note: Percentage figures may not total due to rounding.
Problem 6-26A (continued)
4. The following points should be brought to the attention of management:
a. Sales in the West are much lower than in the other two regions. This
is not due to lack of salespeople—salaries in the West are about the
same as in the Central Region, which has the highest sales of the
company.
Ethics Challenge (30 minutes)
1. Because of soft demand for the Brazilian Division’s product, the
inventory should be drawn down to the minimum level of 50 units.
Drawing inventory down to the minimum level would require production
as follows during the last quarter:
Desired inventory, December 31 ..........
50 units
Expected sales, last quarter ................
600 units
Total needs ........................................
650 units
Less inventory, September 30 ..............
400 units
Required production ...........................
250 units
This plan would save inventory carrying costs such as storage (rent,
insurance), interest, and obsolescence.
The number of units scheduled for production will not affect the
reported net operating income or loss for the year if variable costing is
in use. All fixed manufacturing overhead cost will be treated as an
expense of the period regardless of the number of units produced. Thus,
no fixed manufacturing overhead cost would be shifted between periods
through the inventory account and income would be a function of the
number of units sold, rather than a function of the number of units
produced.
2. To maximize the Brazilian Division’s operating income, Mr. Cavalas could
produce as many units as storage facilities will allow. By building
inventory to the maximum level, Mr. Cavalas would be able to defer a
portion of the year’s fixed manufacturing overhead costs to future years
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
Solutions Manual, Chapter 6 55
Ethics Challenge (continued)
Thus, by producing enough units to build inventory to the maximum
level that storage facilities would allow, Mr. Cavalas could relieve the
current year of fixed manufacturing overhead cost and thereby
maximize the current year’s operating income.
3. By setting a production schedule that will maximize his division’s net
operating income—and maximize his own bonus—Mr. Cavalas would be
acting against the best interests of the company as a whole. The extra
units aren’t needed and would be expensive to carry in inventory.
56 Introduction to Managerial Accounting, 7th Edition
Analytical Thinking (45 minutes)
1.
Total
Company
Cook-
book
Travel
Guide
Handy
Speller
Sales ......................................
$300,000
$90,000
$150,000
$60,000
Variable expenses:
Printing cost .........................
102,000
27,000
63,000
12,000
Sales commissions................
30,000
9,000
15,000
6,000
Total variable expenses ...........
132,000
36,000
78,000
18,000
Contribution margin ................
168,000
54,000
72,000
42,000
Traceable fixed expenses:
Advertising...........................
36,000
13,500
19,500
3,000
Salaries ...............................
33,000
18,000
9,000
6,000
Equipment depreciation*
9,000
2,700
4,500
1,800
Warehouse rent** ................
12,000
1,800
6,000
4,200
Total traceable fixed expenses .
90,000
36,000
39,000
15,000
Product line segment margin ...
78,000
$18,000
$ 33,000
$27,000
Common fixed expenses:
General sales .......................
18,000
General administration ..........
42,000
Depreciation—office facilities .
3,000
Total common fixed expenses ..
63,000
Net operating income ..............
$ 15,000
*
$9,000 × 30%, 50%, and 20%, respectively.
**
$48,000 square feet × $3 per square foot = $144,000; $144,000 ÷ 12
months = $12,000 per month. $12,000 ÷ 48,000 square feet = $0.25 per
square foot per month.
$0.25 per square foot × 7,200 square feet = $1,800; $0.25 per square
foot × 24,000 square feet = $6,000; and $0.25 per square foot × 16,800
square feet = $4,200.
