Solutions Manual, Chapter 5 1
Chapter 5
Variable Costing and Segment Reporting:
Tools for Management
Solutions to Questions
5-1 Absorption and variable costing differ in
how they handle fixed manufacturing overhead.
Under absorption costing, fixed manufacturing
5-2 Selling and administrative expenses are
manufacturing overhead costs are included in
product costs, along with direct materials, direct
5-4 Absorption costing advocates argue that
absorption costing does a better job of matching
costs with revenues than variable costing. They
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
the products? These costs are incurred to have
the capacity to make products during a
particular period and should be charged against
absorption and variable costing. When
production equals sales, inventories do not
5-7 If production exceeds sales, absorption
manufacturing overhead cost of the current
period is immediately expensed under variable
costing.
manufacturing overhead costs into the inventory
account, reducing the current period’s reported
2 Managerial Accounting for Managers, 4th Edition
expenses and causing net operating income to
5-10 Differences in reported net operating
income between absorption and variable costing
territories, divisions, and product lines.
under the contribution approach.
5-13 A traceable cost of a segment is a cost
that arises specifically because of the existence
of that segment. If the segment were
department’s supervisor, depreciation of
machines used exclusively by the department,
headquarters building, corporate image
5-14 The contribution margin is the difference
may appear to be unprofitable and managers
segments—making them appear less profitable.
5-16 There are often limits to how far down
an organization a cost can be traced. Therefore,
costs that are traceable to a segment may
5-17 No, a company should not allocate its
common fixed expenses to business segments.
Solutions Manual, Chapter 5 3
The Foundational 15
1. and 2.
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 …………………………
$ (36,000)
4 Managerial Accounting for Managers, 4th Edition
The Foundational 15 (continued)
5. and 6.
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:
Variable costing net operating loss………………………
$(36,000)
Add fixed manufacturing overhead cost deferred in
inventory under absorption costing* …………………
100,000
Absorption costing net operating income ……………..
$ 64,000
8. The break-even point in units is computed as follows:
Profit
= Unit CM × Q − Fixed expenses
$0
= ($80 − $44) × Q − $1,296,000
$0
= ($36) × Q − $1,296,000
$36Q
= $1,296,000
Q
= $1,296,000 ÷ $36
Q
= 36,000 units
counter-intuitive result emerges because $100,000 of fixed
Solutions Manual, Chapter 5 5
The Foundational 15 (continued)
9. The breakeven point of 36,000 units would remain the same. This
occurs because the contribution margin per unit is the same regardless
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 …………………………
$ (36,000)
When the number of units produced equals the number of units sold,
12. Absorption costing income will be lower than variable costing income.
The variable costing income statement will only include the fixed
6 Managerial Accounting for Managers, 4th Edition
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
The correct way to answer this question is to focus on the information
in the contribution format segmented income statements as follows:
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)
Solutions Manual, Chapter 5 7
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
8 Managerial Accounting for Managers, 4th Edition
Exercise 5-1 (15 minutes)
1. Under absorption costing, all manufacturing costs (variable and fixed)
are included in product costs.
Direct materials ……………………………………………………
$100
Direct labor …………………………..…………………………….
320
Variable manufacturing overhead …………………………….
40
Fixed manufacturing overhead ($60,000 ÷ 250 units) …..
240
Absorption costing unit product cost …………………………
$700
2. Under variable costing, only the variable manufacturing costs are
included in product costs.
Direct materials ……………………………………………………
$100
Direct labor …………………………..…………………………….
320
Variable manufacturing overhead …………………………….
40
Variable costing unit product cost …………………………….
$460
period’s revenue.
Solutions Manual, Chapter 5 9
Exercise 5-2 (20 minutes)
1. 25 units in ending inventory × $240 per unit fixed manufacturing
2. The variable costing income statement appears below:
Sales ……………………………………………………
$191,250
Variable expenses:
Variable cost of goods sold
(225 units sold × $460 per unit) ……………
$103,500
Variable selling and administrative expenses
(225 units × $20 per unit) ……………………
4,500
108,000
Contribution margin …………………………………
83,250
Fixed expenses:
Fixed manufacturing overhead …………………
60,000
Fixed selling and administrative expenses …..
20,000
80,000
Net operating income ………………………………
$ 3,250
higher than it is under variable costing.
Exercise 5-3 (20 minutes)
1.
Year 1
Year 2
Year 3
Beginning inventories ……….
200
170
180
Ending inventories ……………
170
180
220
Change in inventories ……….
(30)
10
40
Fixed manufacturing
overhead in beginning
inventories (@$560 per
unit) …………………………...
$112,000
$ 95,200
$100,800
Fixed manufacturing
overhead in ending
inventories (@$560 per
unit) …………………………...
95,200
100,800
123,200
Fixed manufacturing
overhead deferred in
(released from)
inventories (@$560 per
unit) …………………………...
$ (16,800)
$ 5,600
$ 22,400
Variable costing net
operating income …………..
$1,080,400
$1,032,400
$ 996,400
Add (deduct) fixed
manufacturing overhead
cost deferred in (released
from) inventory under
absorption costing …………
(16,800)
5,600
22,400
Absorption costing net
operating income …………..
$1,063,600
$1,038,000
$1,018,800
2. Because absorption costing net operating income was greater than
$984,400.