Solutions Manual, Chapter 5 31
Problem 5-18 (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
Year 1
Year 3
Direct materials ………………………………
$20
$20
Direct labor ……………………………………
12
12
Variable manufacturing overhead ……….
4
4.00
4
Fixed manufacturing overhead …………..
*16
***24
Absorption costing unit product cost ……
$52
$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.
32 Managerial Accounting for Managers, 4th Edition
Problem 5-18 (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
Solutions Manual, Chapter 5 33
Problem 5-19 (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
With this figure, the variable costing income statements can be
prepared:
Year 1
Year 2
Unit sales …………………………..……………….
40,000 units
50,000 units
Sales …………………………………………………
$1,000,000
$1,250,000
Variable expenses:
Variable cost of goods sold
(@ $12 per unit) ……………………………..
480,000
600,000
Variable selling and administrative
expenses (@ $2 per unit) ………………….
80,000
100,000
Total variable expenses ………………………….
560,000
700,000
Contribution margin ………………………………
440,000
550,000
Fixed expenses:
Fixed manufacturing overhead ………………
270,000
270,000
Fixed selling and administrative expenses ..
130,000
130,000
Total fixed expenses ……………………………..
400,000
400,000
Net operating income …………………………...
$ 40,000
$ 150,000
34 Managerial Accounting for Managers, 4th Edition
Problem 5-19 (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
Solutions Manual, Chapter 5 35
Problem 5-20 (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
b. The absorption costing income statement is:
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
36 Managerial Accounting for Managers, 4th Edition
Problem 5-20 (continued)
3. The difference in the ending inventory relates to a difference in the
absorption costing, these costs have been added to units of product at
Added to the ending inventory
(2,000 units × $10 per unit) …………………………………
$ 20,000
Expensed as part of cost of goods sold
(8,000 units × $10 per unit) …………………………………
80,000
Total fixed manufacturing overhead cost for the month ..
$100,000
(2) above.
Solutions Manual, Chapter 5 37
Problem 5-21 (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
38 Managerial Accounting for Managers, 4th Edition
Problem 5-21 (continued)
the Northern territory is very weak.
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
territory and in the company as a whole.
Solutions Manual, Chapter 5 39
Problem 5-22 (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)
40 Managerial Accounting for Managers, 4th Edition
Problem 5-22 (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
month in order for the company to break even. Because the $45,000
was added to the inventory account, and thus did not appear on the
income statement for July as an expense, the company was able to
report a small profit for the month even though it sold less than the
unclear or confusing.