Solutions Manual, Chapter 5 41
Problem 5-23 (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:
Manufacturing overhead deferred in (released from) inventory = Fixed
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
42 Managerial Accounting for Managers, 4th Edition
Problem 5-23 (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
timing
of release of fixed manufacturing overhead costs to expense.
Advocates of variable costing argue that all such costs should be
Advocates of absorption costing would argue, however, that fixed
overhead), then a profit is earned even if some units produced are
unsold and carry some fixed manufacturing overhead with them to the
manipulated by increasing or decreasing a company’s inventories.
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
Solutions Manual, Chapter 5 43
Problem 5-23 (continued)
follows:
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
is:
Units in ending inventory = Units in beginning inventory + Units
= 0 units
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
44 Managerial Accounting for Managers, 4th Edition
Problem 5-24 (45 minutes)
1. The intern’s decision to use the absorption format for her segmented
separates costs into variable cost and fixed cost categories.
2. To answer this question, students must understand that cost of goods
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
based on sales dollars.
decisions.
Solutions Manual, Chapter 5 45
Problem 5-24 (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
46 Managerial Accounting for Managers, 4th Edition
Problem 5-24 (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
=
$707,244 (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)
Solutions Manual, Chapter 5 47
Problem 5-24 (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)
follows:
Dollar sales for a
segment to break even
=
Segment traceable fixed expenses
Segment CM ratio
=
$68,000
0.23
=
$295,652 (rounded)
48 Managerial Accounting for Managers, 4th Edition
Problem 5-25 (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
50,00
0
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
Solutions Manual, Chapter 5 49
Problem 5-25 (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)
4. The fixed manufacturing overhead deferred in inventory from Year 2
50 Managerial Accounting for Managers, 4th Edition
Problem 5-25 (continued)
in Year 1.
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.
each year, the income statements under absorption costing would
have appeared as follows:
Year 1
Year 2
Year 3
Unit sales …………………………
50,000
40,000
50,000
Sales ………………………………
$ 800,000
$ 640,000
$ 800,000
Cost of goods sold:
Cost of goods
manufactured @ $11.60
per unit ………………………
580,000
464,000
*
580,000
Add underapplied overhead .
96,000
**
Cost of goods sold ……………..
580,000
560,000
580,000
Gross margin ……………………
220,000
80,000
220,000
Selling and administrative
expenses ……………………….
190,000
180,000
190,000
Net operating income (loss) …
$ 30,000
$(100,000)
$ 30,000
* 40,000 units × $11.60 per unit = $464,000.
** 10,000 units
not
produced × $9.60 per unit fixed manufacturing
overhead cost per unit = $96,000 fixed manufacturing overhead cost
not applied to products.