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Solutions Manual, Chapter 6 41
Problem 6-19 (30 minutes)
1. The unit product cost under variable costing is computed as follows:
Direct materials ……………………. $ 4
V
2. With this figure, the variable costing income statements can be
prepared:
Year 1 Year 2
Sales (@ $25 per unit) ………………………….. $1,000,000 $1,250,000
V
ariable expenses:
Variable cost of
g
oods sold
(@ $12 per unit) …………………………….. 480,000 600,000
Variable sellin
g
and administrative
T
T
V
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42 Managerial Accounting, 16th Edition
Problem 6-19 (continued)
3. The reconciliation of absorption and variable costing follows:
Y
ear
1
Y
ear
2
Units in be
g
innin
g
inventory…………………… 0 5,000
Y
ear
1
Y
ear
2
Fixed manufacturin
g
overhead in endin
g
inventory (5,000 units × $6 per unit) …….. $30,000 $ 0
Deduct: Fixed manufacturin
g
overhead in
Y
ear
1
Y
ear
2
V
ariable costin
g
net operatin
g
income (loss). $40,000 $150,000
A
dd: Fixed manufacturin
g
overhead cost
deferred in inventory under absorption
A
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Solutions Manual, Chapter 6 43
Problem 6-20 (45 minutes)
1. a. The unit product cost under absorption costing is:
Direct materials …………………………….. $20
Direct labor ………………………………….. 8
b. The absorption costing income statement is:
Sales (8,000 units × $75 per unit)…………….………. $600,000
Cost of
g
oods sold (8,000 units × $40 per unit) …… 320,000
2. a. The unit product cost under variable costing is:
Direct materials ………………………. $20
V
V
b. The variable costing income statement is:
Sales (8,000 units × $75 per unit) ……………… $600,000
V
ariable expenses:
Variable cost of
g
oods sold
(8,000 units × $30 per unit) …………………. $240,000
Variable sellin
g
expenses
V
A
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44 Managerial Accounting, 16th Edition
Problem 6-20 (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
A
dded to the endin
g
inventory
(2,000 units × $10 per unit) …………………………….…. $ 20,000
Expensed as part of cost of
g
oods sold
T
Because $20,000 of fixed manufacturing overhead cost has been
deferred in inventory under absorption costing, the net operating
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Solutions Manual, Chapter 6 45
Problem 6-21 (30 minutes)
1.
Sales Territory
Total Company Northern Southern
Amount % Amount % Amount %
Sales ……………………………………….. $750,000 100.0 $300,000 100 $450,000 100
V
ariable expenses ………………………. 336,000 44.8 156,000 52 180,000 40
Contribution mar
g
in ……………………. 414,000 55.2 144,000 48 270,000 60
–
Product Line
Northern Territory Paks Tibs
Amount % Amount % Amount %
Sales ………………………………………. $300,000 100.0 $50,000 100 $250,000 100
V
ariable expenses ……………………… 156,000 52.0 11,000 22 145,000 58
Contribution mar
g
in …………………… 144,000 48.0 39,000 78 105,000 42
T
g
–
T
T
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46 Managerial Accounting, 16th Edition
Problem 6-21 (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
ratio. This poor sales mix accounts for the low overall contribution
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Solutions Manual, Chapter 6 47
Problem 6-22 (45 minutes)
1. a. and b.
Absorption
Costing
Variable
Costing
Direct materials …………………………….. $ 7 $ 7
Direct labor ………………………………….. 10 10
2.
July August
Sales ………………………………………………….. $900,000 $1,200,000
V
ariable expenses:
Variable cost of
g
oods sold @ $22 per unit .. 330,000 440,000
Variable sellin
g
and administrative
expenses @ $3 per unit ……………………… 45,000 60,000
T
g
T
3.
July August
Units in be
g
innin
g
inventor
y
…………………… 0 2,500
+ Units produced …………………………………. 17,500 17,500
− Units sold ………………..………………………. 15,000 20,000
= Units in endin
g
inventor
y
……………………. 2,500 0
Fixed manufacturin
g
overhead in endin
g
g
V
g
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48 Managerial Accounting, 16th Edition
Problem 6-22 (continued)
July August
Variable costin
g
net operatin
g
income
(loss) ………………………………………………. $ (35,000) $ 140,000
A
dd fixed manufacturin
g
overhead cost
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
units that went into inventory at the end of that month. This $45,000
was part of the $560,000 total fixed cost that has to be covered each
month in order for the company to break even. Because the $45,000
A
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Solutions Manual, Chapter 6 49
Problem 6-23 (60 minutes)
1. a. Absorption costing unit product cost is:
Direct materials …………………………… $ 3.50
Direct labor ………………………………… 12.00
b. The absorption costing income statement is:
Sales (28,000 units × $40 per unit) …………………… $1,120,000
Cost of
g
oods sold (28,000 units × $26.50 per unit) 742,000
c. The reconciliation is as follows:
Units in ending inventory = Units in beginning inventory + Units
Manufacturing overhead deferred in (released from) inventory = Fixed
manufacturing overhead in ending inventory – Fixed manufacturing
V
ariable costin
g
net loss …………………………………. $(10,000)
A
A
dd fixed manufacturin
g
overhead cost deferred in
V
A
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50 Managerial Accounting, 16th Edition
Problem 6-23 (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
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 absorption costing would argue, however, that fixed
manufacturing overhead costs attach to units of product as they are
produced, and that such costs do not become an expense until the units
are sold. Therefore, if the selling price of a unit is greater than the unit
product cost (including a proportionate amount of fixed manufacturing
overhead), then a profit is earned even if some units produced are
3. a. The variable costing income statement is:
Sales (32,000 units × $40 per unit) ……….. $1,280,000
V
ariable expenses:
Variable cost of
g
oods sold
[32,000 units × ($3.50 + $12.00 +
$1.00) per unit] ……………………………. $528,000
Variable sellin
g
and administrative