CHAPTER 20 Variable Costing for Management Analysis
Prob. 20–1B (FIN MAN); Prob. 5–1B (MAN)
1.
Sales $2,150,000
Cost of goods sold:
Cost of goods manufactured $1,824,000
Less inventory, July 31 (400 units × $760*) 304,000
*$1,824,000 ÷ 2,400 units = $760
2.
Sales $2,150,000
Variable cost of goods sold:
Variable cost of goods manufactured $1,536,000
Less inventory, July 31 (400 units × $640*) 256,000
*$1,536,000 ÷ 2,400 units = $640
3. The income from operations reported under absorption costing exceeds the income
from operations reported under variable costing by $48,000 ($330,000 – $282,000).
YOSAN INC.
Variable Costing Income Statement
For the Month Ended July 31, 2016
YOSAN INC.
Absorption Costing Income Statement
For the Month Ended July 31, 2016
20-35
CHAPTER 20 Variable Costing for Management Analysis
Prob. 20–2B (FIN MAN); Prob. 5–2B (MAN)
1.
Sales (320,000 units) $25,600,000
Cost of goods sold:
Direct materials $ 4,800,000
2.
Sales (320,000 units) $25,600,000
Variable cost of goods sold:
Direct materials $ 4,800,000
Direct labor 5,440,000
3. $1,800,000. The operating loss from temporarily closing the portion of the plant
4. Production of A.V. lotion should be continued. Temporary suspension of
production would result in an operating loss of $1,800,000 [from (3) above],
SMOOTH SKIN CARE PRODUCTS INC.
Estimated Income Statement—Absorption Costing—Aloe Vera Hand Lotion
For the Month Ending November 30, 2016
For the Month Ending November 30, 2016
Estimated Income Statement—Variable Costing—Aloe Vera Hand Lotion
SMOOTH SKIN CARE PRODUCTS INC.
20-36
1. a.
Sales $104,000
Cost of goods sold:
Cost of goods manufactured $97,280
Less inventory, July 31 (1,200 units × $15.20*) 18,240
*$97,280 ÷ 6,400 units = $15.20
b.
Sales $104,000
Cost of goods sold:
Inventory, August 1 (1,200 units × $15.20) $18,240
Cost of goods manufactured 66,560
2. a.
Sales $104,000
Variable cost of goods sold:
Variable cost of goods manufactured $81,920
Less inventory, July 31 (1,200 units × $12.80*) 15,360
HEAD GEAR INC.
Absorption Costing Income Statement
For the Month Ended July 31, 2016
HEAD GEAR INC.
For the Month Ended July 31, 2016
HEAD GEAR INC.
Absorption Costing Income Statement
For the Month Ended August 30, 2016
Variable Costing Income Statement
20-37
CHAPTER 20 Variable Costing for Management Analysis
Prob. 20–3B (FIN MAN); Prob. 5–3B (MAN) (Concluded)
2. b.
Sales $104,000
Variable cost of goods sold:
Inventory, August 1 (1,200 units × $12.80) $15,360
Variable cost of goods manufactured 51,200
3. a. For July, the income from operations reported under absorption costing
exceeds the income from operations reported under variable costing by
$2,880. This difference is due to including $2,880 of fixed cost in inventory
b. For August, the income from operations reported under absorption costing
is less than the income from operations reported under variable costing by
$2,880. This difference is due to including $2,880 of fixed cost in the August 1
4. Head Gear Inc. was equally profitable in July and in August under the variable
costing concept. Sales and the variable cost per unit were the same for both July
and August. The difference in income reported under the absorption costing
HEAD GEAR INC.
Variable Costing Income Statement
For the Month Ended August 30, 2016
20-38
CHAPTER 20 Variable Costing for Management Analysis
Prob. 20–4B (FIN MAN); Prob. 5–4B (MAN)
1.
Variable
Variable Cost Selling
of Goods Sold Expenses Contribution
Contribution as a Percent as a Percent Margin
Salesperson Margin of Sales of Sales Ratio
Asarenka $157,500 45.0% 19.0% 36.0%
Crowell 250,800 40.0% 16.0% 44.0%
Dempster 222,750 46.0% 21.0% 33.0%
2. Crowell has the highest contribution margin and contribution margin ratio for
the year. This is because of two factors. First, Crowell had the smallest variable
3. Other factors that should be considered in evaluating the performance of
PACHEC INC.
Salespersons’ Analysis
For the Year Ended June 30
20-39
CHAPTER 20 Variable Costing for Management Analysis
Prob. 20–5B (FIN MAN); Prob. 5–5B (MAN)
1.
2. Annual income from operations would be reduced below its present level by
$89,400 if Size M were to be discontinued (Proposal 2), as indicated below.
Contribution margin for Size M $260,250
KIMBRELL, INC.
For the Year Ended December 31, 2016
Size
Variable Costing Income Statement
20-40
CHAPTER 20 Variable Costing for Management Analysis
Prob. 20–5B (FIN MAN); Prob. 5–5B (MAN) (Concluded)
3.
S L Total
Sales $2,277,000 $945,000 $3,222,000
Variable cost of goods sold 1,238,550 567,000 1,805,550
4. $88,120. A comparison of the amount of income from operations under
present conditions, as indicated in (1), and under Proposal 3, as indicated in
(3), suggests an increase of $88,120 if Proposal 3 is accepted, as illustrated
below.
Income from operations, Proposal 3 $106,820
Size
KIMBRELL, INC.
For the Year Ended December 31, 2016
Variable Costing Income Statement
20-41
CHAPTER 20 Variable Costing for Management Analysis
Prob. 20–6B (FIN MAN); Prob. 5–6B (MAN)
1.
Planned contribution margin $540,000
Effect of change in sales:
Sales quantity factor (34,500 – 30,000) × $69 $ 310,500
Unit price factor ($66 – $69) × 34,500 (103,500)
Total effect of change in sales 207,000
2. No, the president is not correct in saying that the variable cost of goods sold got
out of control. The majority of the increase in the variable cost of goods sold was
due to the variable cost quantity factor. Specifically, the increase of 4,500 units
$6.00 for selling and administrative expenses does raise concern. This increase
may have been caused by additional selling expenses associated with the increased
sales. The increase in selling and administrative expenses also could have been
MATHEWS COMPANY
Contribution Margin Analysis
For the Year Ended December 31
20-42
CHAPTER 20 Variable Costing for Management Analysis
CP 20–1 (FIN MAN); CP 5–1 (MAN)
Aston Melon has performed the task requested by the division manager. However,
Aston Melon has not exercised good judgment, to the point of bordering on
unethical behavior. Aston Melon should question the wisdom of manipulating
CP 20–2 (FIN MAN); CP 5–2 (MAN)
1. Absorption costing is required under generally accepted accounting principles.
Under this approach, the fixed manufacturing costs are allocated to sold and
inventoried units. Thus, if production exceeds sales, a portion of the fixed
2. Gordon is incorrect in implying that nothing can be done because of generally
accepted accounting principles (GAAP). GAAP is required for external financial
reporting. However, the income reports used to guide management may be
CASES & PROJECTS
20-43
CHAPTER 20 Variable Costing for Management Analysis
CP 20–3 (FIN MAN); CP 5–3 (MAN)
Martin is earning more contribution margin than Dean; however, both salespersons
are earning the same contribution margin ratio. Dean’s total sales are less than
Martin’s. However, the manufacturing margin ratio is much different between the
two salespersons. Dean is selling products with a much higher manufacturing
margin than is Martin. This indicates that Dean is selling a more attractive product
mix than is Martin. Unfortunately, Dean’s very attractive manufacturing margin is
offset by very high promotional costs (as a percent of sales). As a result, Dean’s
encouragement going to Dean).
As a final point, it may be the case that the high manufacturing margin product mix
sold by Dean requires extensive promotional support. For example, maybe Dean
is selling newly introduced products that have high margins but require extensive
launch-related promotional expenses. In this case, there may be little opportunity
for Dean to improve profitability, except by increasing total sales.
CP 20–4 (FIN MAN); CP 5–4 (MAN)
1. Danica Kyle Richard Tom
2. Danica has the highest contribution margin and contribution margin ratio of the
four salespersons, even though Danica’s sales level is ranked third. There are
two reasons for Danica’s superior performance. First, Danica sells products that
20-44
CHAPTER 20 Variable Costing for Management Analysis
CP 20–5 (FIN MAN); CP 5–5 (MAN)
1.
Florida Georgia Tennessee
Revenue $1,125,000 $1,000,000 $1,181,250
Variable cost of goods sold 450,000 310,000 436,000
Manufacturing margin $ 675,000 $ 690,000 $ 745,250
2. Florida Georgia Tennessee
Increase in contribution margin $78,755 $97,500 $87,775
3. Georgia will generate the greatest profit increase for an additional $42,200
in advertising. This may seem surprising, because the profit report indicates
that Georgia is the least profitable on an absorption costing basis. However,
TRANS SPORT COMPANY
Contribution Margin by State
20-45
CHAPTER 20 Variable Costing for Management Analysis
CP 20–6 (FIN MAN); CP 5–6 (MAN)
1.
Sales (44,000 × $106) $4,664,000
Cost of goods sold (44,000 × $61) 2,684,000
Sales (44,000 × $106) $4,664,000
Cost of goods sold:
Cost of goods manufactured (55,000 × $58.8) $3,234,000
2. The $96,800 difference in the amount of income from operations ($696,800 –
$600,000) is due to the allocation of fixed manufacturing costs to ending
3. a. Base salary…………………………………………………………………… $140,000
Bonus ($600,000 – $670,000) × 10%……………………………………… —
4. By manufacturing 55,000 units, Pinder increased his salary by $2,680.
Note: Instructors may also point out that by increasing the ending inventory by
CRAIG COMPANY
Absorption Costing Income Statement—55,000 units manufactured
For the Year Ended December 31, 2016
CRAIG COMPANY
Absorption Costing Income Statement—44,000 units manufactured
For the Year Ended December 31, 2016
20-46
CHAPTER 20 Variable Costing for Management Analysis
CP 20–6 (FIN MAN); CP 5–6 (MAN) (Concluded)
5. If Pinder’s salary were $140,000 (plus a bonus based on income from operations)
and the variable costing method had been used, income from operations would
have been $600,000, regardless of how many units were manufactured. Thus,
Pinder would not have been able to increase his salary simply by manufacturing
more units.
Sales (44,000 × $106) $4,664,000
Cost of goods sold (44,000 × $50) 2,200,000
Manufacturing margin $2,464,000
Sales (44,000 × $106) $4,664,000
Variable cost of goods sold:
Variable cost of goods manufactured
(55,000 × $50) $2,750,000
CRAIG COMPANY
Variable Costing Income Statement—55,000 units manufactured
For the Year Ended December 31, 2016
CRAIG COMPANY
Variable Costing Income Statement—44,000 Units Manufactured
For the Year Ended December 31, 2016
20-47