CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Ex. 21–17 (FIN MAN); Ex. 7–17 (MAN)
a.
East Coast Railroad Company
Contribution Margin by Route
For the Month Ended April 30
Atlanta/
Baltimore
Baltimore/
Pittsburgh
Pittsburgh/
Atlanta
Total
Revenues
$ 255,000
$ 594,000
$ 542,080
$ 1,391,080
Variable costs:
Labor costs for loading
Fuel costs
Switchyard labor costs
and unloading railcars
$ (19,550)
$ (99,360)
$ (56,672)
$ (175,582)
b. The Atlanta/Baltimore route performs significantly worse than do the other two
Note to Instructors: Part (b) is somewhat subtle but a worthy discussion. The cost
behavior issues discussed in (b) are common in service companies. For example,
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Ex. 21–18 (FIN MAN); Ex. 7–18 (MAN)
Underwater University
Variable Costing Income Statement
For the Fall Term
Revenue
$ 7,254,000
Variable costs:
Registration, records, and marketing costs
$(1,237,500)
Instructional costs
(3,868,800)
Contribution margin
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
PROBLEMS
Prob. 21–1A (FIN MAN); Prob. 7–1A (MAN)
1.
Kodiak Fridgeration Company
Absorption Costing Income Statement
For the Month Ended August 31
Sales
$10,800,000
Cost of goods sold:
Cost of goods manufactured
$9,600,000
Inventory, August 31 (8,000 units × $120.00*)
(960,000)
Gross profit
2.
Kodiak Fridgeration Company
Variable Costing Income Statement
For the Month Ended August 31
Sales
$10,800,000
Variable cost of goods sold:
Variable cost of goods manufactured*
$9,280,000
Inventory, August 31 (8,000 units × $116.00**)
(928,000)
Total variable cost of goods sold
(8,352,000)
Fixed selling and administrative expenses
3. The operating income reported under absorption costing exceeds the operating
income reported under variable costing by $32,000 ($900,000 – $868,000). This
$32,000 is due to including $32,000 of fixed manufacturing cost in inventory under
absorption costing [8,000 units × $4 ($320,000 ÷ 80,000)]. The $32,000 was thus
deferred to a future month under absorption costing, while it was included as an
expense of August (part of fixed costs) under variable costing.
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–2A (FIN MAN); Prob. 7–2A (MAN)
1.
Logan Industries Inc.
Estimated Income Statement—Absorption Costing—Solvent
For the Month Ending October 31
Sales (6,000 units)
$ 480,000
Cost of goods sold:
Direct materials
$210,000
Direct labor
144,000
Variable manufacturing cost
Fixed manufacturing cost
100,000
Operating loss
2.
Logan Industries Inc.
Estimated Income Statement—Variable Costing—Solvent
For the Month Ending October 31
Sales (6,000 units)
$ 480,000
Variable cost of goods sold:
Direct materials
$210,000
Direct labor
144,000
Variable manufacturing cost
48,000
Contribution margin
3. $140,000. The operating loss from temporarily closing the portion of the plant
associated with solvent would be $140,000 (fixed manufacturing cost of $100,000 plus
fixed selling and administrative expenses of $40,000).
4. Production of solvent should be continued. Temporary suspension of production
would result in an operating loss of $140,000 [from (3) above], compared with an
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–3A (FIN MAN); Prob. 7–3A (MAN)
1.
a.
Big Sky Creations Company
Absorption Costing Income Statement
For the Month Ended May 31
Sales
$ 4,500,000
Cost of goods sold:
$ 1,260,000
Selling and administrative expenses
*
$3,600,000 ÷ 40,000 units = $90.00
b.
Big Sky Creations Company
Absorption Costing Income Statement
For the Month Ended June 30
Sales
$ 4,500,000
Cost of goods sold:
Gross profit
2.
a.
Big Sky Creations Company
Variable Costing Income Statement
For the Month Ended May 31
Sales
$ 4,500,000
Variable cost of goods sold:
Variable cost of goods manufactured
$3,480,000
Inventory, May 31 (4,000 units × $87*)
(348,000)
Contribution margin
$ 1,296,000
Fixed manufacturing costs
Fixed selling and administrative expenses
Operating income
*
$3,480,000 ÷ 40,000 units = $87.00
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–3A (FIN MAN); Prob. 7–3A (MAN) (Concluded)
2.
b.
Big Sky Creations Company
Variable Costing Income Statement
For the Month Ended June 30
Sales
$ 4,500,000
Variable cost of goods sold:
Inventory, June 1 (4,000 units × $87.00)
$ 348,000
Variable cost of goods manufactured
2,784,000
Manufacturing margin
$ 1,368,000
Contribution margin
$ 1,296,000
Fixed manufacturing costs
Fixed selling and administrative expenses
3. a. For May, the operating income reported under absorption costing exceeds the
operating income reported under variable costing by $12,000 ($1,108,000 –
$1,096,000). This difference is due to including $12,000 of fixed manufacturing
cost in inventory under absorption costing [4,000 units × $3.00 ($120,000 ÷
40,000)]. The $12,000 was thus deferred to June under absorption costing, while
it was included as an expense of May (part of fixed costs) under variable
costing.
4. Big Sky Creations Company was equally profitable in May and June under the
variable costing concept. Sales and the variable cost per unit were the same for
both May and June. The difference in operating income reported under the
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–4A (FIN MAN); Prob. 7–4A (MAN)
1.
Waltham Industries Inc.
Salespersons’ Analysis
For the Year Ended December 31
Variable
Variable Cost
Selling
of Goods Sold
Expenses
Contribution
Contribution
as a Percent
as a Percent
Margin
Salesperson
Margin
of Sales
of Sales
Ratio
Case
$231,800
44%
18%
38%
Dix
265,320
40%
16%
44%
181,660
48%
21%
31%
Orcas
308,000
36%
14%
50%
2. Orcas has the highest contribution margin and contribution margin ratio for the
year. This is because of two factors. First, Orcas has the smallest variable cost
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–5A (FIN MAN); Prob. 7–5A (MAN)
1.
Valdespin Company
Variable Costing Income Statement
For the Year Ended June 30, 20Y9
Size
Total
S
M
L
Sales
$ 668,000
$ 737,300
$ 956,160
$ 2,361,460
Variable cost of goods sold
(300,000)
(357,120)
(437,760)
(1,094,880)
Manufacturing margin
$ 368,000
$ 380,180
$ 518,400
$ 1,266,580
Variable operating expenses
(132,480)
(155,500)
(195,840)
Fixed costs:
2. Annual operating income would be reduced below its present level by $146,360
if Size M were to be discontinued (Proposal 2), as indicated below.
Contribution margin for Size M
$224,680
Less reduction in fixed production costs and fixed operating
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–5A (FIN MAN); Prob. 7–5A (MAN) (Concluded)
3.
Valdespin Company
Variable Costing Income Statement
For the Year Ended June 30, 20Y9
Size
Total
S
L
Sales*
$1,536,400
$ 956,160
$ 2,492,560
Manufacturing margin
$ 518,400
$ 1,364,800
Variable operating expenses***
Variable cost of goods sold**
$ 541,696
$ 322,560
$ 864,256
Fixed costs:
Manufacturing costs
$ (385,930)
*
$668,000 + ($668,000 × 130%)
**
$300,000 + ($300,000 × 130%)
***
$132,480 + ($132,480 × 130%)
4. $46,936. A comparison of the amount of operating income under present
conditions, as indicated in (1), and under Proposal 3, as indicated in (3), suggests
an increase of $46,936 if Proposal 3 is accepted, as illustrated below.
Operating income, Proposal 3
$ 132,726
Operating income, present conditions
(85,790)
Increase in operating income
$ 46,936
Alternatively, the $46,936 increase can be determined as follows:
Contribution margin, Size S, Proposal 3
Contribution margin, Size S, present operations
Increase in contribution margin
$ 306,176
$ 541,696
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–1B (FIN MAN); Prob. 7–1B (MAN)
1.
YoSan Inc.
Absorption Costing Income Statement
For the Month Ended July 31
Sales
$ 2,150,000
Cost of goods sold:
Cost of goods manufactured
$1,824,000
Gross profit
Selling and administrative expenses
*
$1,824,000 ÷ 2,400 units = $760
2.
YoSan Inc.
Variable Costing Income Statement
For the Month Ended July 31
Sales
$ 2,150,000
Variable cost of goods sold:
Variable cost of goods manufactured
$1,536,000
Inventory, July 31 (400 units × $640*)
(256,000)
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
*
$1,536,000 ÷ 2,400 units = $640
3. The operating income reported under absorption costing exceeds the operating
income reported under variable costing by $48,000 ($330,000 – $282,000). This
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–2B (FIN MAN); Prob. 7–2B (MAN)
1.
Smooth Skin Care Products Inc.
Estimated Income Statement—Absorption Costing—Aloe Vera Hand Lotion
For the Month Ending November 30
Sales (320,000 units)
$ 25,600,000
Cost of goods sold:
Direct materials
$ 4,800,000
Direct labor
5,440,000
Variable manufacturing cost
11,200,000
Fixed manufacturing cost
(22,970,000)
Gross profit
Selling and administrative expenses:
Variable selling and administrative expenses
$ 3,200,000
Fixed selling and administrative expenses
Operating loss
2.
Smooth Skin Care Products Inc.
Estimated Income Statement—Variable Costing—Aloe Vera Hand Lotion
For the Month Ending November 30
Sales (320,000 units)
$ 25,600,000
Variable cost of goods sold:
Direct materials
$ 4,800,000
Direct labor
5,440,000
Variable manufacturing cost
11,200,000
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing cost
$ 1,530,000
Fixed selling and administrative expenses
Operating loss
3. $1,800,000. The operating loss from temporarily closing the portion of the plant
associated with A.V. lotion would be $1,800,000 (fixed manufacturing cost of
$1,530,000 plus fixed selling and administrative expenses of $270,000). This
assumes that the variable costs would be eliminated with the shutdown.
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],
CHAPTER 21 (FIN MAN); CHAPTER 7 (MAN) Variable Costing for Management Analysis
Prob. 21–3B (FIN MAN); Prob. 7–3B (MAN)
1.
a.
Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended July 31
Sales
$104,000
Cost of goods sold:
Cost of goods manufactured
$ 97,280
Inventory, July 31 (1,200 units × $15.20*)
Total cost of goods sold
Selling and administrative expenses
*
$97,280 ÷ 6,400 units = $15.20
b.
Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales
$104,000
Cost of goods sold:
Inventory, August 1 (1,200 units × $15.20)
$ 18,240
Cost of goods manufactured
Total cost of goods sold
(84,800)
2.
a.
Head Gear Inc.
Variable Costing Income Statement
For the Month Ended July 31
Sales
$104,000
Variable cost of goods sold:
Variable cost of goods manufactured
$ 81,920
Inventory, July 31 (1,200 units × $12.80*)
(15,360)
Total variable cost of goods sold
(66,560)
Variable selling and administrative expenses
Fixed costs:
Fixed selling and administrative expenses
*
$81,920 ÷ 6,400 units = $12.80