Variable Costing Income Statement
On April 30, the end of the first month of operations, Joplin Company prepared the following income statement, based on the absorption costing concept:
Joplin Company
Absorption Costing Income Statement
For the Month Ended April 30
Sales (5,600 units)
$145,600
Cost of goods sold:
Cost of goods manufactured (6,600 units)
$118,800
Inventory, April 30 (900 units)
(16,200)
Total cost of goods sold
(102,600)
Gross profit
$43,000
Selling and administrative expenses
(23,660)
Operating income
$19,340
If the fixed manufacturing costs were $23,760 and the fixed selling and administrative expenses were $11,590, prepare an income statement according to the variable costing
concept. Round all final answers to whole dollars.
Joplin Company
Variable Costing Income Statement
For the Month Ended April 30
Sales

$
✔
✔
145,600
Variable cost of goods sold:
Variable cost of goods manufactured
Inventory, April 30

✔
12,960
Total variable cost of goods sold
Manufacturing margin

✔
✔
82,080
$
✔

✔
63,520
Variable selling and administrative expenses

✔
95,040
✔

Contribution margin
$
✔

✔
✔
12,070
$
✔
✔
51,450
Fixed costs:
Fixed manufacturing costs

Fixed selling and administrative expenses
Total fixed costs
✔

$
✔
✔
23,760

✔
✔
11,590
✔
35,350
$
Operating income

✔
✔
16,100
Feedback
Check My Work
Sales - (Variable Cost of Goods Manufactured* - Variable Costing Ending inventory**) = Manufacturing Margin; Manufacturing Margin - Variable Selling and Administrative
Expenses = Contribution Margin; Contribution Margin - (Fixed Manufacturing Costs + Fixed Selling and Administrative Expenses) = Operating income
*Variable Cost of Goods Manufactured = Total Cost of Goods Manufactured - Fixed Manufacturing Cost
**Variable Costing Ending Inventory = (Variable Cost of Goods Manufactured/Total Units of Goods Manufactured) x Absorption Costing Ending Inventory Units (given)
Variable and Absorption Costing—Three Products
Winslow Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows:
Winslow Inc.
Product Income Statements—Absorption Costing
For the Year Ended December 31, 20Y1
Cross Training Shoes Golf Shoes Running Shoes
Revenues
$537,400
$317,100
$272,700
Cost of goods sold
(279,400)
(155,400)
(182,700)
Gross profit
$258,000
$161,700
$90,000
Selling and administrative expenses
(221,900)
(116,400)
(150,300)
$36,100
$45,300
$(60,300)
Operating income
In addition, you have determined the following information with respect to allocated fixed costs:
Cross Training Shoes Golf Shoes Running Shoes
Fixed costs:
Cost of goods sold
Selling and administrative expenses
$86,000
$41,200
$38,200
64,500
38,100
38,200
These fixed costs are used to support all three product lines and will not change with the elimination of any one product. In addition, you have determined that the effects
of inventory may be ignored.
The management of the company has deemed the profit performance of the running shoe line as unacceptable. As a result, it has decided to eliminate the running shoe
line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the running shoe line, management expects the
profits of the company to increase by $60,300.
a. Are management’s decision and conclusions correct?
Management’s decision and conclusion are incorrect
running shoes will not
✔

✔

. The profit will not

✔
be improved because the fixed costs used in manufacturing and selling
be avoided if the line is eliminated.
Feedback
Check My Work
Consider the impact the elimination of the running shoe line would have on the fixed costs.
b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number using a minus sign.
Winslow Inc.
Variable Costing Income Statements—Three Product Lines
For the Year Ended December 31, 20Y1
Cross Training Shoes
Revenues

$
✔
537,400
Variable cost of goods sold
Manufacturing margin


✔

✔
317,100
Running Shoes
$
✔
272,700
✔
✔
114,200
144,500
✔
$
✔
186,600
✔
202,900
✔
157,400
$
✔
✔
✔
344,000

Golf Shoes
$
193,400
$
✔
Variable selling and administrative expenses
Contribution margin
✔
$
✔
78,300
$
✔
124,600
✔
128,200
✔
112,100
$
✔
16,100
Fixed costs:
Fixed manufacturing costs

Fixed selling and administrative expenses
Total fixed costs
$
✔
✔
86,000

✔
✔
64,500
$
✔
41,200
✔
38,100
$
✔
38,200
✔
38,200
$
✔
$
150,500
$
Operating income (loss)
✔
79,300
✔
$
36,100
✔
45,300
$
✔
76,400
$
✔
-60,300
Feedback
Check My Work
When recasting the variable costing income statement, remember that under variable costing, all fixed factory overhead costs are deducted in the period
incurred. Revenues - Variable Cost of Goods Sold = Manufacturing Margin; Manufacturing Margin - Variable Selling and Administrative Expenses = Contribution
Margin; Contribution Margin - (Fixed Manufacturing Costs + Fixed Selling and Administrative Expenses) = Operating income
c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes.
If the running shoes line were eliminated, then the contribution margin of the product line would be eliminated
eliminated. Thus, the profit of the company would actually decline

✔
by $

✔
and the fixed costs would not
✔
16,100
. Management should keep the line and attempt to improve the profitability of the product by increasing
reducing

✔

✔
prices, increasing
costs.
Feedback
Check My Work
Consider the impact the elimination of the running shoe line would have on sales as well as variable and fixed costs.
Feedback
Check My Work
Correct

✔
volume, or

✔
be
Inventory Valuation under Absorption Costing and Variable Costing
At the end of the first year of operations, 5,000 units remained in the finished goods inventory. The unit manufacturing costs during the year
were as follows:
Direct materials
$36.50
Direct labor
18.00
Fixed factory overhead
7.20
Variable factory overhead
6.30
Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable
costing concept.
Absorption costing
Variable costing
$
✔
340,000
$
✔
304,000
Feedback
Check My Work
Recall that the fixed factory overhead cost is included in absorption costing, while only direct materials and labor and variable factory
overhead is included in variable costing.
Income Statements under Absorption Costing and Variable Costing
Gallatin County Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1 and operated at 100% of capacity
during the first month. The following data summarize the results for July:
Sales (20,000 units)
$2,600,000
Production costs (26,000 units):
Direct materials
$1,250,600
Direct labor
600,600
Variable factory overhead
299,000
Fixed factory overhead
200,200
2,350,400
Selling and administrative expenses:
Variable selling and administrative expenses
$364,300
Fixed selling and administrative expenses
141,000
505,300
If required, round interim per-unit calculations to the nearest cent.
a. Prepare an income statement according to the absorption costing concept.
Gallatin County Motors Inc.
Absorption Costing Income Statement
For the Month Ended July 31
Sales

$
✔
Cost of goods sold
Gross profit
✔
2,600,000

✔
✔

-1,808,000
$
✔
Selling and administrative expenses

✔
✔
-505,300
$
Operating income
✔
792,000

✔
✔
286,700
Feedback
Check My Work
a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed
and variable factory costs are included as part of factory overhead.
b. Prepare an income statement according to the variable costing concept.
Gallatin County Motors Inc.
Variable Costing Income Statement
For the Month Ended July 31
Sales

$
✔
2,600,000
Variable cost of goods sold
Manufacturing margin
✔


✔
✔
✔
-1,654,000
$
✔
946,000
Variable selling and administrative expenses
Contribution margin

✔
✔
-364,300
$
✔

✔
581,700
Fixed costs:
Fixed factory overhead costs

$
✔
Fixed selling and administrative expenses
Total fixed costs

✔
✔
141,000
✔
✔

✔
200,200
-341,200
$
Operating income

✔
✔
240,500
Feedback
Check My Work
b. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs.
c. What is the reason for the difference in the amount of operating income reported in (a) and (b)?
Under the absorption costing
Under variable costing

✔

✔
method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues.
, all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of
inventory change. Thus, when inventory increases, the absorption costing

✔
income statement will have a higher operating income.
Feedback
Check My Work
c. Consider what causing the difference in operating income reported under the two methods. There is a need for management to exercise
care in interpreting operating income reported under absorption costing when significant changes in inventory levels occur.
Feedback
Check My Work
Correct
Cost of Goods Manufactured, using Variable Costing and Absorption Costing
On March 31, the end of the first year of operations, Barnard Inc., manufactured 2,300 units and sold 2,000 units. The following income
statement was prepared, based on the variable costing concept:
Barnard Inc.
Variable Costing Income Statement
For the Year Ended March 31, 20Y1
Sales
$1,080,000
Variable cost of goods sold:
Variable cost of goods manufactured
Inventory, March 31
$595,700
(77,700)
Total variable cost of goods sold
(518,000)
Manufacturing margin
$562,000
Total variable selling and administrative expenses
(130,000)
Contribution margin
$432,000
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Total fixed costs
$273,700
86,000
(359,700)
$72,300
Operating income
Determine the unit cost of goods manufactured, based on (a) the variable costing concept and (b) the absorption costing concept.
Variable costing
Absorption costing
$
✔
259
$
✔
378
Feedback
Check My Work
a. Variable costs of goods manufactured ÷ number of units produced
b. (Variable cost of goods manufactured + fixed cost of goods manufactured) ÷ number of units produced
Variable Costing Income Statement
The following data were adapted from a recent income statement of The Bluth Company:
(in millions)
Sales
$185,190
Operating costs:
Cost of products sold
$(88,890)
Marketing, administrative, and other expenses
(59,260)
Total operating costs
$(148,150)
$37,040
Operating income
Assume that the variable amount of each category of operating costs is as follows:
(in millions)
Cost of products sold
$50,000
Marketing, administrative, and other expenses
24,070
a. Based on the data given, prepare a variable costing income statement for Bluth, assuming that the company maintained constant
inventory levels during the period.
The Bluth Company
Variable Costing Income Statement (assumed)
(in millions)
Sales

$
✔
✔
185,190
Variable cost of products sold
Manufacturing margin


✔
✔
-50,000
$
✔
135,190
Variable marketing, administrative, and other expenses
Contribution margin

✔

✔
✔
-24,070
$
✔
✔
111,120
Fixed costs:
Fixed manufacturing costs

Fixed marketing, administrative, and other expenses
Total fixed costs
✔

$
✔
✔
38,890

✔
✔
35,190
✔
-74,080
$
Operating income
Feedback

✔
✔
37,040
Check My Work
a. Sales - variable cost of products sold = Manufacturing margin; Manufacturing margin - variable marketing, administrative, and
other expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed marketing, administrative and
other expenses) = operating income
b. If the Bluth company reduced its inventories during the period, what impact would that have on the operating income determined under
absorption costing?
If the Bluth company reduced its inventories during the period, then the cost of products sold would include

✔
fixed costs allocated
to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be
higher

✔
, and the operating income would be lower

✔
.
Feedback
Check My Work
b. Remember under variable costing, the cost of goods manufactured includes only variable manufacturing costs. Therefore, fixed
factory overhead costs are treated as a period expense. However, under absorption costing, both fixed and variable factory costs
are included as part of factory overhead.
Feedback
Check My Work
Correct
Variable and Absorption Costing
The following data were adapted from a recent income statement of Ansara Company for the year ended December 31:
(in millions)
Sales
$22,400
Cost of goods sold
$(19,040)
Selling, administrative, and other expenses
(2,020)
Total expenses
$(21,060)
$1,340
Operating income
Assume that $4,880 million of cost of goods sold and $1,110 million of selling, administrative, and other expenses were fixed costs. Inventories at the
beginning and end of the year were as follows:
Beginning inventory $2,660
Ending inventory
$3,110
Also, assume that 30% of the beginning and ending inventories were fixed costs.
a. Prepare an income statement according to the variable costing concept for Ansara Company. Round numbers to nearest million.
Ansara Company
Variable Costing Income Statement (assumed)
For the Year Ended December 31
Sales

$
✔
✔
22,400
Variable cost of goods sold:
$
Beginning inventory
1,862
Variable cost of goods manufactured
Ending inventory
✔


14,610
✔
✔
-2,177
Total variable cost of goods sold
Manufacturing margin


✔
✔
-14,295
$
✔

✔
8,105
Variable selling and administrative expenses
Contribution margin
✔
✔

✔
✔
-910
$
✔
✔
7,195
Fixed costs:
Fixed manufacturing costs

Fixed selling and administrative expenses
Total fixed costs
✔

$
✔
✔
4,880

✔
✔
1,110
✔
-5,990
$
Operating income

✔
✔
1,205
Feedback
Check My Work
Sales - variable cost of goods sold = Manufacturing margin; Variable cost of goods sold = (beginning inventory of 70% x $2,660 million) + variable cost of goods
manufactured* - (ending inventory of 70% x $3,110 million); Manufacturing margin - variable selling and administrative expenses** = Contribution margin; Contribution
margin - (fixed manufacturing costs + fixed selling, administrative and other expenses) = income from operations
*Variable cost of goods manufactured = cost of goods sold + ending inventory - beginning inventory - fixed manufacturing costs
**Variable selling and administrative expenses = selling and administrative expenses - fixed selling, administrative and other expenses
b. Explain the difference between the amount of operating income reported under the absorption costing and variable costing concepts.
The income from operations under the variable costing concept will not

✔
be the same as the income from operations under the absorption
costing concept when the inventories either increase or decrease during the year. In this case, Ansara’s inventory increased
less

✔
than it produced. As a result, the income from operations under the variable costing concept will be less
operations under the absorption costing concept. The reason is because the variable costing concept does

✔

✔

✔
, meaning it sold
than the income from
deduct the fixed costs in the period
that they are incurred, regardless of changes in inventory balances.
Feedback
Check My Work
Absorption costing will match costs with sales by allocating the fixed costs to the beginning and ending inventories. Therefore, when inventories
decrease, fixed costs from the beginning inventory are deducted in determining cost of goods sold under absorption costing.
Feedback
Check My Work
Correct
Change in Sales Mix and Contribution Margin
Head Pops Inc. manufactures two models of solar-powered, noise-canceling headphones: Sun Sound and Ear Bling models. The company is operating at
less than full capacity. Market research indicates that 23,500 additional Sun Sound and 25,900 additional Ear Bling headphones could be sold. The
operating income by unit of product is as follows:
Sun Sound
Ear Bling
Headphones Headphones
Sales price
$28.00
Variable cost of goods sold
(15.70)
(24.50)
Manufacturing margin
$12.30
$19.20
Variable selling and administrative expenses
(5.60)
Contribution margin
$6.70
$43.70
(8.70)
$10.50
Fixed manufacturing costs
(2.50)
(3.90)
Operating income
$4.20
$6.60
Prepare an analysis indicating the increase or decrease in total profitability if 23,500 additional Sun Sound and 25,900 additional Ear Bling headphones are
produced and sold, assuming that there is sufficient capacity for the additional production. Round your per unit answers to two decimal place.
Head Pops Inc.
Analysis
Sun Sound Headphones
Ear Bling Headphones
✔
Unit volume increase
23,500
$
✔
x Contribution margin per unit 6.7
$
Increase in profitability
✔
25,900
$
✔
10.5
✔
157,450
$
✔
271,950
Feedback
Check My Work
Fixed costs should be excluded when determining the incremental income for operations, because they will not be affected by the decision.
Sales Territory and Salesperson Profitability Analysis
Havasu Off-Road Inc. manufactures and sells a variety of commercial vehicles in the Northeast and Southwest regions. There are two salespersons
assigned to each territory. Higher commission rates go to the most experienced salespersons. The following sales statistics are available for each
salesperson:
Northeast
Rene
Southwest
Steve
Colleen
Paul
Average per unit:
Sales price
$15,500
$16,000
$14,000
$18,000
$9,300
$8,000
$8,400
$9,000
8%
12%
10%
8%
36
24
40
60
40%
50%
40%
50%
Variable cost of goods sold
Commission rate
Units sold
Manufacturing margin ratio
a. 1. Prepare a contribution margin by salesperson report. Compute the contribution margin ratio for each salesperson.
Havasu Off-Road Inc.
Contribution Margin by Salesperson
Rene
Sales

$
✔
✔
Steve
$
✔
558,000 384,000
Variable cost of goods sold
Manufacturing margin
✔
✔

$
✔

✔
44,640
$

$
✔
223,200 192,000
Variable commission expense
Contribution margin
✔
✔
✔
$
✔
✔
32
%
$
✔
1,080,000
✔
✔
540,000
$
✔
$
224,000
$
✔
540,000
✔
✔
56,000
✔
86,400
$
168,000
✔
38
%
✔
Paul
336,000
✔
46,080
178,560 145,920
Contribution margin ratio
$
560,000
✔
334,800 192,000
✔

Colleen
✔
453,600
✔
✔
30
%
42
%
Feedback
Check My Work
a. 1. To recast the contribution margin data by salesperson report, multiply the sales volume by each per unit amount. To calculate the
contribution margin ratio, divide the contribution margin by sales.
a. 2. Interpret the report.
Paul earns the highest
units, has a low
high

✔

✔

✔
contribution margin and has the highest

commission rate, and sells a product mix with a high
average manufacturing margin but at a high

✔
✔

contribution margin ratio. This is because he sells the most
✔
Feedback
Check My Work

✔
total contribution margin.
✔
manufacturing margin. Steve also sells products with a
commission rate. Colleen has the poorest

among the four salespersons. Although Rene has a high variable cost of goods sold and also sells products with a low
unit, she has the second highest

✔

contribution margin ratio
✔
average sales price per
a. 2. Consider the impact the level of sales and the amount of the variable costs have on each salesperson's contribution margin ratio.
b. 1. Prepare a contribution margin by territory report. Compute the contribution margin for each territory as a percent, rounded to one decimal place.
Havasu Off-Road Inc.
Contribution Margin by Territory
Northeast
Sales

$
✔
✔
$
942,000
Variable cost of goods sold
Manufacturing margin

✔
Variable commission expense
✔
✔
876,000
✔

✔
$
✔
✔
142,400
✔
$
324,480
✔
621,600
✔
Contribution margin ratio
✔
764,000
90,720
$
Contribution margin
✔
415,200

✔
1,640,000
526,800
$
✔

Southwest
✔
34.4
%
37.9
%
Feedback
Check My Work
b. 1. Combine salesperson data for each territory and then recalculate the contribution margin ratio by dividing the contribution margin by sales.
b. 2. Interpret the report.
The Southwest Region has $
✔
698,000
more sales and $
✔
297,120
more contribution margin. In the Southwest Region, the salesperson with the highest sales unit volume, has the highest
ratio. The Southwest Region has the highest

✔
performance, even though it also has the salesperson with the lowest
margin ratio. The Northeast Region contribution margin is less
Paul

✔


✔
✔

contribution margin
✔
contribution
than the Southwest Region because of the outstanding performance of
.
Feedback
Check My Work
b. 2. Consider the impact the level of sales and the amount of the variable costs have on each territory's contribution margin ratio.
Feedback
Check My Work
Correct
Variable Costing Income Statement for a Service Company
East Coast Railroad Company transports commodities among three routes (city-pairs): Atlanta/Baltimore, Baltimore/Pittsburgh, and
Pittsburgh/Atlanta. Significant costs, their cost behavior, and activity rates for April are as follows:
Cost
Amount
Labor costs for loading and unloading railcars
Cost Behavior
Activity Rate
$175,582
Variable
Fuel costs
460,226
Variable
$46.00 per railcar
12.40 per train-mile
Train crew labor costs
267,228
Variable
7.20 per train-mile
Switchyard labor costs
118,327
Variable
Track and equipment depreciation
194,400
Fixed
Maintenance
129,600
Fixed
31.00 per railcar
$1,345,363
Operating statistics from the management information system reveal the following for April:
Atlanta/ Baltimore/ Pittsburgh/
Baltimore Pittsburgh
Number of train-miles
Atlanta
Total
12,835
10,200
14,080
37,115
425
2,160
1,232
3,817
$600
$275
$440
Number of railcars
Revenue per railcar
a. Prepare a contribution margin by route report for East Coast Railroad Company for the month of April. Compute the contribution margin
ratio. Rounded to one decimal place. If required, use the minus sign to indicate a negative contribution margin.
East Coast Railroad Company
Contribution Margin by Route
For the Month Ended April 30
Atlanta/Baltimore
$
Revenues
✔
255,000
Baltimore/Pittsburgh
$
✔
594,000
Pittsburgh/Atlanta
$
✔
542,080
Total
$
✔
1,391,080
Variable costs:
$
✔
Labor costs for loading and unloading railcars 19,550
$
✔
99,360
$
✔
56,672
$
✔
175,582
✔
✔
✔
✔
Fuel costs
159,154
126,480
174,592
460,226
Train crew labor costs
92,412
Switchyard labor costs
13,175
Total variable costs
284,291
✔
✔
73,440
✔
$
$
✔
✔
Contribution margin
-29,291
Contribution margin ratio
-11.5
%
✔
✔
✔
101,376
267,228
✔
66,960
$
✔
366,240
$
✔
227,760
✔
38.3
%
✔
38,192
$
✔
370,832
$
✔
171,248
✔
31.6
%
✔
118,327
$
✔
1,021,363
$
✔
369,717
✔
26.6
%
Feedback
Check My Work
a. Revenues - Variable Costs = Contribution Margin
To calculate the contribution margin ratio, divide the contribution margin by revenues.
b. Evaluate the route performance of the railroad using the report in (a).
The Atlanta/Baltimore

✔
route performs significantly worse than do the other two routes. A close examination of the operating
statistics indicates that this route runs very few

suggests that the railroad is running many short

✔
✔
railcars, combined with fairly high
Feedback
Check My Work
b. Is the railroad’s profitability is sensitive to the size, or length, of the train?
Check My Work
✔
total mileage. This combination
trains on the railroad. That is, the railroad’s profitability is very
to the size, or length, of the train in railcar terms.
Feedback


✔
sensitive
Variable Costing Income Statement for a Service Company
The actual and planned data for Underwater University for the Fall term were as follows:
Enrollment
Actual
Planned
4,500
4,125
$120
$135
60,450
43,200
$275
$275
Tuition per credit hour
Credit hours
Registration, records, and marketing costs per enrolled student
Instructional costs per credit hour
Depreciation on classrooms and equipment
$64
$60
$825,600
$825,600
Registration, records, and marketing costs vary by the number of enrolled students, while instructional costs vary by the number of credit hours.
Depreciation is a fixed cost.
Prepare a variable costing income statement showing the contribution margin and operating income for the Fall term.
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
Total variable costs
5,106,300
Contribution margin
2,147,700
$
$
✔
✔
✔
Depreciation on classrooms and equipment 825,600
$
Operating income
✔
1,322,100
Feedback
Check My Work
Calculate:
Revenue = $120 x credit hours
Variable costs:
Registration, records, and marketing costs = $275 x students
Instructional costs = $64 x credit hours
Revenue - variable costs = contribution margin - depreciation = operating income