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Exercise 6-1 (15 minutes)
1. Under absorption costing, all manufacturing costs (variable and fixed)
are included in product costs.
Direct materials ............................................................
Direct labor..................................................................
Variable manufacturing overhead ..................................
Fixed manufacturing overhead ($60,000 ÷ 250 units) ....
Absorption costing unit product cost..............................
$100
320
40
240
$700
2. Under variable costing, only the variable manufacturing costs are
included in product costs.
Direct materials ............................................................
Direct labor..................................................................
Variable manufacturing overhead ..................................
Variable costing unit product cost ..................................
$100
320
40
$460
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Note that selling and administrative expenses are not treated as product
costs under either absorption or variable costing. These expenses are
always treated as period costs and are charged against the current
period’s revenue.
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Exercise 6-2 (20 minutes)
1. Fixed manufacturing overhead cost deferred in inventory = 25 units in
ending inventory × $240 per unit* = $6,000
* $60,000 ÷ 250 units = $240 per unit
2. The variable costing income statement appears below:
Sales ............................................................
Variable expenses:
Variable cost of goods sold
(225 units sold × $460* per unit) .............
Variable selling and administrative expenses
(225 units × $20 per unit) ........................
Contribution margin ......................................
Fixed expenses:
Fixed manufacturing overhead.....................
Fixed selling and administrative expenses ....
Net operating income ....................................
* Variable cost of goods sold per unit:
Direct materials .............................................
Direct labor ...................................................
Variable manufacturing overhead ...................
Variable costing unit product cost ...................
$191,250
$103,500
4,500
60,000
20,000
108,000
83,250
80,000
$ 3,250
$100
320
40
$460
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The difference in net operating income between variable and absorption
costing can be explained by the deferral of fixed manufacturing
overhead cost in inventory that has taken place under the absorption
costing approach. Note from part (1) that $6,000 of fixed manufacturing
overhead cost has been deferred in inventory to the next period. Thus,
net operating income under the absorption costing approach is $6,000
higher than it is under variable costing.
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Exercise 6-9 (30 minutes)
1. a. Under variable costing, only the variable manufacturing costs are
included in product costs.
Year 1 Year 2
Direct materials ....................................
Direct labor ..........................................
Variable manufacturing overhead ..........
Variable costing unit product cost ..........
$25
15
5
$45
$25
15
5
$45
Note that selling and administrative expenses are not treated as
product costs; that is, they are not included in the costs that are
inventoried. These expenses are always treated as period costs.
1. b.
Sales ..........................................................
Variable expenses:
Variable cost of goods sold @ $45 per unit .
Variable selling and administrative @ $2
per unit .................................................
Total variable expenses ................................
Contribution margin.....................................
Fixed expenses:
Fixed manufacturing overhead ...................
Fixed selling and administrative .................
Total fixed expenses ....................................
Net operating income (loss) .........................
Year 1
$2,400,000 $3,000,000
1,800,000
2,250,000
80,000
1,880,000
520,000
100,000
2,350,000
650,000
250,000
250,000
80,000
80,000
330,000
330,000
$ 190,000 $ 320,000
2. a. The unit product costs under absorption costing:
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Direct materials ....................................
Direct labor ..........................................
Variable manufacturing overhead ..........
Fixed manufacturing overhead ..............
Absorption costing unit product cost ......
Year 2
Year 1 Year 2
$25 $25.00
15 15.00
5
5.00
*5 **6.25
$50 $51.25
* $250,000 ÷ 50,000 units = $5 per unit.
** $250,000 ÷ 40,000 units = $6.25 per unit.
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Exercise 6-9 (continued)
2. b. The absorption costing income statements appears below:
Year 1
Year 2
Sales (see requirement 1(b)) ................... $2,400,000 $3,000,000
Cost of goods sold .................................. *2,000,000 **2,550,000
Gross margin ..........................................
400,000
450,000
Selling and administrative expenses .........
160,000
180,000
Net operating income .............................. $ 240,000 $ 270,000
* 40,000 units × $50 per unit = $2,000,000
** (40,000 units × $51.25 per unit) + (10,000 units × $50 per unit)
= $2,550,000
3. The net operating incomes are reconciled as follows:
Units in beginning inventory ........................
+ Units produced ........................................
− Units sold ................................................
= Units in ending inventory .........................
Fixed manufacturing overhead in ending
inventory (10,000 units × $5 per unit) .......
Deduct: Fixed manufacturing overhead in
beginning inventory (10,000 units × $5
per unit) ..................................................
Manufacturing overhead deferred in
(released from) inventory ..........................
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Variable costing net operating income ........
Add (deduct) fixed manufacturing overhead
cost deferred in (released from) inventory
under absorption costing ........................
Absorption costing net operating income ....
Year 1
Year 2
Year 1
Year 2
0
50,000
40,000
10,000
$50,000
10,000
40,000
50,000
0
$
0
50,000
$50,000
$(50,000)
Year 1
Year 2
$190,000
$320,000
50,000
$240,000
(50,000)
$270,000
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Problem 6-21 (30 minutes)
1.
Total Company
Amount
%
Sales ............................................... $750,000 100.0
Variable expenses ............................ 336,000 44.8
Contribution margin ......................... 414,000 55.2
Traceable fixed expenses .................. 228,000 30.4
Territorial segment margin ................ 186,000 24.8
Common fixed expenses* ................. 150,000 20.0
Net operating income ....................... $ 36,000
4.8
Sales Territory
Northern
Southern
Amount %
Amount %
$300,000 100
156,000 52
144,000 48
120,000 40
$ 24,000
8
$450,000 100
180,000 40
270,000 60
108,000 24
$162,000 36
*378,000 – $228,000 = $150,000
Product Line
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Sales ............................................
Variable expenses ...........................
Contribution margin ........................
Traceable fixed expenses .................
Product line segment margin ...........
Common fixed expenses* ................
Sales territory segment margin ........
*$120,000 – $70,000 = $50,000
Northern Territory
Amount
%
$300,000 100.0
156,000 52.0
144,000 48.0
70,000 23.3
74,000 24.7
50,000 16.7
$ 24,000
8.0
Paks
Amount %
$50,000 100
11,000 22
39,000 78
30,000 60
$ 9,000 18
Tibs
Amount %
$250,000 100
145,000 58
105,000 42
40,000 16
$ 65,000 26
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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
contribution margin ratio. Second, the Northern territory has high
traceable fixed expenses. Overall, compared to the Southern territory,
the Northern territory is very weak.
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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
margin ratio in the Northern territory mentioned in part (2) above.
Second, the traceable fixed expenses of the Paks product seem very
high in relation to sales. These high fixed expenses may simply mean
that the Paks product is highly leveraged; if so, then an increase in sales
of this product line would greatly enhance profits in the Northern
territory and in the company as a whole.