CHAPTER 20 (FIN MAN); CHAPTER 5 (MAN)
VARIABLE COSTING FOR MANAGEMENT ANALYSIS
DISCUSSION QUESTIONS
1.
a.
Under absorption costing, both variable and fixed manufacturing costs are included as a
part of the cost of the product manufactured.
b.
Under variable costing, only the variable manufacturing costs are included as a part of
the cost of the product manufactured. The fixed manufacturing costs are treated as an
expense of the period in which they are incurred.
2.
Fixed factory overhead.
3.
Included as part of the cost of product manufactured: (b), (d), (g).
4.
In the variable costing income statement, the fixed manufacturing costs and the fixed
selling and administrative expenses are reported in a special section for fixed costs and are
deducted from the contribution margin.
5.
All costs are controllable by someone within the business but not necessarily by the same
level of management. For a specific level of management, noncontrollable costs are costs
for which another level of management is responsible.
6.
In the short run, income from operations is maximized if the revenue from the sale of the
product exceeds the variable cost of making and selling the product. Under variable costing,
these relevant costs are readily available.
7.
Product profitability analysis can be used by management to set product prices, to emphasize
promotional activity toward more profitable products or away from less profitable products,
and to make decisions about keeping products or eliminating products from the product line.
8.
Rewarding sales personnel on the basis of total sales will normally motivate the sales staff
to expend their efforts promoting high-volume products, which will produce a large total
amount of sales dollars. In some cases, more profit may be earned by promoting specialty
products with lower sales volume but which have higher profit margins on each product sold.
For example, grocery stores must generate a large volume of sales to earn the same profit as
a jewelry store, because the profit margin for the grocery industry is low, while the profit
margin for the jewelry industry is high. A better measure of sales performance is the total
dollar contribution margin of each salesperson (total sales less variable cost of goods sold
and variable selling expenses) to overall company profit.
9.
A change in contribution margin can be attributed to a change in the following factors as
they affect sales and/or variable costs: (1) quantity factor—the effect of a difference in the
number of units sold, assuming no change in unit sales price or unit cost, and (2) unit price
or unit cost factor—the effect of a difference in unit sales price or unit cost on the number of
units sold.
10.
The quantity factor for sales is computed as the difference between the actual quantity sold
and the planned quantity sold, multiplied by the planned unit sales price.
11.
The unit cost factor for variable cost of goods sold is computed as the difference between the
planned unit cost and the actual unit cost, multiplied by the actual quantity sold.
20-1
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CHAPTER 20
Variable Costing for Management Analysis
PRACTICE EXERCISES
PE 20–1A (FIN MAN); PE 5–1A (MAN)
a.
b.
c.
$345,600 = $540,000 – $194,400
$302,400 = $345,600 – $43,200
$140,400 = $302,400 – $129,600 – $32,400
PE 20–1B (FIN MAN); PE 5–1B (MAN)
a.
b.
c.
$364,800 = $760,000 – $395,200
$167,200 = $364,800 – $197,600
$53,200 = $167,200 – $68,400 – $45,600
PE 20–2A (FIN MAN); PE 5–2A (MAN)
a.
Variable costing income from operations is less than absorption costing
income from operations because the units manufactured are greater than
the units sold.
b.
$2,688,000 ($70 per unit × 38,400 units)
PE 20–2B (FIN MAN); PE 5–2B (MAN)
a.
Variable costing income from operations is less than absorption costing
income from operations because the units manufactured are greater than
the units sold.
b.
$739,200 ($44 per unit × 16,800 units)
PE 20–3A (FIN MAN); PE 5–3A (MAN)
a.
Variable costing income from operations is greater than absorption costing
income from operations because the units manufactured are less than the
units sold.
b.
$201,600 ($21.00 per unit × 9,600 units)
PE 20–3B (FIN MAN); PE 5–3B (MAN)
a.
Variable costing income from operations is greater than absorption costing
income from operations because the units manufactured are less than the
units sold.
b.
$776,160 ($14.70 per unit × 52,800 units)
20-2
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CHAPTER 20
Variable Costing for Management Analysis
PE 20–4A (FIN MAN); PE 5–4A (MAN)
a.
$15,000 greater in producing 15,000 units. 12,000 units × (6.25* – 5.00**),
or [3,000 units × ($75,000 ÷ 15,000 units)].
b.
There would be no difference in variable costing income from operations.
* $75,000 ÷ 12,000 units
** $75,000 ÷ 15,000 units
PE 20–4B (FIN MAN); PE 5–4B (MAN)
a.
$52,500 greater in producing 15,000 units. 10,000 units × (15.75* – 10.50**),
or [5,000 units × ($157,500 ÷ 15,000 units)].
b.
There would be no difference in variable costing income from operations.
* $157,500 ÷ 10,000 units
** $157,500 ÷ 15,000 units
PE 20–5A (FIN MAN); PE 5–5A (MAN)
a.
b.
$28,232,000 = [50,000 units × ($480 – $248)] + [(66,000 units × ($500 – $248)]
$45,200,000 = [50,000 units × ($480 – $248)] + [(112,000 units × ($560 – $260)]
PE 20–5B (FIN MAN); PE 5–5B (MAN)
a.
b.
$40,080,000 = [60,000 units × ($728 – $360)] + [(50,000 units × ($720 – $360)]
$30,312,000 = [38,000 units × ($660 – $336)] + [(50,000 units × ($720 – $360)]
PE 20–6A (FIN MAN); PE 5–6A (MAN)
a.
b.
$500,000 decrease in sales = 20,000 units × $25 per unit
$1,230,000 increase in sales = ($28 – $25) × 410,000 units
PE 20–6B (FIN MAN); PE 5–6B (MAN)
a.
b.
$326,400 increase in variable cost of goods sold = (2,400 units × $136 per unit)
$56,000 decrease in contribution margin = ($136 – $140) × 14,000 units
20-3
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CHAPTER 20
Variable Costing for Management Analysis
EXERCISES
Ex. 20–1 (FIN MAN); Ex. 5–1 (MAN)
a.
The inventory valuation under the absorption costing concept would include
the fixed factory overhead cost, as follows:
11,250 units × $139.00 = $1,563,750
Direct materials…………………………………………………………………………
Direct labor………………………………………………………………………………
Fixed factory overhead………………………………………………………………
Variable factory overhead……………………………………………………………
Total………………………………………………………………………………………
b.
$ 78.00
38.00
12.00
11.00
$139.00
The inventory valuation under the variable costing concept would not include
the fixed factory overhead cost, as follows:
11,250 units × $127.00 = $1,428,750
Direct materials…………………………………………………………………………
Direct labor………………………………………………………………………………
Variable factory overhead……………………………………………………………
Total………………………………………………………………………………………
$ 78.00
38.00
11.00
$127.00
All of the fixed factory overhead cost would be expensed in the variable costing
income statement as a period cost. Thus, the absorption costing income statement
would have a higher net income than would the variable costing income statement.
20-4
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–2 (FIN MAN); Ex. 5–2 (MAN)
BEACH MOTORS INC.
Absorption Costing Income Statement
For the Month Ended July 31, 2014
a.
Sales
Cost of goods sold (30,000 units × $210.00*)
Gross profit
Selling and administrative expenses ($1,260,000 + $225,000)
Income from operations
$9,000,000
6,300,000
$2,700,000
1,485,000
$1,215,000
* Production costs per unit:
Direct materials per unit ($4,495,500 ÷ 40,500 units)……………………
Direct labor per unit ($2,187,000 ÷ 40,500 units)…………………………
Variable factory overhead per unit ($1,093,500 ÷ 40,500 units)………
Fixed factory overhead per unit ($729,000 ÷ 40,500 units)……………
$111.00
54.00
27.00
18.00
Total production costs per unit……………………………………………
$210.00
BEACH MOTORS INC.
Variable Costing Income Statement
For the Month Ended July 31, 2014
b.
Sales
Variable cost of goods sold
(30,000 units × $192* per unit)
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed factory overhead costs
Fixed selling and administrative expenses
Income from operations
$9,000,000
5,760,000
$3,240,000
1,260,000
$1,980,000
$729,000
225,000
954,000
$1,026,000
* $111 + $54 + $27 = $192
20-5
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–2 (FIN MAN); Ex. 5–2 (MAN) (Concluded)
c.
The difference between the absorption and variable costing income from operations
of $189,000 ($1,215,000 – $1,026,000) can be explained as follows:
10,500
Increase in inventory…………………………………………………………………
$
18.00
× Fixed factory overhead per unit…………………………………………………
Difference in income from operations…………………………………………… $189,000
Under the absorption costing method, the fixed factory overhead cost included in
the cost of goods sold is matched with the revenues. As a result, 10,500 units that
were produced but unsold (inventory) include fixed factory overhead cost, which is
not included in the cost of goods sold.
Under variable costing, all of the fixed factory overhead 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 income from operations than will the variable costing income statement.
20-6
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–3 (FIN MAN); Ex. 5–3 (MAN)
a.
EKIN INC.
Absorption Costing Income Statement
For the Month Ended February 28, 2014
Sales
Cost of goods sold:
Beginning inventory (9,000 × $120.00)
Cost of goods manufactured
(90,000 × $122.00)
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
b.
$ 1,080,000
10,980,000
12,060,000
$12,690,000
5,539,500
$ 7,150,500
EKIN INC.
Variable Costing Income Statement
For the Month Ended February 28, 2014
Sales
Variable cost of goods sold
(99,000 units × $100.00 per unit)
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
c.
$24,750,000
$24,750,000
9,900,000
$14,850,000
4,752,000
$10,098,000
$1,980,000
787,500
2,767,500
$ 7,330,500
The difference between the absorption and variable costing income from
operations of −$180,000 ($7,150,500 − $7,330,500) can be explained as follows:
Reduction in inventory……………………………………………………………
× Fixed manufacturing cost per unit (at 100% capacity)……………………
Difference in income from operations…………………………………………
(9,000)
$20.00
$(180,000)
Under the absorption costing method, the fixed manufacturing cost included in the
cost of goods sold is matched with the revenues. As a result, 9,000 units that were
produced but unsold in January (beginning inventory for February) include fixed
manufacturing cost, which is included in the cost of goods sold for February. Under
variable costing, 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 decreases, the absorption costing income statement will have a lower
income from operations than will the variable costing income statement.
20-7
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–4 (FIN MAN); Ex. 5–4 (MAN)
a.
Variable cost of goods manufactured
Number of units produced
Variable cost of goods
=
manufactured per unit
Variable cost of goods
=
manufactured per unit
$20,736,000
10,800 units
Variable cost of goods
= $1,920
manufactured per unit
b.
Total cost of goods manufactured
(variable + fixed)
Number of units produced
Absorption cost of goods
=
manufactured per unit
Absorption cost of goods
=
manufactured per unit
($20,736,000 + $9,504,000)
10,800 units
Absorption cost of goods
= $2,800
manufactured per unit
Ex. 20–5 (FIN MAN); Ex. 5–5 (MAN)
HAMAN COMPANY
Variable Costing Income Statement
For the Month Ended June 30, 2015
Sales (14,400 units)
Variable cost of goods sold:
Variable cost of goods manufactured*
Less inventory, June 30 (2,400 units)**
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$1,209,600
$932,400
133,200
799,200
$ 410,400
68,400
$ 342,000
$ 75,600
54,720
130,320
$ 211,680
* $1,008,000 – $75,600 (total manufacturing cost less fixed manufacturing cost)
** ($932,400 ÷ $1,008,000) × $144,000 (the ratio of variable to total manufacturing costs times the value of
the ending inventory under absorption costing); or $932,400 ÷ 16,800 units manufactured = $55.50;
$55.50 × $2,400 units = $133,200.
20-8
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–6 (FIN MAN); Ex. 5–6 (MAN)
COVELLI EQUIPMENT COMPANY
Absorption Costing Income Statement
For the Month Ended July 31, 2014
Sales (45,000 units)
Cost of goods sold:
Cost of goods manufactured*
Less inventory, May 31 (9,000 units)**
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
$6,750,000
$3,915,000
652,500
3,262,500
$3,487,500
2,250,000
$1,237,500
* $3,240,000 + $675,000 (total variable plus fixed manufacturing cost)
** ($3,915,000 ÷ $3,240,000) × $540,000 (the ratio of total to variable manufacturing cost times the ending
inventory valuation under variable costing); or $3,915,000 ÷ 54,000 units manufactured = $72.50/unit;
$72.50 × 9,000 units = $652,500.
Ex. 20–7 (FIN MAN); Ex. 5–7 (MAN)
a.
PROCTER & GAMBLE COMPANY
Variable Costing Income Statement (assumed)
(in millions)
Net sales
Variable cost of products sold
Manufacturing margin
Variable marketing, administrative, and other
expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed marketing, administrative, and other
expenses
Income from operations
b.
$82,559
22,830
$59,729
10,400
$49,329
$17,938
15,573
33,511
$15,818
If Procter & Gamble Company reduced its inventories during the period, then the cost
of products sold would include fixed costs allocated to the beginning inventories.
These would not be fixed costs of the current period. Thus, the total fixed costs of
products sold on the absorption costing income statement would be higher, and the
income from operations would be lower.
20-9
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–8 (FIN MAN); Ex. 5–8 (MAN)
a.
1.
MUZENSKI INDUSTRIES INC.
Absorption Costing Income Statement
For the Month Ending July 31, 2014
28,800 Units
Manufactured
Sales
Cost of goods sold:
Cost of goods manufactured:
28,800 units × $69.50*
36,000 units × $68**
Less inventory, July 31 (7,200 units × $68)
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
$2,160,000
36,000 Units
Manufactured
$2,160,000
$2,001,600
$2,001,600
$ 158,400
64,900
$ 93,500
$2,448,000
489,600
$1,958,400
$ 201,600
64,900
$ 136,700
* Unit cost of goods manufactured:
Direct materials ($1,324,800 ÷ 28,800)………………………………
Direct labor ($316,800 ÷ 28,800)……………………………………
Variable factory overhead cost ($144,000 ÷ 28,800)……………
Fixed factory overhead cost ($216,000 ÷ 28,800)…………………
Total unit cost…………………………………………………………
$46.00
11.00
5.00
7.50
$69.50
** Unit cost of goods manufactured:
Direct materials…………………………………………………………
Direct labor………………………………………………………………
Variable factory overhead cost………………………………………
Fixed factory overhead cost ($216,000 ÷ 36,000)…………………
Total unit cost…………………………………………………………
$46.00
11.00
5.00
6.00
$68.00
20-10
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–8 (FIN MAN); Ex. 5–8 (MAN) (Concluded)
2.
MUZENSKI INDUSTRIES INC.
Variable Costing Income Statement
For the Month Ending July 31, 2014
28,800 Units
Manufactured
Sales
Variable cost of goods sold:
Variable cost of goods manufactured:
28,800 units × $62.00*
36,000 units × $62.00*
Less inventory, July 31 (7,200 units × $62.00)
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses**
Contribution margin
Fixed costs:
Fixed factory overhead
Fixed selling and administrative expenses
Total fixed costs
Income from operations
$2,160,000
36,000 Units
Manufactured
$2,160,000
$1,785,600
$1,785,600
$ 374,400
35,500
$ 338,900
$2,232,000
446,400
$1,785,600
$ 374,400
35,500
$ 338,900
$ 216,000
29,400
$ 245,400
$ 93,500
$ 216,000
29,400
$ 245,400
$ 93,500
* Unit variable cost of goods manufactured:
Direct materials ($1,324,800 ÷ 28,800)………………………………
Direct labor ($316,800 ÷ 28,800)……………………………………
Variable factory overhead cost ($144,000 ÷ 28,800)……………
Total unit variable cost………………………………………………
$46.00
11.00
5.00
$62.00
** Variable selling and administrative expenses are constant with constant sales levels.
b.
If 36,000 units rather than 28,800 units are manufactured, the increase in income
from operations of $43,200 ($136,700 – $93,500) under absorption costing is caused
by the allocation of $216,000 of fixed factory overhead cost over a larger number of
units. If 28,800 units are manufactured, the fixed factory overhead cost is $7.50 per
unit ($216,000 ÷ 28,800) compared to $6.00 per unit ($216,000 ÷ 36,000) if 36,000 units
are manufactured. Thus, the cost of goods sold is $43,200 less by the amount of
$1.50/unit ($7.50 – $6.00) times the number of units sold, or $1.50 × 28,800 units =
$43,200. The $43,200 difference can also be explained by the amount of fixed factory
overhead cost included in the ending inventory if 36,000 units are manufactured
($6.00 per unit × 7,200 units).
20-11
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–9 (FIN MAN); Ex. 5–9 (MAN)
a.
WHIRLPOOL CORPORATION
Variable Costing Income Statement (assumed)
(in millions)
Sales
Variable cost of goods sold:
Beginning inventory (70% × $2,792)
Variable cost of goods manufactured*
Less: Ending inventory (70% × $2,354)
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses**
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$18,666
$ 1,954
11,627
(1,648)
11,933
$ 6,733
691
$ 6,042
$ 4,024
930
4,954
$ 1,088
* Variable cost of goods manufactured:
Cost of goods sold…………………………………………………………
Plus: Ending inventory……………………………………………………
Less: Beginning inventory………………………………………………
Cost of goods manufactured………………………………………………
Less: Manufacturing fixed costs…………………………………………
Variable cost of goods manufactured……………………………………
$16,089
2,354
(2,792)
$15,651
4,024
$11,627
** Variable selling and administrative expenses:
Selling and administrative expenses……………………………………
Less: Selling and administrative fixed expenses……………………
Variable selling and administrative expenses…………………………
$ 1,621
930
$
691
20-12
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–9 (FIN MAN); Ex. 5–9 (MAN) (Concluded)
b.
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, Whirlpool’s
inventory decreased, meaning it sold more than it produced. As a result, the income
from operations under the variable costing concept will be greater than the income
from operations under the absorption costing concept. The reason is because the
variable costing concept will deduct the fixed costs in the period that they are incurred,
regardless of changes in inventory balances. In contrast, absorption costing will match
costs with sales by allocating the fixed costs to the beginning and ending inventories.
When sales are less than the cost of goods manufactured (when inventories decrease),
fixed costs from the beginning inventory are included in cost of goods sold under
absorption costing. Thus, more fixed costs will be included in cost of goods sold
than were actually incurred during the period. This will result in a lower income from
operations than would be reported under the variable costing concept.
The difference between the income from operations under the two concepts can be
explained as follows (rounded):
Fixed cost portion of Jan. 1 inventory (30% × $2,792)……………………………
Less: Fixed cost portion of Dec. 31 inventory (30% × $2,354)…………………
Difference in income from operations………………………………………………
$ 838
706
$ 132
Income from operations—variable costing………………………………………
Income from operations—absorption costing……………………………………
Difference…………………………………………………………………………………
$1,088
956
$ 132
20-13
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–10 (FIN MAN); Ex. 5–10 (MAN)
a.
Management’s decision and conclusion are incorrect. The profit will not be improved
by $114,000 because the fixed costs used in manufacturing and selling running shoes
will not be avoided if the line is eliminated. These fixed costs total $192,000 for the
running shoe line. Thus, the actual profit will go down by $78,000 ($192,000 – $114,000)
if the running shoe line is eliminated. This is shown in the variable costing income
statements in (b). The absorption costing product profit reports should not be used
for making this type of decision.
b.
KOBEER, INC
Variable Costing Income Statements—Three Product Lines
For the Year Ended December 31, 2014
c.
Basketball
Shoes
Cross Training
Shoes
Running
Shoes
Revenues
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative
expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative
expenses
$696,000
252,000
$444,000
$588,000
210,000
$378,000
$ 504,000
240,000
$ 264,000
204,000
$240,000
144,000
$234,000
186,000
$ 78,000
$108,000
$ 78,000
$ 96,000
84,000
$192,000
72,000
$150,000
96,000
$ 192,000
Income from operations
$ 48,000
$ 84,000
$(114,000)
If the running shoe line were eliminated, then the contribution margin of the product
line also would be eliminated. The fixed costs would not be eliminated. Thus, the
profit of the company would actually decline by $78,000. Management should keep
the line and attempt to improve the profitability of the product by increasing prices,
increasing volume, or reducing costs. Alternatively, if the volume of the other two
products were to increase, then the running shoe line could be eliminated and
replaced with volume from the other two products.
20-14
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–11 (FIN MAN); Ex. 5–11 (MAN)
No Noise
Headphone
Silent
Candy
Headphone
35,700
$14.40
$514,080
39,600
$20.20
$799,920
Unit volume increase…………………………………………………
× Contribution margin per unit………………………………………
Increase in profitability………………………………………………
The increase in total profitability would be $1,314,000 ($514,080 + $799,920). Note that
the income from operations per unit figures are not used in the analysis, since the fixed
costs should be excluded in determining the incremental income from operations to be
earned from the incremental sales. This is because the company has sufficient capacity
for the additional production. Thus, fixed costs will not be affected by the decision.
Ex. 20–12 (FIN MAN); Ex. 5–12 (MAN)
SNOW MOTOR SPORTS INC.
Contribution Margin by Product
a.
ARCTIC
Revenues
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Contribution margin ratio
b.
$12,600,000
7,440,000
$ 5,160,000
1,884,000
$ 3,276,000
26.00%
CAT
$5,720,000
3,696,000
$2,024,000
765,600
$1,258,400
22.00%
The Arctic line provides the largest total contribution margin and the largest
contribution margin ratio. If the sales mix were shifted more toward the Arctic, the
overall profitability of the company would increase.
20-15
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–13 (FIN MAN); Ex. 5–13 (MAN)
COAST TO COAST SURFBOARDS INC.
Contribution Margin by Territory
a.
East Coast
$8,000,000
6,000,000
$2,000,000
1,360,000
$ 640,000
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses
Contribution margin
8.0%
Contribution margin ratio
b.
West Coast
$8,000,000
6,000,000
$2,000,000
1,250,000
$ 750,000
9.38%
The total contribution margin is slightly lower for the East Coast, while the
contribution margin ratio is slightly higher for West Coast. This is because East Coast
sells only Atlantic Waves, which have a lower contribution margin ratio (8.0% vs.
11.7%)* but a higher contribution margin per unit ($16 vs. $14). In attempting to
improve the company’s profitability, it is unlikely that changing the mix of products
to the two territories will have much effect. East Coast will sell very few Pacific
Pounders (due to surf style), while West Coast has a mixed surf. However, there
appears to be a number of profit opportunities. First, the Atlantic Wave has a
manufacturing margin of $50 per unit, while the Pacific Pounder is only $30 per unit.
Why such a large difference? Maybe the Pacific Pounder is underpriced or made in
inefficient manufacturing processes. Second, the variable selling expense per unit
for the Atlantic Wave is much higher than that of the Pacific Pounder ($34 vs. $16).
This suggests that the variable selling expenses per unit for the Atlantic Wave may
be too high. It seems difficult to justify a more than two-to-one difference in this
expense. Reducing the variable selling expense for the Atlantic Wave by half, for
example, would have a significant impact on the firm’s overall profitability.
* 8% = $16 ÷ $200, rounded to one decimal place
11.7% = $14 ÷ $120
20-16
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–14 (FIN MAN); Ex. 5–14 (MAN)
REYES INDUSTRIES INC.
Contribution Margin by Salesperson
a. 1.
Sales
Variable cost of goods sold
Manufacturing margin
Variable expense—Commission
Contribution margin
Contribution margin ratio
Cassy G.
Todd
Tim
Jeff
$2,688,000
1,612,800
$1,075,200
$2,016,000
806,400
$1,209,600
$2,592,000
1,555,200
$1,036,800
$2,964,000
1,185,600
$1,778,400
322,560
$752,640
322,560
$887,040
414,720
$622,080
355,680
$1,422,720
28.00%
44.00%
24.00%
48.00%
2. Jeff earns the highest contribution margin and has the highest contribution margin
ratio. This is because he sells the most units, has a low commission rate, and sells a
product mix with a high manufacturing margin (60% of sales, $1,778,400 ÷ $2,964,000).
Todd also sells products with a high average manufacturing margin (60% of sales,
$1,209,600 ÷ $2,016,000) but at a high commission rate. This accounts for the four
percentage point difference in the contribution margin ratio between Jeff and Todd.
The other two salespersons sell products with lower average manufacturing margins
(40% of sales). Combining this with the high commission rate causes Tim to have the
poorest contribution margin ratio among the four salespersons. In addition, because
Tim has the lowest sales volume and the highest variable cost of goods sold, he also
provides the lowest overall contribution margin. Again, the four percentage point
difference between Tim and Cassy is due to the difference in their commission rates.
20-17
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–14 (FIN MAN); Ex. 5–14 (MAN) (Concluded)
b.
1.
REYES INDUSTRIES INC.
Contribution Margin by Territory
Sales
Variable cost of goods sold
Manufacturing margin
Variable commission expense
Contribution margin
Contribution margin ratio
2.
Northeast
Southwest
$4,704,000
2,419,200
$2,284,800
645,120
$1,639,680
$5,556,000
2,740,800
$2,815,200
770,400
$2,044,800
34.9%
36.8%
The Southwest Region has $852,000 more sales and $405,120 more contribution
margin. In addition, the Southwest Region has the largest contribution margin
ratio. In the Southwest Region, the salesperson with the highest sales unit volume
also has the highest contribution margin ratio (Jeff). The Southwest Region has
the highest performance, even though it also has the salesperson with the
lowest contribution margin and contribution margin ratio (Tim). In the Northeast
Region, both salespersons are performing similarly. The Northeast Region
contribution margin is less than the Southwest Region because of the outstanding
performance of Jeff. Jeff is driving the Southwest Region’s performance.
20-18
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CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–15 (FIN MAN); Ex. 5–15 (MAN)
CATERPILLAR, INC.
Contribution Margin by Segment (assumed)
(in millions, except ratio figures)
a.
Building
Construction
Products
Cat Japan
Core
Components
Earthmoving
Electric
Power
Excavation
Large
Power
Systems
Logistics
Marine &
Petroleum
Power
Mining
Turbines
Sales
Variable cost of goods sold
Manufacturing margin
$2,217.00
997.65
$1,219.35
$1,225.00
673.75
$ 551.25
$1,234.00
604.66
$ 629.34
$5,045.00
2,572.95
$2,472.05
$2,847.00
1,537.38
$1,309.62
$4,562.00
2,372.24
$2,189.76
$2,885.00
1,529.05
$1,355.95
$659.00
329.50
$329.50
$2,132.00
1,066.00
$1,066.00
$3,975.00
2,067.00
$1,908.00
$3,321.00
1,594.08
$ 1,726.92
Dealer commissions
Variable promotion expenses
Variable selling expenses
$ 199.53
310.00
$ 509.53
$ 134.75
120.00
$ 254.75
$
98.72
150.00
$ 248.72
$ 403.60
600.00
$1,003.60
$ 284.70
200.00
$ 484.70
$ 273.72
600.00
$ 873.72
$ 144.25
300.00
$ 444.25
$ 65.90
75.00
$140.90
$ 191.88
270.00
$ 461.88
$ 278.25
480.00
$ 758.25
298.89
400.00
$ 698.89
Contribution margin
$ 709.82
$ 296.50
$ 380.62
$1,468.45
$ 824.92
$1,316.04
$ 911.70
$188.60
$ 604.12
$1,149.75
$1,028.03
Contribution margin ratio
32.0%
24.2%
30.8%
29.1%
29.0%
28.8%
31.6%
28.6%
28.3%
28.9%
31.0%
b.
Building
Construction
Products
Manufacturing margin
Commission
Variable promotion
Contribution margin ratio
55.0%
–9.0%
–14.0%
32.0%
Cat Japan
45.0%
–11.0%
–9.8%
24.2%
Core
Components
Earthmoving
51.0%
–8.0%
–12.2%
30.8%
49.0%
–8.0%
–11.9%
29.1%
Electric
Power
46.0%
–10.0%
–7.0%
29.0%
Excavation
48.0%
–6.0%
–13.2%
28.8%
Large
Power
Systems
47.0%
–5.0%
–10.4%
31.6%
Logistics
50.0%
–10.0%
–11.4%
28.6%
19
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Marine &
Petroleum
Power
50.0%
–9.0%
–12.7%
28.3%
Mining
48.0%
–7.0%
–12.1%
28.9%
Turbines
52.0%
–9.0%
–12.0%
31.0%
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–15 (FIN MAN); Ex. 5–15 (MAN) (Concluded)
c.
The Building Construction Products segment has the highest contribution margin
ratio. The manufacturing margin is high, while the dealer commission rate is average.
The variable promotion expenses as a percent of sales is higher than average. Cat
Japan is the poorest performing segment in terms of contribution margin ratio. This
is because the manufacturing margin is the lowest and dealer commissions are the
highest. The high dealer commission is out of balance with the rest of the business
segments. This may be the result of the high labor cost structure of Japan. The
Large Power Systems are sold mostly to other manufacturers. As a result, each
sale has more volume and requires less effort, so the commission rate is lower. This
helps the Large Power Systems segment perform well in light of a low manufacturing
margin. The Electric Power segment operates similarly to the Large Power Systems
segment and exhibits similar contribution margin characteristics.
20-20
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–16 (FIN MAN); Ex. 5–16 (MAN)
a.
Filmed
Entertainment
Revenues………………………………
Variable costs…………………………
Contribution margin…………………
Contribution margin ratio…………
$11,784.0
4,006.6
$ 7,777
66%
Networks
$13,562.0
4,339.8
$ 9,222
68%
Publishing
$6,328.0
4,429.6
$ 1,898
30%
b.
The Filmed Entertainment and Networks segments sell an information or media
product that has a very small variable cost per unit. For example, the Networks
segment earns revenue monthly from each customer. However, the variable
cost of each customer is rather small. The cost of providing the service is
essentially fixed. The same holds true for the Filmed Entertainment segment.
The variable cost per ticket sold to a motion picture is rather small. The costs
of producing and promoting a new film are essentially fixed to the number of
tickets sold. The studio will have enough capacity to release a set number of
films per year. The costs will be incurred regardless of the number of tickets
sold. The same logic holds for HBO and the cable network. Much of their costs
are fixed to the number of subscribers. The Publishing segment produces and
sells products that do have a variable cost per unit. The total cost of producing
a magazine will increase as more units are sold. The editorial costs will likely
be fixed, but the printing and distribution costs will be variable to the number of
units sold. Thus, the Publishing segment will have a much lower contribution
margin ratio than the other segments.
c.
The higher contribution margin ratios of the Filmed Entertainment and Networks
segments should not be interpreted as being the most profitable. The fixed costs
cannot be ignored. These segments will have high fixed costs. If the volume of
business is not sufficient to exceed the break-even point, then the segments would
be unprofitable. In the final analysis, the fixed costs also should be considered in
determining the overall profitability of the segments. The contribution margin ratio
shows how sensitive the profit will be to changes in volume. These segments
increase their profitability rapidly with increases in subscription or audience volume,
compared to the Publishing segment.
20-21
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–17 (FIN MAN); Ex. 5–17 (MAN)
BUY BEST INC.
Contribution Margin Analysis—Sales
For the Year Ended December 31, 2015
a.
Effect of change in sales:
Sales quantity factor (36,000 – 32,250) × $32.50
Unit price factor ($30 – $32.50) × 36,000
Total effect of change in sales*
$121,875
(90,000)
$31,875
* This represents the total effect that the change in sales has on Buy Best Inc.’s contribution
margin.
b.
The sales will increase by $31,875. If the variable cost per unit were $10, and
there were 3,750 more units than planned, then the variable cost will increase
by $37,500 due to the variable cost quantity factor. Thus, the contribution margin
will decrease by $5,625 ($37,500 – $31,875) as a result of the price reduction.
Ex. 20–18 (FIN MAN); Ex. 5–18 (MAN)
ROMERO PRODUCTS INC.
Contribution Margin Analysis—Sales
For the Year Ended December 31, 2014
Effect of change in sales:
Sales quantity factor (38,000 – 41,000) × $200
Unit price factor ($220 – $200) × 38,000
Total effect of change in sales*
$(600,000)
760,000
$160,000
* This represents the total effect that change in sales has on Romero Products Inc.’s contribution
margin.
20-22
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–19 (FIN MAN); Ex. 5–19 (MAN)
ROMERO PRODUCTS INC.
Contribution Margin Analysis—Variable Costs
For the Year Ended December 31, 2014
Effect of changes in variable costs of goods sold:
Variable cost quantity factor (41,000 – 38,000) × $80
Unit cost factor ($80 – $92) × 38,000
Total effect of change in variable cost of
goods sold
Effect of changes in variable selling and administrative
expenses:
Variable cost quantity factor (41,000 – 38,000) × $22
Unit cost factor ($22 – $20) × 38,000
Total effect of changes in selling and
administrative expenses
Decrease in contribution margin from change in
variable costs
$ 240,000
(456,000)
$(216,000)
$ 66,000
76,000
142,000
$ (74,000)
20-23
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–20 (FIN MAN); Ex. 5–20 (MAN)
EAST COAST RAILROAD
Contribution Margin by Route
For the Month Ended April 30, 2014
a.
Atlanta/
Baltimore
Revenues
Baltimore/
Pittsburgh
Pittsburgh/
Atlanta
Total
$255,000
$594,000
$542,080
$1,391,080
$ 19,550
$ 99,360
$ 56,672
$ 175,582
159,154
126,480
174,592
460,226
92,412
13,175
73,440
66,960
101,376
38,192
267,228
118,327
$284,291
$366,240
$370,832
$1,021,363
$ (29,291)
$227,760
$171,248
$ 369,717
Variable costs:
Labor costs for loading
and unloading railcars
Fuel costs
Train crew labor costs
Switchyard labor costs
Total variable costs
Contribution margin
Contribution margin ratio
–11.5%
38.3%
31.6%
26.6%
Revenues: Revenue per railcar × Number of railcars
Labor costs for loading and unloading railcars: $46.00 × Number of railcars
Fuel costs: $12.40 × Number of train-miles
Train crew labor costs: $7.20 × Number of train-miles
Switchyard labor costs: $31 × Number of railcars
b.
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
railcars, combined with fairly high total mileage. This combination suggests that the
railroad is running many short trains on the railroad. That is, the railroad’s profitability
is very sensitive to the size, or length, of the train in railcar terms. A short train costs
nearly as much fuel and crewing costs as does a longer train. Thus, short trains will
be inherently less profitable than longer trains. The other two routes have much better
ratios of train-miles to railcars, indicating that their train sizes are larger.
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,
large classes in a university are inherently more profitable than small classes, dense
data traffic on a telecommunication system is more profitable than less traffic, full
airplanes are more profitable than empty airplanes, and faster table turns in a
restaurant create greater profitability than do slower turns, etc.
20-24
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–21 (FIN MAN); Ex. 5–21 (MAN)
a.
EAST COAST RAILROAD
Contribution Margin for Atlanta/Baltimore Route
For the Month Ended May 31, 2014
Revenues ($500 × 700 railcars)
Labor costs for loading and unloading railcars
($46.00 × 700 railcars)
Fuel costs ($12.40 × 12,835 train-miles)
Train crew labor costs ($7.20 × 12,835 train-miles)
Switchyard labor costs ($31.00 × 700 railcars)
Total variable costs
Contribution margin
$350,000
$ 32,200
159,154
92,412
21,700
$305,466
$ 44,534
Contribution margin ratio
b.
12.7%
EAST COAST RAILROAD
Contribution Margin Analysis—Atlanta/Baltimore Route
For the Month Ended May 31, 2014
Planned contribution margin
Effect of change in sales:
Sales quantity factor (700 – 425) × $600
Unit price factor ($500 – $600) × 700
Total effect of change in sales
Effect of changes in variable cost of goods sold:
Variable cost quantity factor (425 – 700) × $77*
Unit cost factor ($77 – $77) × 700
Total effect of changes in variable cost
of goods sold
Actual contribution margin
$(29,291)
$165,000
(70,000)
95,000
$ (21,175)
0
(21,175)
$ 44,534
* $46 per car + $31 per car
Note to Instructors: If Exercise 20–20 was assigned, the increase in contribution
margin can be reconciled. The increase in the contribution margin is reconciled
from the planned contribution margin for the route from Exercise 20–20 of
$(29,291) to the actual contribution margin of $44,534 in part (b).
20-25
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Ex. 20–22 (FIN MAN); Ex. 5–22 (MAN)
UNDERWATER UNIVERSITY
Variable Costing Income Statement
For the Fall Term 2014
a.
Revenue
Variable costs:
Registration, records, and marketing cost
Instructional costs
Total variable costs
Contribution margin
Depreciation on classrooms and equipment
Income from operations
$7,254,000
$1,237,500
3,868,800
$5,106,300
$2,147,700
825,600
$1,322,100
Supporting Calculations
Revenue: $120 × 60,450 credit hours
Registration, records, and marketing costs: $275 × 4,500 students
Instructional costs: $64 × 60,450 credit hours
b.
UNDERWATER UNIVERSITY
Contribution Margin Analysis
For the Fall Term 2014
Planned contribution margin*
Effect of change in revenue:
Revenue quantity factor (60,450 – 43,200)
× $135
Unit price factor ($120 – $135) × 60,450
Total effect of change in sales
Effect of changes in registration, records, and
marketing costs:
Variable cost quantity factor (4,125 – 4,500)
× $275
Unit cost factor ($275 – $275) × 4,500
Total effect of changes in registration,
records, and marketing costs
Effect of changes in instructional costs:
Variable cost quantity factor (43,200 – 60,450)
× $60
Unit cost factor ($60 – $64) × 60,450
Total effect of changes in instructional cost
Actual contribution margin
$ 2,105,625
$ 2,328,750
(906,750)
1,422,000
$ (103,125)
0
(103,125)
$(1,035,000)
(241,800)
(1,276,800)
$ 2,147,700
Note: There was no unit cost change for registration, records, and marketing cost.
* $5,832,000 – $1,134,375 – $2,592,000
20-26
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
PROBLEMS
Prob. 20–1A (FIN MAN); Prob. 5–1A (MAN)
1.
ICE COLD FRIDGE COMPANY
Absorption Costing Income Statement
For the Month Ended May 31, 2014
Sales
Cost of goods sold:
Cost of goods manufactured
Less inventory, May 31 (1,120 units × $198.00*)
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
$4,095,000
$3,465,000
221,760
3,243,240
$ 851,760
475,020
$ 376,740
* $3,465,000 ÷ 17,500 units = $198.00
2.
ICE COLD FRIDGE COMPANY
Variable Costing Income Statement
For the Month Ended May 31, 2014
Sales
Variable cost of goods sold:
Variable cost of goods manufactured
Less inventory, May 31 (1,120 units × $183.00*)
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$4,095,000
$3,202,500
204,960
2,997,540
$1,097,460
327,600
$ 769,860
$ 262,500
147,420
409,920
$ 359,940
* $3,202,500 ÷ 17,500 units = $183.00
3.
The income from operations reported under absorption costing exceeds the
income from operations reported under variable costing by $16,800 ($376,740 –
$359,940). This $16,800 is due to including $16,800 of fixed manufacturing cost
in inventory under absorption costing [1,120 units × 15 ($262,500 ÷ 17,500)]. The
$16,800 was thus deferred to a future month under absorption costing, while it
was included as an expense of May (part of fixed costs) under variable
costing.
20-27
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–2A (FIN MAN); Prob. 5–2A (MAN)
1.
HEYWARD INDUSTRIES INC.
Estimated Income Statement—Absorption Costing—Solvent
For the Month Ending May 31, 2015
Sales (2,925 units)
Cost of goods sold:
Direct materials
Direct labor
Variable manufacturing cost
Fixed manufacturing cost
Cost of goods sold
Gross profit
Selling and administrative expenses:
Variable selling and administrative expenses
Fixed selling and administrative expenses
Loss from operations
2.
$315,900
$117,000
52,650
43,875
70,000
283,525
$ 32,375
$ 35,100
36,500
71,600
$ (39,225)
HEYWARD INDUSTRIES INC.
Estimated Income Statement—Variable Costing—Solvent
For the Month Ending May 31, 2015
Sales (2,925 units)
Variable cost of goods sold:
Direct materials
Direct labor
Variable manufacturing cost
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing cost
Fixed selling and administrative expenses
Loss from operations
$315,900
$117,000
52,650
43,875
$ 70,000
36,500
213,525
$102,375
35,100
$ 67,275
106,500
$ (39,225)
3.
$106,500. The loss from operations from temporarily closing the portion of the plant
associated with solvent would be $106,500 (fixed manufacturing cost of $70,000 plus
fixed selling and administrative expenses of $36,500).
4.
Production of solvent should be continued. Temporary suspension of production
would result in an operating loss of $106,500 [from (3) above], compared with a loss
from operations of $39,225 if production is continued. The savings of $67,275,
measured by the excess of $106,500 over $39,225, is the amount reported as
contribution margin on the variable costing income statement.
20-28
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–3A (FIN MAN); Prob. 5–3A (MAN)
1. a.
HIP AND CONSCIOUS CLOTHING COMPANY
Absorption Costing Income Statement
For the Month Ended January 31, 2015
Sales
Cost of goods sold:
Cost of goods manufactured
Less inventory, January 31 (4,050 units × $12.90*)
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
$771,750
$715,950
52,245
663,705
$108,045
61,740
$ 46,305
* $715,950 ÷ 55,500 units = $12.90
b.
HIP AND CONSCIOUS CLOTHING COMPANY
Absorption Costing Income Statement
For the Month Ended February 28, 2015
Sales
Cost of goods sold:
Inventory, February 1 (4,050 units × $12.90)
Cost of goods manufactured
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
2. a.
$771,750
$ 52,245
619,560
671,805
$ 99,945
61,740
$ 38,205
HIP AND CONSCIOUS CLOTHING COMPANY
Variable Costing Income Statement
For the Month Ended January 31, 2015
Sales
Variable cost of goods sold:
Variable cost of goods manufactured
Less inventory, January 31 (4,050 units × $11.90*)
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$771,750
$660,450
48,195
612,255
$159,495
36,015
$123,480
$ 55,500
25,725
81,225
$ 42,255
* $660,450 ÷ 55,500 units = $11.90
20-29
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–3A (FIN MAN); Prob. 5–3A (MAN) (Concluded)
2.
b.
HIP AND CONSCIOUS CLOTHING COMPANY
Variable Costing Income Statement
For the Month Ended February 28, 2015
Sales
Variable cost of goods sold:
Inventory, February 1 (4,050 units × $11.90)
Variable cost of goods manufactured
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
3.
4.
$771,750
$ 48,195
564,060
612,255
$159,495
36,015
$123,480
$ 55,500
25,725
81,225
$ 42,255
a.
For January, the income from operations reported under absorption costing
exceeds the income from operations reported under variable costing by
$4,050. This difference is due to including $4,050 of fixed manufacturing
cost in inventory under absorption costing [4,050 units × $1.00 ($55,500 ÷
55,500)]. The $4,050 was thus deferred to February under absorption costing,
while it was included as an expense of January (part of fixed costs) under
variable costing.
b.
For February, the income from operations reported under absorption costing
is less than the income from operations reported under variable costing by
$4,050. This difference is due to including $4,050 of fixed manufacturing
cost in the February 1 inventory under absorption costing (4,050 units × $1.00).
Thus, this $4,050 was included in February’s cost of goods sold under absorption
costing. Under variable costing, this $4,050 was included as an expense of
January (part of the fixed costs) and thus is excluded from February’s income
statement.
The Hip and Conscious Clothing Company was equally profitable in January and
February under the variable costing concept. Sales and the variable cost per unit
were the same for both January and February. The difference in income reported
under the absorption costing concept is due to allocating $4,050 of fixed
manufacturing cost to the January 31 ending inventory.
Note: The combined income from operations reported for January and February
($84,510) is the same for both absorption costing and variable costing. This problem
illustrates the need for management to exercise care in interpreting income from
operations reported under absorption costing when large changes in inventory levels
occur.
20-30
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–4A (FIN MAN); Prob. 5–4A (MAN)
VICTORN INSTRUMENTS COMPANY
Salespersons’ Analysis
For the Year Ended December 31, 2014
1.
Variable
Variable Cost
Salesperson
Case
Dix
Johnson
LaFave
Orcas
Sussman
Willbond
Selling
of Goods Sold
Expenses
Contribution
Contribution
Margin
as a Percent
of Sales
as a Percent
of Sales
Margin
Ratio
$147,560
139,200
140,760
177,940
171,000
312,700
157,250
50.0%
50.0%
46.0%
41.0%
44.0%
31.0%
44.0%
19.0%
21.0%
18.0%
18.0%
18.0%
16.0%
19.0%
31.0%
29.0%
36.0%
41.0%
38.0%
53.0%
37.0%
2. Sussman has the highest contribution margin and contribution margin ratio for the
year. This is because of two factors. First, Sussman has the smallest variable cost
of goods sold as a percent of sales. This is probably due to selling a favorable
mix of product that has high manufacturing margins as a percent of sales. Second,
Sussman has the lowest variable selling expenses as a percent of sales. This could
be due to a lower sales commission or selling support costs.
3. Other factors that should be considered in evaluating the performance of salespersons
include rate of growth in sales for the current year compared with past years, years of
experience for salespersons, size of sales territory, and actual sales compared with
budgeted sales.
20-31
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–5A (FIN MAN); Prob. 5–5A (MAN)
VALDESPIN COMPANY
Contribution Margin by Size Segment
For the Year Ended June 30, 2014
1.
Size
S
M
L
Total
Sales
Variable cost of goods sold
$668,000
300,000
$737,300
357,120
$956,160
437,760
$2,361,460
1,094,880
Manufacturing margin
Variable operating expenses
$368,000
132,480
$380,180
155,500
$518,400
195,840
$1,266,580
483,820
Contribution margin
$235,520
$224,680
$322,560
$ 782,760
Fixed costs:
Manufacturing costs
Operating expenses
$ 385,930
311,040
Total fixed costs
$ 696,970
Income from operations
2.
$
85,790
Annual income from operations 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
expenses ($46,080 + $32,240)
Reduction in annual income from operations
78,320
$146,360
If Size M is discontinued, $224,680 of contribution margin would be forgone and only
$78,320 in fixed costs would be saved, resulting in a decrease of $146,360 in income
from operations.
20-32
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–5A (FIN MAN); Prob. 5–5A (MAN) (Concluded)
VALDESPIN COMPANY
Contribution Margin—Proposal 3
3.
Size
S
Sales
Variable cost of goods sold
Manufacturing margin
Variable operating expenses
Contribution margin
L
Total
$1,536,400
690,000
$956,160
437,760
$2,492,560
1,127,760
$846,400
304,704
$518,400
195,840
$1,364,800
500,544
$ 541,696
$322,560
$ 864,256
Fixed costs:
Manufacturing costs
Operating expenses (including $34,560 additional rent)
$ 385,930
345,600
Total fixed costs
$ 731,530
Income from operations
4.
$ 132,726
$46,936. 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 $46,936 if Proposal 3 is accepted, as illustrated below.
Income from operations, Proposal 3
Income from operations, present conditions
$132,726
85,790
Increase in income from operations
$ 46,936
Alternatively, the $46,936 increase can be determined as follows:
Contribution margin, Size S, Proposal 3
Contribution margin, Size S, present operations
$541,696
235,520
Increase in contribution margin
$306,176
Less contribution margin, Size M, present operations
Additional rent
Increase in income from operations
$224,680
34,560
259,240
$ 46,936
20-33
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–6A (FIN MAN); Prob. 5–6A (MAN)
1.
DOZIER INDUSTRIES INC.
Contribution Margin Analysis
For the Year Ended December 31, 2014
Planned contribution margin
Effect of change in sales:
Sales quantity factor (19,250 – 22,000) × $125
Unit price factor ($144 – $125) × 19,250
Total effect of change in sales
Effect of changes in variable cost of goods sold:
Variable cost quantity factor (22,000 – 19,250) × $51
Unit cost factor ($51 – $55) × 19,250
Total effect of changes in variable cost of
goods sold
Effect of changes in variable selling and
administrative expenses:
Variable cost quantity factor (22,000 – 19,250) × $11
Unit cost factor ($11 – $15) × 19,250
Total effect of changes in variable selling and
administrative expenses
Actual contribution margin
$1,386,000
$(343,750)
365,750
22,000
$ 140,250
(77,000)
63,250
$ 30,250
(77,000)
(46,750)
$1,424,500
2. The president’s first statement appears correct taken at face value. The president is
incorrect regarding variable cost of goods sold. The majority of the decrease in the
variable cost of goods sold was due to the variable cost quantity factor. However,
this decrease was offset by a $4.00 increase in the variable cost of goods sold per
unit. The contribution margin improved, but some inefficiency reduced the expected
amount of improvement from the variable cost quantity factor.
The president is correct in saying that an investigation of the increase in variable
selling and administrative expenses is needed. The unit cost factor increased by
$4.00, which more than offset the favorable variable cost quantity factor, resulting
in an overall decrease in the contribution margin. The increase in the variable selling
and administrative expenses is probably due to the additional selling effort required
in the face of price increases. It will probably be very difficult to improve the efficiency
of this effort as prices go up. Therefore, the president’s suggestion is probably
unwarranted. Increasing the price again will require even more selling effort to
overcome this negative influence. In addition, there is a limit as to how much price
increase the market will likely be able to support.
20-34
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–1B (FIN MAN); Prob. 5–1B (MAN)
1.
YOSAN INC.
Absorption Costing Income Statement
For the Month Ended July 31, 2014
Sales
Cost of goods sold:
Cost of goods manufactured
Less inventory, July 31 (400 units × $760*)
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
$2,150,000
$1,824,000
304,000
1,520,000
$ 630,000
300,000
$ 330,000
* $1,824,000 ÷ 2,400 units = $760
2.
YOSAN INC.
Variable Costing Income Statement
For the Month Ended July 31, 2014
Sales
Variable cost of goods sold:
Variable cost of goods manufactured
Less inventory, July 31 (400 units × $640*)
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$2,150,000
$1,536,000
256,000
1,280,000
$ 870,000
204,000
$666,000
$ 288,000
96,000
384,000
$ 282,000
* $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).
This difference is due to including $48,000 of fixed manufacturing cost in inventory
under absorption costing [400 units × $120 ($288,000 ÷ 2,400)]. The $48,000 was
thus deferred to a future month under absorption costing, while it was included as
an expense of July (part of fixed costs) under variable costing.
20-35
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–2B (FIN MAN); Prob. 5–2B (MAN)
1.
SMOOTH SKIN CARE PRODUCTS INC.
Estimated Income Statement—Absorption Costing—Aloe Vera Hand Lotion
For the Month Ending February 28, 2014
Sales (320,000 units)
Cost of goods sold:
Direct materials
Direct labor
Variable manufacturing cost
Fixed manufacturing cost
Cost of goods sold
Gross profit
Selling and administrative expenses:
Variable selling and administrative expenses
Fixed selling and administrative expenses
Operating loss
2.
$25,600,000
$ 4,800,000
5,440,000
11,200,000
1,530,000
22,970,000
$ 2,630,000
$ 3,200,000
270,000
3,470,000
$ (840,000)
SMOOTH SKIN CARE PRODUCTS INC.
Estimated Income Statement—Variable Costing—Aloe Vera Hand Lotion
For the Month Ending February 28, 2014
Sales (320,000 units)
Variable cost of goods sold:
Direct materials
Direct labor
Variable manufacturing cost
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing cost
Fixed selling and administrative expenses
Operating loss
$25,600,000
$ 4,800,000
5,440,000
11,200,000
$ 1,530,000
270,000
21,440,000
$ 4,160,000
3,200,000
$ 960,000
1,800,000
$ (840,000)
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],
compared with an operating loss of $840,000 if production is continued. The
savings of $960,000, measured by the excess of $1,800,000 over $840,000, is
the amount reported as contribution margin on the variable costing income
statement.
20-36
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–3B (FIN MAN); Prob. 5–3B (MAN)
1. a.
HEAD GEAR INC.
Absorption Costing Income Statement
For the Month Ended January 31, 2014
Sales
Cost of goods sold:
Cost of goods manufactured
Less inventory, January 31 (1,200 units × $15.20*)
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
$104,000
$97,280
18,240
79,040
$ 24,960
16,120
$ 8,840
* $97,280 ÷ 6,400 units = $15.20
b.
HEAD GEAR INC.
Absorption Costing Income Statement
For the Month Ended February 28, 2014
Sales
Cost of goods sold:
Inventory, February 1 (1,200 units × $15.20)
Cost of goods manufactured
Cost of goods sold
Gross profit
Selling and administrative expenses
Income from operations
2. a.
$104,000
$18,240
66,560
84,800
$ 19,200
16,120
$ 3,080
HEAD GEAR INC.
Variable Costing Income Statement
For the Month Ended January 31, 2014
Sales
Variable cost of goods sold:
Variable cost of goods manufactured
Less inventory, January 31 (1,200 units × $12.80*)
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$104,000
$81,920
15,360
66,560
$ 37,440
10,920
$ 26,520
$15,360
5,200
20,560
$ 5,960
* $81,920 ÷ 6,400 units = $12.80
20-37
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–3B (FIN MAN); Prob. 5–3B (MAN) (Concluded)
2.
b.
HEAD GEAR INC.
Variable Costing Income Statement
For the Month Ended February 28, 2014
Sales
Variable cost of goods sold:
Inventory, February 1 (1,200 units × $12.80)
Variable cost of goods manufactured
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
3.
4.
$104,000
$15,360
51,200
66,560
$ 37,440
10,920
$ 26,520
$15,360
5,200
20,560
$ 5,960
a.
For January, 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
under absorption costing [1,200 units × $2.40 ($15,360 ÷ 6,400)]. The $2,880
was thus deferred to February under absorption costing, while it was included
as an expense of January (part of fixed costs) under variable costing.
b.
For February, 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 February 1
inventory under absorption costing (1,200 units × $2.40). Thus, this $2,880
was included in February’s cost of goods sold under absorption costing. Under
variable costing, this $2,880 was included as an expense of January (part of the
fixed costs) and thus is excluded from February’s income statement.
Head Gear Inc. was equally profitable in January and in February under the variable
costing concept. Sales and the variable cost per unit were the same for both January
and February. The difference in income reported under the absorption costing
concept is due to allocating $2,880 of fixed manufacturing cost to the January 31
ending inventory.
Note: The combined income from operations reported for January and February
($11,920) is the same for both absorption costing and variable costing. This
problem illustrates the need for management to exercise care in interpreting
income from operations reported under absorption costing when large changes
in inventory levels occur.
20-38
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–4B (FIN MAN); Prob. 5–4B (MAN)
PACHEC INC.
Salespersons’ Analysis
For the Year Ended June 30, 2014
1.
Variable
Variable Cost
Salesperson
Asarenka
Crowell
Dempster
MacLean
Ortiz
Sullivan
Williams
Selling
of Goods Sold
Expenses
Contribution
Contribution
Margin
as a Percent
of Sales
as a Percent
of Sales
Margin
Ratio
$157,500
250,800
222,750
217,375
183,750
240,875
207,000
45.0%
40.0%
46.0%
42.0%
41.0%
42.0%
44.0%
19.0%
16.0%
21.0%
21.0%
24.0%
17.0%
20.0%
36.0%
44.0%
33.0%
37.0%
35.0%
41.0%
36.0%
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
cost of goods sold as a percent of sales. This is probably due to selling a
favorable mix of product that has high manufacturing margins as a percent of
sales. Second, Crowell has the lowest variable selling expenses as a percent of
sales. This could be due to a lower sales commission or selling support costs.
3.
Other factors that should be considered in evaluating the performance of
salespersons include rate of growth in sales for the current year compared with
past years, years of experience for salespersons, size of sales territory, and
actual sales compared with budgeted sales.
20-39
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–5B (FIN MAN); Prob. 5–5B (MAN)
KIMBRELL, INC.
Contribution Margin by Size Segment
For the Year Ended January 31, 2015
1.
Size
S
M
L
Total
Sales
Variable cost of goods sold
$990,000
538,500
$1,087,500
718,500
$945,000
567,000
$3,022,500
1,824,000
Manufacturing margin
Variable operating expenses
$451,500
118,100
$ 369,000
108,750
$378,000
85,050
$1,198,500
311,900
Contribution margin
$333,400
$ 260,250
$292,950
$ 886,600
Fixed costs:
Manufacturing costs
Operating expenses
$ 779,000
88,900
Total fixed costs
$ 867,900
Income from operations
2.
$
18,700
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
Less reduction in fixed production costs and fixed operating
expenses ($142,500 + $28,350)
Reduction in annual income from operations
170,850
$ 89,400
If Size M is discontinued, $260,250 of contribution margin would be forgone and
only $170,850 in fixed costs would be saved, resulting in a decrease of $89,400
in income from operations.
20-40
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–5B (FIN MAN); Prob. 5–5B (MAN) (Concluded)
KIMBRELL, INC.
Contribution Margin—Proposal 3
3.
Size
S
L
Total
Sales
Variable cost of goods sold
$2,277,000
1,238,550
$945,000
567,000
$3,222,000
1,805,550
Manufacturing margin
Variable operating expenses
$1,038,450
271,630
$378,000
85,050
$1,416,450
356,680
Contribution margin
$ 766,820
$292,950
$1,059,770
Fixed costs:
Manufacturing costs
Operating expenses (including $85,050 additional salary)
$ 779,000
173,950
Total fixed costs
$ 952,950
Income from operations
4.
$ 106,820
$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
Income from operations, present conditions
$106,820
18,700
Increase in income from operations
$ 88,120
Alternatively, the $88,120 increase can be determined as follows:
Contribution margin, Size S, Proposal 3
Contribution margin, Size S, present operations
$766,820
333,400
Increase in contribution margin
$433,420
Less contribution margin, Size M, present operations
Additional salaries
Increase in income from operations
$260,250
85,050
345,300
$ 88,120
20-41
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
Prob. 20–6B (FIN MAN); Prob. 5–6B (MAN)
1.
MATHEWS COMPANY
Contribution Margin Analysis
For the Year Ended December 31, 2014
Planned contribution margin
Effect of change in sales:
Sales quantity factor (34,500 – 30,000) × $69
Unit price factor ($66 – $69) × 34,500
Total effect of change in sales
Effect of changes in variable cost of goods sold:
Variable cost quantity factor (30,000 – 34,500) × $33
Unit cost factor ($33 – $30) × 34,500
Total effect of changes in variable cost of
goods sold
Effect of changes in variable selling and
administrative expenses:
Variable cost quantity factor (30,000 – 34,500) × $18
Unit cost factor ($18 – $24) × 34,500
Total effect of changes in variable selling and
administrative expenses
Actual contribution margin
2.
$540,000
$ 310,500
(103,500)
207,000
$(148,500)
103,500
(45,000)
$ (81,000)
(207,000)
(288,000)
$ 414,000
No, the president is not correct in saying that the variable cost of goods sold got
out of control in 2014. 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 in the quantity of product sold increased the variable cost of goods
sold by $148,500, based on planned unit costs. Actually, the unit cost of variable
cost of goods sold decreased $3.00, which had a favorable effect of $103,500 on
the contribution margin.
The president is correct in saying that an investigation of the increase in variable
selling and administrative expenses is needed. Of the $288,000 increase in these
expenses, only $81,000 was due to the quantity factor. The unit cost increase of
$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
caused by increased marketing and advertising expenditures to promote the price
decrease. Thus, the increase in sales may not have been caused entirely by the
lowering of the unit sales price. If this is the case, the president should exercise
caution in deciding to lower the selling price further to increase sales. In addition,
the reduction in sales price does not generate sufficient volume to compensate for
the variable cost quantity factor. Therefore, reducing the price further will not likely
be a successful strategy.
20-42
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
CASES & PROJECTS
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
the amount of inventory solely for purposes of meeting numerical profit targets.
The Standards of Ethical Conduct for Practitioners of Management Accounting
and Financial Management states that the management accountant should
“recognize and communicate professional limitations or other constraints
that would preclude responsible judgment or successful performance of an
activity.” In addition, the management accountant should “communicate
unfavorable as well as favorable information and professional judgments or
opinions.” The absorption costing income statements could mislead the senior
management overseeing the division managers. It may erroneously conclude
that the division has become more efficient. Moreover, it may not be wise for the
division to build more inventory. The excess inventory may need to be sold at a
later date at “fire sale” prices. Thus, the division actually may be worse off in the
long run by building the excess inventory. Aston Melon has a responsibility to
communicate these concerns to the general manager. As a last resort, Aston
Melon may need to report the concerns to the company’s senior management if
the division manager refuses to respond favorably.
20-43
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
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
manufacturing cost is included in the ending inventory balance and not matched
against current period sales. This has the effect of reducing cost of goods sold
by the amount of fixed costs allocated to the inventory. Thus, net income is
improved by increasing inventory. Likewise, when sales exceed production and
the inventory is liquidated, the fixed manufacturing cost in the beginning
goods sold by the amount of fixed costs included in the beginning inventory.
Therefore, net income is reduced when inventory is liquidated.
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
developed under the variable costing concept. Under variable costing, the fixed
manufacturing cost is not allocated to sold goods and inventory. Rather, fixed
manufacturing cost is allocated to the period in which it is incurred. Treating
fixed manufacturing cost in this way causes net income to be unaffected by
either inventory building or reduction. Changes in net income under variable
costing only occur from business events such as changes in volume, price, or
cost. Reporting under variable costing would address Matt’s concern by
tying profit more directly to profit-changing business events rather than
inventory decisions.
20-44
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
final contribution margin ratio is no better than Martin’s. Both employees apparently
earn the same commission rate of 14% of sales. Thus, the promotion expenses as a
percent of sales for Dean (18%) are much greater than for Martin (9%). In summary,
Martin should be encouraged to sell products with higher manufacturing margins,
while Dean should be encouraged to trim promotional costs. Both salespersons
should be encouraged to improve total sales volume (with a little more
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
Manufacturing margin as a percent of sales
65%
50%
50%
50%
Contribution margin ratio
32%
22%
22%
22%
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
have the highest manufacturing margin (65% vs. 50% for the others). This means
that Danica is selling a more profitable mix of products than the other three
salespersons. However, Danica spends more on variable selling expenses as a
percent of sales than do the other three salespersons (33% vs. 28% for the others).
Together these two explanations cause Danica to have a contribution margin ratio
that is 10 percentage points higher than the other three salespersons. As a result,
Danica is able to contribute more profit than either Kyle or Richard, both of whom
have higher sales.
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 20
Variable Costing for Management Analysis
CP 20–5 (FIN MAN); CP 5–5 (MAN)
TRANS SPORT COMPANY
Contribution Margin by State
1.
Florida
Georgia
Revenue
Variable cost of goods sold
$1,125,000
450,000
$1,000,000
310,000
$1,181,250
436,000
Manufacturing margin
Variable operating expenses
$ 675,000
281,225
$ 690,000
202,500
$ 745,250
306,375
Contribution margin
$ 393,775
$ 487,500
$ 438,875
Contribution margin ratio
35.0%
Tennessee
48.8%
37.2%
Note: The variable cost of goods sold and variable selling expenses are determined
by subtracting the respective fixed costs from the cost of goods sold and selling
expenses found on the income statement.
2.
Florida
Georgia
Tennessee
Increase in contribution margin
Less additional advertising
$78,755
42,200
$97,500
42,200
$87,775
42,200
Additional profit
$36,555
$55,300
$45,575
Note: The increase in contribution margin is determined by multiplying the
contribution margin in (1) by 20%.
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,
Georgia also has the largest fixed costs. These costs will not change with a
change in sales volume. Thus, the contribution margin and contribution margin
ratio for Georgia are actually higher than the other two states [from (1)].
Increasing sales volume by 20% will produce the greatest increase in contribution
margin in Georgia. Increases in contribution margin translate directly into
increases in income from operations because the fixed costs are not expected
to change beyond the increase in advertising.
20-46
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CHAPTER 20
Variable Costing for Management Analysis
CP 20–6 (FIN MAN); CP 5–6 (MAN)
CRAIG COMPANY
Absorption Costing Income Statement—44,000 units manufactured
For the Year Ended December 31, 2014
1.
Sales (44,000 × $106)
Cost of goods sold (44,000 × $61)
Gross profit
Selling and administrative expenses ($1,050,000 + $330,000)
Income from operations
$4,664,000
2,684,000
$1,980,000
1,380,000
$ 600,000
CRAIG COMPANY
Absorption Costing Income Statement—55,000 units manufactured
For the Year Ended December 31, 2014
Sales (44,000 × $106)
Cost of goods sold:
Cost of goods manufactured (55,000 × $58.8)
Less inventory, December 31 (11,000 × $58.8)
Cost of goods sold
Gross profit
Selling and administrative expenses
($1,050,000 + $330,000)
Income from operations
$4,664,000
$3,234,000
646,800
2,587,200
$2,076,800
1,380,000
$ 696,800
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
inventory. The entire amount of the $484,000 of fixed manufacturing costs is
included in the cost of goods sold when 44,000 units are manufactured. When
55,000 units are manufactured, $96,800 (11,000 units × $8.8) of the fixed
manufacturing costs are included in ending inventory and are thus excluded
from the cost of goods sold.
3.
a.
Base salary……………………………………………………………………… $140,000
—
Bonus ($600,000 – $670,000) × 10%…………………………………………
Total salary……………………………………………………………………… $140,000
b.
Base salary……………………………………………………………………… $140,000
2,680
Bonus ($696,800 – $670,000) × 10%…………………………………………
Total salary……………………………………………………………………… $142,680
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
11,000 units, Craig Company will risk higher obsolescence and incur additional
costs of carrying and storing inventory, and these costs will reduce future
income of Craig Company.
20-47
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
Note: Instructors may ask students to verify that income from operations, using
the variable costing method, would be $600,000 regardless of whether 44,000 or
55,000 units are manufactured. The variable costing income statements are as
follows:
CRAIG COMPANY
Variable Costing Income Statement—44,000 Units Manufactured
For the Year Ended December 31, 2014
Sales (44,000 × $106)
Cost of goods sold (44,000 × $50)
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$4,664,000
2,200,000
$2,464,000
1,050,000
$1,414,000
$484,000
330,000
814,000
$ 600,000
CRAIG COMPANY
Variable Costing Income Statement—55,000 units manufactured
For the Year Ended December 31, 2014
Sales (44,000 × $106)
Variable cost of goods sold:
Variable cost of goods manufactured
(55,000 × $50)
Less inventory, December 31 (11,000 × $50)
Variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Income from operations
$4,664,000
$2,750,000
550,000
2,200,000
$2,464,000
1,050,000
$1,414,000
$ 484,000
330,000
814,000
$ 600,000
20-48
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