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Quiz
Exercise 6-13 (20 minutes)
- Sales (40,000 units × $33.75 per unit) .......... $1,350, Variable expenses: Variable cost of goods sold (40,000 units × $16 per unit*) ................. $640, Variable selling and administrative expenses (40,000 units × $3 per unit) .................... 120,000 760, Contribution margin ..................................... 590, Fixed expenses: Fixed manufacturing overhead .................... 250, Fixed selling and administrative expenses .... 300,000 550, Net operating income ................................... $ 40, * Direct materials .............................. $ Direct labor .................................... 4 Variable manufacturing overhead ..... 2 Total variable manufacturing cost..... $
- The difference in net operating income can be explained by the $50,000 in fixed manufacturing overhead deferred in inventory under the absorption costing method: Variable costing net operating income ........................... $40, Add fixed manufacturing overhead cost deferred in inventory under absorption costing (10,000 units × $ per unit in fixed manufacturing overhead cost) ........... 50, Absorption costing net operating income ....................... $90,
b. The segment margin ratio rises and falls as sales rise and fall due to the presence of fixed costs. The fixed expenses are spread over a larger base as sales increase. In contrast to the segment ratio, the contribution margin ratio is stable so long as there is no change in either variable expenses or the selling price of a unit of service.
Problem 6-19 (30 minutes)
- SalesTerritory
Total Company Central Eastern Amount % Amount % Amount % Sales .............................................. $900,000 100.0 $400,000 100 $500,000 100 Variable expenses ........................... 408,000 45.3 208,000 52 200,000 40 Contribution margin ........................ 492,000 54.7 192,000 48 300,000 60 Traceable fixed expenses ................. 290,000 32.2 160,000 40 130,000 26 Territorial segment margin ............... 202,000 22.4 $ 32,000 8 $170,000 34 Common fixed expenses* ................ 175,000 19. Net operating income ...................... $ 27,000 3. *465,000 – $290,000 = $175,
Product Line CentralTerritory Awls Pows Amount % Amount % Amount % Sales .............................................. $400,000 100.0 $100,000 100 $300,000 100 Variable expenses ........................... 208,000 52.0 25,000 25 183,000 61 Contribution margin ........................ 192,000 48.0 75,000 75 117,000 39 Traceable fixed expenses ................. 114,000 28.5 60,000 60 54,000 18 Product line segment margin............ 78,000 19.5 $ 15,000 15 $ 63,000 21 Common fixed expenses* ................ 46,000 11. Sales territory segment margin ........ $ 32,000 8. *$160,000 – $114,000 = $46,
Problem 6-22 (60 minutes)
- a. Absorption costing unit product cost is:
Direct materials ......................................... $1. Direct labor ............................................... 0. Variable manufacturing overhead ................ 0. Fixed manufacturing overhead ($75,000 ÷ 50,000 units) ......................... 1. Absorption costing unit product cost ............ $3.
b. The absorption costing income statement is: Sales (40,000 units) ................................................ $200, Cost of goods sold (40,000 units × $3.50 per unit) .... 140, Gross margin .......................................................... 60, Selling and administrative expenses ($20,000 + 40,000 units × $0.75 per unit) ............. 50, Net operating income .............................................. $ 10,
c. The reconciliation is as follows: Variable costing net operating loss............................ $ (5,000) Add fixed manufacturing overhead cost deferred in inventory under absorption costing (10,000 units × $1.50 per unit) ............................. 15, Absorption costing net operating income................... $ 10,
- Under absorption costing, the company did earn a profit for the month. However, before the question
can really be answered, one must first define what is meant by a “profit.” The central issue here relates totiming of release of fixed manufacturing overhead costs to expense. Advocates of variable costing would argue that all such costs should be expensed immediately, and that no profit is earned unless the revenues of a period are sufficient to cover the fixed manufacturing overhead costs in full. From this point of view, then, no profit was earned during the month, because the fixed costs were not fully covered.
Problem 6-22 (continued)
b. The absorption costing income statement would be constructed as follows: The absorption costing unit product cost will remain at $3.50, the same as in part (1). Sales (60,000 units × $5 per unit) ................................ $300, Cost of goods sold (60,000 units × $3.50 per unit) ........ 210, Gross margin .............................................................. 90, Selling and administrative expenses (60,000 units × $0.75 per unit + $20,000) ................. 65, Net operating income .................................................. $ 25,
c. The reconciliation is as follows: Variable costing net operating income .......................... $ 40, Deduct fixed manufacturing overhead cost released from inventory under absorption costing (10,000 units × $1.50 per unit) ......................................................... 15, Absorption costing net operating income ...................... $ 25,
