Module 9

Demonstration Problem 1Baxter Company

The following data are available for 2001 from the accounting records of Baxter Company:

Units in beginning inventory 0Units produced 20,000Units in ending inventory 4,000

Selling price per unit $20

Manufacturing costs Direct materials (per unit) $4 Direct labor (per unit) $2 Variable overhead (per unit) $1 Fixed overhead (total) $60,000

Selling and Administrative expenses Variable (per unit) $3 Fixed (per unit) $40,000

Required:

1. Compute the following using absorption costing and variable costing (a) unit cost, (b) cost of goods sold, and (c) ending inventory.2. Prepare an income statement using (a) absorption costing and (b) variable costing.

1. Unit cost using absorption costing Total fixed overhead costs = $60,000Units produced = 20,000Fixed overhead cost per unit = 60,000/20,000 = $3

Unit cost Direct materials (per unit) $4 Direct labor (per unit) $2 Variable overhead (per unit) $1 Fixed overhead (per unit) $3 Total unit cost $10

Unit cost using variable costing Direct materials (per unit) 4 Direct labor (per unit) 2 Variable overhead (per unit) 1 Total unit cost $7

Units sold = beginning inventory + units produced - ending inventory = 0 + 20,000 - 4,000 = 16,000

Absorption costing Variable Costing Unit cost $10 $7Cost of goods sold ( unit cost x 16,000) $160,000 $112,000Ending inventory (unit cost x 4,000) $40,000 $28,000

2. Sales revenue = $20 x 16,000 = $320,000Selling and administrative expenses

variable: = $48,000 ($3 x 16,000)fixed: = $40,000total: = $88,000 ($48,000 + 40,000)

Baxter CompanyAbsorption-Costing Income Statement

Sales revenue $320,000Less: Cost of goods sold 160,000Gross margin 160,000Less: Selling and administrative expenses 88,000Net income $72,000

Baxter CompanyVariable-Costing Income Statement

Sales revenue $320,000Less variable expenses

Cost of goods sold 112,000Variable selling and administrative expenses 48,000Contribution margin 160,000

Less fixed expensesFixed overhead 60,000Fixed selling and administrative expenses 40,000

Net income $60,000

Demonstration Problem 2Maxwell Department Store

Maxwell Department has three segments: clothing, shoes, and appliances. The following information is available for 2001. (Amounts are in thousands of dollars)

Clothing Shoes AppliancesSales revenue 90,000 36,000 50,000Variable costs 54,000 19,000 32,000Direct fixed costs 7,500 3,200 6,000Indirect (Common)fixed costs 9,000 3,600 5,000

Common fixed costs are allocated to the segments in the proportion of sales revenues.

Prepare a segmented income statement using the variable costing approach.

Total common costs = $9,000 + 3,600 + 5,000 = $17,600

Maxwell Department StoreIncome Statement

Clothing Shoes Appliances TotalSales revenue $90,000 $36,000 $50,000 $176,000less: Variable costs 54,000 19,000 32,000 105,000Contribution margin 36,000 17,000 18,000 71,000less:Direct fixed costs 7,500 3,200 6,000 16,700Segment margin 28,500 13,800 12,000 54,300Less: Common fixed costs 17,600Net Income 36,700

Practice Problem 1Groden Company

The following data are available for 2001 from the accounting records of Groden Company:

Units in beginning inventory 0Units produced 50,000Units in ending inventory 8,000

Selling price per unit $32

Manufacturing costs Direct materials (per unit) $8 Direct labor (per unit) $5 Variable overhead (per unit) $4 Fixed overhead (total) $150,000

Selling and Administrative expenses Variable (per unit) $4 Fixed (per unit) $200,000

Required:1. Compute the following using absorption costing and variable costing (a) unit cost, (b) cost of goods sold, and (c) ending inventory.2. Prepare an income statement using absorption costing and variable costing.

1. Unit cost using absorption costing Total fixed overhead costs = $150,000Units produced = 50,000Fixed overhead cost per unit = 150,000/50,000 = $3

Unit cost Direct materials (per unit) $8Direct labor (per unit) $5Variable overhead (per unit) $4Fixed overhead (per unit) $3Total unit cost $20

Unit cost using variable costing

Direct materials (per unit) 8Direct labor (per unit) 5Variable overhead (per unit) 4Total unit cost $17

Units sold = beginning inventory + units produced - ending inventory = 0 + 50,000 - 8,000 = 42,000

Absorption costing Variable CostingUnit cost (a) $20 $17Cost of goods sold (unit cost x 42,000) $840,000 $714,000Ending inventory (unit cost x 8,000) $160,000 $136,000

2. Sales revenue = $32 x 42,000 = $1,344,000Selling and administrative expenses

variable : $4 x 42,000 = $168,000total : $168,000 + $200,000 = $368,000

Groden CompanyAbsorption-Costing Income Statement

Sales revenue $1,344,000Less: Cost of goods sold 840,000Gross margin 504,000Less: Selling and administrative expenses 368,000Net income $136,000

Groden CompanyVariable-Costing Income Statement

Sales revenue $1,344,000Less variable expenses

Cost of goods sold 714,000Variable selling and administrative expenses 168,000Contribution margin 462,000

Less fixed expensesFixed overhead 150,000Fixed selling and administrative expenses 200,000

Net income $112,000

Practice Problem 2Carnes Frozen Treats

Carnes Frozen Treats has two segments: Frozen Yogurt and Smoothies. The following information is available for Carnes Frozen Treats for 2001.

Frozen Yogurt SmoothiesSales revenue $240,000 $126,000Variable costs 178,000 109,000Direct fixed costs 2,500 1,200Indirect (Common) fixed costs 8,000 4,200

Common fixed costs are allocated to the segments in the proportion of sales revenues.

Required: Prepare a segmented income statement using the variable costing approach.

Carnes Frozen TreatsIncome Statement

Frozen Yogurt Smoothies TotalSales revenue 240,000 126,000 366,000Less: Variable costs 178,000 109,000 287,000Contribution margin 62,000 17,000 79,000Less: Direct fixed costs 2,500 1,200 3,700Segment margin 59,500 15,800 75,300Less: Common fixed costs 12,200Net income $63,100

ExercisesMultiple Choice

1. If production is greater than sales thenA. absorption costing income is higher than variable costing incomeB. absorption costing income is lower than variable costing incomeC. absorption costing income is equal to the variable costing incomeD. none of the above

2. Which of the following is not included in product cost under variable costing?A. direct laborB. direct materialsC. fixed overheadD. variable overhead

3. Which of the following is not included in product cost under absorption costing?A. direct laborB. selling expensesC. fixed overheadD. variable overhead

4. The difference between the total segment margin of all segments and the net income equalsA. common fixed costs

B. direct fixed costsC. variable costsD. fixed selling and administrative costs

5. The difference between revenue and variable expenses equalsA. net income

B. segment marginC. contribution marginD. gross margin

6. The unit costs for a product produced by Doerrman Company are as follows: direct materials $4, direct labor $5, variable overhead $3 and fixed overhead $2. The total unit cost under absorption costing is:

A. $12B. $14C. $9D. $11

7. The unit costs for a product produced by Shapira Company are as follows: direct materials $4, direct labor $2.50, variable overhead $3.50 and fixed overhead $2.00. The total unit cost under variable costing is:

A. $12B. $10C. $8.50D. $9.50

8. The unit costs for a product produced by Bender Company are as follows: direct materials $5, direct labor $2.50, variable overhead $3.50 and fixed overhead $1.00. 20,000 units were produced in 2001. The sales were 16,000 units for 2001. Assume that beginning inventory is zero. The cost of goods sold under variable costing is

A. $176,000B. $192,000C. $136,000D. $120,000

9. Which of the following statements is true about absorption costing?A. All fixed expenses are expensed in the period in which they are incurredB. All selling expenses are included in the calculation of product costC. All fixed expenses are included in the calculation of product costD. Fixed overhead is included in the calculation of product cost

10. Which of the following statements is true about variable costing?A. All fixed expenses are expensed in the period in which they are incurredB. All selling expenses are expensed in the period in which they are incurredC. All fixed expenses are included in the calculation of included in the calculation of

product costD. Fixed overhead is included in the calculation of product cost

II. Matching Problem

E Costs not considered in calculating segment margin A. Segment MarginD Sum of unit costs of direct materials, direct labor,

variable overhead and fixed overhead equals total unit cost under

B. Variable Costing

A Contribution that a segment makes towards covering the common fixed costs and making a profit

C. Net Income

B Sum of unit costs of direct materials, direct labor, and variable overhead equals total unit cost under

D. Absorption Costing

G Difference between revenue and variable costs E. Common Fixed CostsC Segment margin minus common fixed costs F. Direct CostsF Costs that can be physically traced to the particular

cost object under consideration without undue cost or inconvenience

G. Contribution Margin

H Difference between revenues and cost of goods sold

H. Gross Margin

Homework Problem 1Sportswear Inc.

Sportswear Inc. produces and sells a football uniform and helmet set for kids. The following data are available for 2001 from the accounting records of Sportswear Inc.:

Units in beginning inventory 0Units produced 12,000Units in ending inventory 2,000

Selling price per unit $26

Manufacturing costs Direct materials (per unit) $5 Direct labor (per unit) $3 Variable overhead (per unit) $2 Fixed overhead (total) $30,000

Selling and Administrative expenses Variable (per unit) $3 Fixed (per unit) $42,000

Required:1. Compute the following using absorption costing and variable costing (a) unit cost, (b) cost of goods sold, and (c) ending inventory.

2. Prepare an income statement using (a) absorption costing, and (b) variable costing.

1. Unit cost using absorption costing Total fixed overhead costs = $30,000Units produced = 12,000Fixed overhead cost per unit = 30,000/12,000 = $2.5

Unit cost

Direct materials (per unit) 5.00Direct labor (per unit) 3.00Variable overhead (per unit) 2.00Fixed overhead (per unit) 2.50Total unit cost $12.50

Unit cost using variable costing Direct materials (per unit) 5.00Direct labor (per unit) 3.00Variable overhead (per unit) 2.00Total unit cost $10.00

units sold = beginning inventory + units produced - ending inventory = 0 + 12,000 - 2,000 = 10,000

Absorption costing Variable CostingUnit cost (a) $12.50 $10.00Cost of goods sold (unit cost x 42,000) $125,000 $100,000Ending inventory (unit cost x 8,000) $25,000 $20,000

2. Sales revenue = $26 x 10,000 = $260,000Selling and administrative expenses

variable : $3 x 10,000 = $30,000total : $30,000 + 42,000 = $72,000

Sportswear IncAbsorption-Costing Income Statement

Sales revenue $ 260,000Less: Cost of goods sold 125,000Gross margin 135,000Less: Selling and administrative expenses 72,000Net income $63,000

Sportswear IncVariable-Costing Income Statement

Sales revenue $260,000Less variable expenses

Cost of goods sold 100,000Variable selling and administrative expenses 30,000Contribution margin $130,000

Less fixed expensesFixed overhead 30,000Fixed selling and administrative expenses 42,000

Net income $ 58,000

Homework Problem 2Kimmel Corporation

The following data are available for 2001 from the accounting records of Kimmel Corporation.

Units in beginning inventory 0Units produced 65,000Units in ending inventory 15,000

Selling price per unit $18

Manufacturing costs Direct materials (per unit) $3.00 Direct labor (per unit) $1.80 Variable overhead (per unit) $1.20 Fixed overhead (total) $130,000

Selling and Administrative expenses Variable (per unit) $1.50 Fixed (total) $65,000

Required:1. Compute the following using absorption costing and variable costing (a) unit cost, (b) cost of goods sold, and (c) ending inventory.

2. Prepare an income statement using (a) absorption costing, and (b) variable costing.

1. Unit cost using absorption costing Total fixed overhead costs = $130,000Units produced = 65,000Fixed overhead cost per unit = 130,000/65,000 = $2

Unit cost

Direct materials (per unit) 3.00 Direct labor (per unit) 1.80 Variable overhead (per unit) 1.20 Fixed overhead (per unit) 2.00 Total unit cost $8.00

Unit cost using variable costing Direct materials (per unit) 3.00 Direct labor (per unit) 1.80 Variable overhead (per unit) 1.20 Total unit cost $6.00

units sold = beginning inventory + units produced - ending inventory = 0 + 65,000 - 15,000 = 50,000

Absorption costing Variable CostingUnit cost (a) $12.5 $10Cost of goods sold (unit cost x 42,000) $400,000 $300,000Ending inventory (unit cost x 8,000) $120,000 $90,000

2. Sales revenue = $18 x 50,000 = $900,000Selling and administrative expenses

variable : $1.50 x 50,000 = $75,000total : $75,000 + 65,000 = $140,000

Kimmel CorporationAbsorption-Costing Income Statement

Sales revenue $ 900,000Less: Cost of goods sold 400,000Gross margin 500,000Less: Selling and administrative expenses 140,000Net income $360,000

Kimmel CorporationVariable-Costing Income Statement

Sales revenue $900,000Less variable expenses

Cost of goods sold 300,000Variable selling and administrative expenses 75,000Contribution margin 525,000

Less fixed expensesFixed overhead 130,000Fixed selling and administrative expenses 65,000

Net income $330,000

Homework Problem 3Steele Office Store

The following information is available for Steele Office Store for 2001.

3 ¼ disk mailer 5 ¼ disk mailerSales revenue $24,000 $18,000Variable costs 15,000 9,000Direct fixed costs 2,500 2,200Indirect fixed costs 2,400 1,800

Common fixed costs are allocated to the segments in the proportion of sales revenues.

Required:Prepare a segmented income statement using the variable costing approach.

Steele Office StoreIncome Statement

3 ¼ disk mailer 5 ¼ disk mailer TotalSales revenue 24,000 18,000 42,000Less: Variable costs 15,000 9,000 24,000Contribution margin 9,000 9,000 18,000Less: Direct fixed costs 2,500 2,200 4,700Segment margin 6,500 6,800 13,300Common fixed costs 4,200Net income 9,100

Homework Problem 4Sue Anderson, CPA

Sue Anderson, CPA, offers tax preparation and consulting services to her clients. The annual revenues and expenses are as follows:

Tax preparation ConsultingSales revenue $85,000 $25,000Variable costs 12,000 10,000Direct fixed costs 15,000 10,000Indirect fixed costs 6,500 2,400

1. Prepare a segmented income statement using the variable costing approach.

Tax preparation Consulting Total

Sales revenue $85,000 $25,000 $110,000Less: Variable costs 12,000 10,000 22,000Contribution margin 73,000 15,000 88,000Less: Direct fixed costs 15,000 10,000 25,000Segment margin 58,000 5,000 63,000Less: Common fixed costs 8,900Net income 54,100