PROBLEM 12-46 (75 MINUTES)

1.

SEGMENTED INCOME STATEMENTS: BUCKEYE DEPARTMENT STORES, INC. (IN THOUSANDS)

Segments of Company

Sales revenue .................................................

Variable operating expenses:
Cost of merchandise sold........................
Sales personnelsalaries........................
Sales commissions...................................
Utilities.......................................................
Other..........................................................
Total variable expenses............................
Segment contribution margin........................
Less: Fixed expenses controllable by
segment manager:
Depreciationfurnishings.......................
Computing and billing..............................
Warehouse.................................................
Insurance...................................................
Security......................................................
Total..................................................................
Profit margin controllable by
segment manager.........................................
Less: Fixed expenses, traceable to
segment, but controllable by others:..........
Depreciationbuildings...........................
Property taxes...........................................
Supervisory salaries.................................
Total..................................................................
Profit margin traceable to segment...............
Less: Common fixed expenses......................
Income before taxes.......................................
Less: Income tax expense..............................
Net income.......................................................

Buckeye
Department
Stores, Inc.
$118,200

Segments of Columbus Division

Cleveland
Division
$63,000

Columbus
Division
$55,200

Olentangy
Store
$15,000

$ 69,000
9,150
1,140
1,770
1,395
$ 82,455
$ 35,745

$36,000
4,800
600
900
750
$43,050
$19,950

$33,000
4,350
540
870
645
$39,405
$15,795

$ 9,000
1,200
150
240
180
$10,770
$ 4,230

$6,000
900
120
180
105
$7,305
$ (105)

$18,000
2,250
270
450
360
$21,330
$11,670

$ 1,680
1,215
2,340
1,065
1,050
$ 7,350

870
630*
1,350
600
630
$ 4,080

810
585
990
465
420
$ 3,270

240
120
210
120
90
780

$ 150
90
180
75
90
$ 585

$ 28,395

$15,870

$12,525

$ 3,450

$(690)

$ 2,790
915
5,250
$ 8,955
$ 19,440
360
$ 19,080
5,850
$ 13,230

$ 1,410
510
3,000
$ 4,920
$10,950

$ 1,380
405
2,250
$ 4,035
$ 8,490

360
105
450
$ 915
$ 2,535

*$630 = $480 listed in table + $150 not allocated. $3,000 = $2,700 listed in table + $300 not allocated.

Scioto
Store
$7,200

$ 270
60
300
$ 630
$(1,320)

Downtown
Store
$33,000

Not Allocated

420
225
600
270
240
$ 1,755

_____
$150

$ 9,915

(150)

750
240
1,200
$ 2,190
$ 7,725

150

$300
$300
$(450)

PROBLEM 12-46 (CONTINUED)

2.

The segmented income statement would help the president of Buckeye Department
Stores gain insight into which division and which individual stores are performing well
or having difficulty. Such information serves to direct management's attention to areas
where its expertise is needed.

PROBLEM 12-48 (35 MINUTES)

1. Segmented income statement:
Piedmont
Novelties
Sales revenue.
Variable operating expenses:
Cost of goods sold
Sales commissions
Total...
Segment contribution margin.
Less: Fixed expenses controllable by
segment manager:
Local advertising
Sales manager salary
Total...
Profit margin controllable by segment
manager
Less: Fixed expenses traceable to
segment, but controllable by
others:
Local property taxes..
Store manager salaries.
Other..
Total...
Segment profit margin..
Less: Common fixed expenses.
Net income...

Raleigh

Charlotte

Savannah

$1,998,000

$666,000

$676,500

$655,500

$1,057,500
119,880
$1,177,380
$ 820,620

$305,250
39,960
$345,210
$320,790

$338,250
40,590
$378,840
$297,660

$414,000
39,330
$453,330
$202,170

$ 121,500
48,000
$ 169,500

$ 16,500
$ 16,500

$ 33,000
---$ 33,000

$ 72,000
48,000
$120,000

$ 651,120

$304,290

$264,660

$ 82,170

$ 6,750
46,500
8,700
$ 61,950
$242,340

$ 3,000
58,500
6,900
$ 68,400
$196,260

$ 9,000
57,000
26,700
$ 92,700
$(10,530)

18,750
162,000
42,300
$ 223,050
$ 428,070
288,450
$ 139,620

Supporting calculations:
Sales revenue: Raleigh, 37,000 units x $18.00; Charlotte, 41,000
units x $16.50; Savannah, 46,000 units x $14.25
Cost of goods sold: Raleigh, 37,000 units x $8.25; Charlotte,
41,000 units x $8.25; Savannah, 46,000 units x $9.00

Sales commissions: Raleigh, $666,000 x 6%; Charlotte,

$676,500 x 6%; Savannah, $655,500 x 6%

PROBLEM 12-48 (CONTINUED)

2. Savannah is the weakest segment because of several factors:
Raleigh and Charlotte have much higher markups on cost [118%
($9.75/$8.25) and 100% ($8.25/$8.25), respectively]. However, Savannahs
markup is only 58% ($5.25/ $9.00).
Despite being the only store that has a sales manager, and spending
considerably more on advertising than Raleigh and Charlotte, Savannah
has the lowest gross dollar sales of the three stores. Savannahs return
on these outlays appears inadequate.
Savannahs other noncontrollable costs are much higher than those of
Raleigh and Charlotte.
3. Piedmont Novelties uses a responsibility accounting system, meaning that
managers and centers are evaluated on the basis of items under their control.
Since this is a personnel-type decision, the decision should be made by
reviewing the profit margin controllable by the store (i.e., segment) manager. The
segment contribution margin excludes fixed costs under a store managers
control; in contrast, a stores segment profit margin would reflect all traceable
costs whether controllable or not.

PROBLEM 17-21 (45 MINUTES)

1.

a. Absorption-costing income statements:

Year 1
Year 2
Sales revenue (at $25 per case) ............................................................
$2,000,000 $1,500,000
Less: Cost of goods sold (at standard
absorption cost of $21 per case) *.......................................................
1,680,000 1,260,000
Gross margin .........................................................................................
$ 320,000 $ 240,000
Less: Selling and administrative expenses:
Variable (at $ .50 per case) ........................................................
40,000
30,000
Fixed ...........................................................................................
37,500 37,500
Operating income ..................................................................................
$ 242,500 $ 172,500
*Standard absorption cost per case is $21, calculated as follows:
Budgeted fixed manufacturing overhead
Planned production

$400,000
80,000

$5

$16

variable manufacturing
cost per case

$16

$21

Year 3
$2,250,000
1,890,000
$ 360,000
45,000
37,500
$ 277,500

PROBLEM 17-21 (CONTINUED)

b. Variable-costing income statements:
Year 1
Year 2
Sales revenue (at $25 per case) ............................................................
$2,000,000 $1,500,000
Less: Variable expenses:
Variable manufacturing costs (at
standard variable cost of $16 per case)
1,280,000
960,000
Variable selling and administrative
costs (at $ .50 per case) ..........................................................
40,000
30,000
Contribution margin ..............................................................................
$ 680,000 $ 510,000
Less: Fixed expenses:
Fixed manufacturing overhead .................................................
400,000
400,000
Fixed selling and administrative
expenses ..................................................................................
37,500 37,500
Operating income ..................................................................................
$ 242,500 $ 72,500
2.

Year 3
$2,250,000
1,440,000
45,000
$ 765,000
400,000
37,500
$ 327,500

Reconciliation:

Reported Income
Year
1
2
3

Absorption Variable
Costing
Costing
$242,500
$242,500
172,500
72,500
277,500
327,500

Difference In
Difference
Predetermined Fixed Overhead
in
Change in
Fixed
Expensed Under

Reported Inventory
Overhead Absorption and
Income
(in units)
Rate*
Variable Costing
-0-0$5
0
$100,000
20,000
5
$100,000
(50,000) (10,000)
5
(50,000)

*Predetermined fixed manufacturing overhead rate =

$400,000
80,000

PROBLEM 17-21 (CONTINUED)

3.

a. In year 4, the difference in reported operating income will be $50,000,

calculated as follows:
Change in
inventory
(in units)

Predetermined
fixed overhead
rate

(10,000)

$5

$(50,000)

Income reported under absorption costing will be lower, because

inventory will decline during year 4.
b. Over the four-year period, the total of all reported operating income will be
the same under absorption and variable costing. This result will occur
because inventory does not change over the four-year period. It starts out
at zero on January 1 of year 1, and it ends up at zero on December 31 of
year 4.

PROBLEM 17-24 (45 MINUTES)

1.

Since there were no variances in 20x4, actual production and budgeted

production must have been the same.
Predetermined fixed overhead rate

budgeted fixed overhead

budgeted production

$600,000
150,000

= $4 per unit

Standard Cost per Unit

Direct material ........................................................................................
Direct labor .............................................................................................
Variable overhead ..................................................................................
a. Standard cost per unit under variable costing ..............................
Fixed overhead per unit under absorption costing .......................
b. Standard cost per unit under absorption costing .........................
2.

a.

$10
4
6
$20
4
$24

SKINNY DIPPERS, INC.

ABSORPTION-COSTING INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X4
Sales revenue (125,000 units sold at $30 per unit) ........................
Less: Cost of goods sold (at standard
absorption cost of $24 per unit) ...................................................
Gross margin ...................................................................................
Less: Selling and administrative expenses:
Variable (at $2 per unit) .......................................................
Fixed .....................................................................................
Net income .......................................................................................

$3,750,000
3,000,000
$ 750,000
250,000
100,000
$ 400,000

PROBLEM 17-24 (CONTINUED)

b.

3.

4.

SKINNY DIPPERS, INC.

VARIABLE-COSTING INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X4
Sales revenue (125,000 units sold at $30 per unit) ........................
Less: Variable expenses:
Variable manufacturing costs
(at standard variable cost of $20 per unit) .......................
Variable selling and administrative costs
(at $2 per unit) ....................................................................
Contribution margin ........................................................................
Less: Fixed expenses:
Fixed manufacturing overhead ...........................................
Fixed selling and administrative expenses .......................
Net income .......................................................................................

$3,750,000

Cost of goods sold under absorption costing ....................................

Less: Variable manufacturing costs under variable costing ............
Subtotal ..................................................................................................
Less: Fixed manufacturing overhead as period expense
under variable costing ...............................................................
Total ........................................................................................................

$3,000,000
2,500,000
$ 500,000
600,000
$(100,000)

Net income under variable costing ......................................................

Less: Net income under absorption costing ......................................
Difference in net income .......................................................................

$ 300,000
400,000
$(100,000)

Difference in
reported income

difference in fixed overhead expensed under

absorption and variable costing

change in inventory

in units

(25,000 units) ($4 per unit)

$100,000

2,500,000
250,000
$1,000,000
600,000
100,000
$ 300,000

predetermined fixed

overhead rate per unit

As shown in requirement (2), reported income is $100,000 lower under

variable costing.