Module 9

Demonstration Problem 1
Baxter Company

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

Units in beginning inventory 0

Units produced 20,000
Units 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 = $60,000
Units produced = 20,000
Fixed 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 $7
Cost of goods sold ( unit cost x 16,000) $160,000 $112,000
Ending inventory (unit cost x 4,000) $40,000 $28,000

2. Sales revenue = $20 x 16,000 = $320,000

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

Baxter Company
Absorption-Costing Income Statement

Sales revenue $320,000

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

Baxter Company
Variable-Costing Income Statement

Sales revenue $320,000

Less variable expenses
Cost of goods sold 112,000
Variable selling and administrative expenses 48,000
Contribution margin 160,000
Less fixed expenses
Fixed overhead 60,000
Fixed selling and administrative expenses 40,000
Net income $60,000
 Demonstration Problem 2
Maxwell 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 Appliances
Sales revenue 90,000 36,000 50,000
Variable costs 54,000 19,000 32,000
Direct fixed costs 7,500 3,200 6,000
Indirect (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 Store

Income Statement

Clothing Shoes Appliances Total

Sales revenue $90,000 $36,000 $50,000 $176,000
less: Variable costs 54,000 19,000 32,000 105,000
Contribution margin 36,000 17,000 18,000 71,000
less:Direct fixed costs 7,500 3,200 6,000 16,700
Segment margin 28,500 13,800 12,000 54,300
Less: Common fixed costs 17,600
Net Income 36,700
 Practice Problem 1
Groden Company

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

Units in beginning inventory 0

Units produced 50,000
Units 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 = $150,000
Units produced = 50,000
Fixed overhead cost per unit = 150,000/50,000 = $3

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

Direct materials (per unit) 8

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

Units sold = beginning inventory + units produced - ending inventory

= 0 + 50,000 - 8,000
= 42,000

Absorption costing Variable Costing

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

2. Sales revenue = $32 x 42,000 = $1,344,000

Selling and administrative expenses
variable : $4 x 42,000 = $168,000
total : $168,000 + $200,000 = $368,000

Groden Company
Absorption-Costing Income Statement

Sales revenue $1,344,000

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

Groden Company
Variable-Costing Income Statement

Sales revenue $1,344,000

Less variable expenses
Cost of goods sold 714,000
Variable selling and administrative expenses 168,000
Contribution margin 462,000
Less fixed expenses
Fixed overhead 150,000
Fixed selling and administrative expenses 200,000
Net income $112,000
 Practice Problem 2
Carnes 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 Smoothies
Sales revenue $240,000 $126,000
Variable costs 178,000 109,000
Direct fixed costs 2,500 1,200
Indirect (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 Treats

Income Statement

Frozen Yogurt Smoothies Total

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

1. If production is greater than sales then

A. absorption costing income is higher than variable costing income
B. absorption costing income is lower than variable costing income
C. absorption costing income is equal to the variable costing income
D. none of the above

2. Which of the following is not included in product cost under variable costing?
A. direct labor
B. direct materials
C. fixed overhead
D. variable overhead

3. Which of the following is not included in product cost under absorption costing?
A. direct labor
B. selling expenses
C. fixed overhead
D. variable overhead

4. The difference between the total segment margin of all segments and the net income equals
A. common fixed costs
B. direct fixed costs
C. variable costs
D. fixed selling and administrative costs

5. The difference between revenue and variable expenses equals

A. net income
B. segment margin
C. contribution margin
D. 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. $12
B. $14
C. $9
D. $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. $12
B. $10
C. $8.50
D. $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. $176,000
B. $192,000
C. $136,000
D. $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 incurred
B. All selling expenses are included in the calculation of product cost
C. All fixed expenses are included in the calculation of product cost
D. 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 incurred
B. All selling expenses are expensed in the period in which they are incurred
C. All fixed expenses are included in the calculation of included in the calculation of
product cost
D. Fixed overhead is included in the calculation of product cost
II. Matching Problem

E Costs not considered in calculating segment margin A. Segment Margin

D Sum of unit costs of direct materials, direct labor, B. Variable Costing
variable overhead and fixed overhead equals total
unit cost under
A Contribution that a segment makes towards C. Net Income
covering the common fixed costs and making a
profit
B Sum of unit costs of direct materials, direct labor, D. Absorption Costing
and variable overhead equals total unit cost under
G Difference between revenue and variable costs E. Common Fixed Costs
C Segment margin minus common fixed costs F. Direct Costs
F Costs that can be physically traced to the particular G. Contribution Margin
cost object under consideration without undue cost
or inconvenience
H Difference between revenues and cost of goods sold H. Gross Margin
 Homework Problem 1
Sportswear 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 0

Units produced 12,000
Units 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 = $30,000
Units produced = 12,000
Fixed overhead cost per unit = 30,000/12,000 = $2.5

Unit cost

Direct materials (per unit) 5.00

Direct labor (per unit) 3.00
Variable overhead (per unit) 2.00
Fixed overhead (per unit) 2.50
Total unit cost $12.50
Unit cost using variable costing
Direct materials (per unit) 5.00
Direct labor (per unit) 3.00
Variable overhead (per unit) 2.00
Total unit cost $10.00

units sold = beginning inventory + units produced - ending inventory

= 0 + 12,000 - 2,000
= 10,000
Absorption costing Variable Costing
Unit cost (a) $12.50 $10.00
Cost of goods sold (unit cost x 42,000) $125,000 $100,000
Ending inventory (unit cost x 8,000) $25,000 $20,000

2. Sales revenue = $26 x 10,000 = $260,000

Selling and administrative expenses
variable : $3 x 10,000 = $30,000
total : $30,000 + 42,000 = $72,000

Sportswear Inc
Absorption-Costing Income Statement

Sales revenue $ 260,000

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

Sportswear Inc
Variable-Costing Income Statement

Sales revenue $260,000

Less variable expenses
Cost of goods sold 100,000
Variable selling and administrative expenses 30,000
Contribution margin $130,000
Less fixed expenses
Fixed overhead 30,000
Fixed selling and administrative expenses 42,000
Net income $ 58,000
 Homework Problem 2
Kimmel Corporation

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

Units in beginning inventory 0

Units produced 65,000
Units 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 = $130,000
Units produced = 65,000
Fixed 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 Costing
Unit cost (a) $12.5 $10
Cost of goods sold (unit cost x 42,000) $400,000 $300,000
Ending inventory (unit cost x 8,000) $120,000 $90,000

2. Sales revenue = $18 x 50,000 = $900,000

Selling and administrative expenses
variable : $1.50 x 50,000 = $75,000
total : $75,000 + 65,000 = $140,000

Kimmel Corporation
Absorption-Costing Income Statement

Sales revenue $ 900,000

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

Kimmel Corporation
Variable-Costing Income Statement

Sales revenue $900,000

Less variable expenses
Cost of goods sold 300,000
Variable selling and administrative expenses 75,000
Contribution margin 525,000
Less fixed expenses
Fixed overhead 130,000
Fixed selling and administrative expenses 65,000
Net income $330,000
 Homework Problem 3
Steele Office Store

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

3 ¼ disk mailer 5 ¼ disk mailer

Sales revenue $24,000 $18,000
Variable costs 15,000 9,000
Direct fixed costs 2,500 2,200
Indirect 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 Store

Income Statement

3 ¼ disk mailer 5 ¼ disk mailer Total

Sales revenue 24,000 18,000 42,000
Less: Variable costs 15,000 9,000 24,000
Contribution margin 9,000 9,000 18,000
Less: Direct fixed costs 2,500 2,200 4,700
Segment margin 6,500 6,800 13,300
Common fixed costs 4,200
Net income 9,100
 Homework Problem 4
Sue Anderson, CPA

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

Tax preparation Consulting

Sales revenue $85,000 $25,000
Variable costs 12,000 10,000
Direct fixed costs 15,000 10,000
Indirect 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 $110,000

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