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
Units produced
Units in ending inventory
Selling price per unit

0
20,000
4,000
$20

Manufacturing costs
Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Fixed overhead (total)

$4
$2
$1
$60,000

Selling and Administrative expenses

Variable (per unit)
Fixed (per unit)

$3
$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)
Direct labor (per unit)
Variable overhead (per unit)
Fixed overhead (per unit)
Total unit cost

$4
$2
$1
$3
$10

Unit cost using variable costing

Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Total unit cost

4
2
1
$7

Units sold = beginning inventory + units produced - ending inventory

= 0 + 20,000 - 4,000
= 16,000
Unit cost
Cost of goods sold ( unit cost x 16,000)
Ending inventory (unit cost x 4,000)

Absorption costing
$10
$160,000
$40,000

Variable Costing
$7
$112,000
$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
Less: Cost of goods sold
Gross margin
Less: Selling and administrative expenses
Net income

$320,000
160,000
160,000
88,000
$72,000

Baxter Company
Variable-Costing Income Statement
Sales revenue
Less variable expenses
Cost of goods sold
Variable selling and administrative expenses
Contribution margin
Less fixed expenses
Fixed overhead
Fixed selling and administrative expenses
Net income

$320,000
112,000
48,000
160,000
60,000
40,000
$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
Sales revenue
less: Variable costs
Contribution margin
less:Direct fixed costs
Segment margin
Less: Common fixed costs
Net Income

Clothing
$90,000
54,000
36,000
7,500
28,500

Shoes
$36,000
19,000
17,000
3,200
13,800

Appliances
$50,000
32,000
18,000
6,000
12,000

Total
$176,000
105,000
71,000
16,700
54,300
17,600
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
Units produced
Units in ending inventory

0
50,000
8,000

Selling price per unit

$32

Manufacturing costs
Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Fixed overhead (total)

$8
$5
$4
$150,000

Selling and Administrative expenses

Variable (per unit)
Fixed (per unit)

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

$8
$5
$4
$3
$20

Unit cost using variable costing

Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Total unit cost

8
5
4
$17

Units sold = beginning inventory + units produced - ending inventory

= 0 + 50,000 - 8,000
= 42,000
Unit cost (a)
Cost of goods sold (unit cost x 42,000)
Ending inventory (unit cost x 8,000)

Absorption costing
$20
$840,000
$160,000

Variable Costing
$17
$714,000
$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
Less: Cost of goods sold
Gross margin
Less: Selling and administrative expenses
Net income

$1,344,000
840,000
504,000
368,000
$136,000

Groden Company
Variable-Costing Income Statement
Sales revenue
Less variable expenses
Cost of goods sold
Variable selling and administrative expenses
Contribution margin
Less fixed expenses
Fixed overhead
Fixed selling and administrative expenses
Net income

$1,344,000
714,000
168,000
462,000
150,000
200,000
$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
Sales revenue
Less: Variable costs
Contribution margin
Less: Direct fixed costs
Segment margin
Less: Common fixed costs
Net income

Frozen Yogurt
240,000
178,000
62,000
2,500
59,500

Smoothies
126,000
109,000
17,000
1,200
15,800

Total
366,000
287,000
79,000
3,700
75,300
12,200
$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
D
A
B
G
C
F
H

Costs not considered in calculating segment margin

Sum of unit costs of direct materials, direct labor,
variable overhead and fixed overhead equals total
unit cost under
Contribution that a segment makes towards
covering the common fixed costs and making a
profit
Sum of unit costs of direct materials, direct labor,
and variable overhead equals total unit cost under
Difference between revenue and variable costs
Segment margin minus common fixed costs
Costs that can be physically traced to the particular
cost object under consideration without undue cost
or inconvenience
Difference between revenues and cost of goods sold

A. Segment Margin
B. Variable Costing
C. Net Income
D. Absorption Costing
E. Common Fixed Costs
F. Direct Costs
G. Contribution Margin
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
Units produced
Units in ending inventory

0
12,000
2,000

Selling price per unit

$26

Manufacturing costs
Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Fixed overhead (total)

$5
$3
$2
$30,000

Selling and Administrative expenses

Variable (per unit)
Fixed (per unit)

$3
$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)
Direct labor (per unit)
Variable overhead (per unit)
Fixed overhead (per unit)
Total unit cost

5.00
3.00
2.00
2.50
$12.50

Unit cost using variable costing

Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Total unit cost

5.00
3.00
2.00
$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
Less: Cost of goods sold
Gross margin
Less: Selling and administrative expenses
Net income

$ 260,000
125,000
135,000
72,000
$63,000

Sportswear Inc
Variable-Costing Income Statement
Sales revenue
Less variable expenses
Cost of goods sold
Variable selling and administrative expenses
Contribution margin
Less fixed expenses
Fixed overhead
Fixed selling and administrative expenses
Net income

$260,000
100,000
30,000
$130,000
30,000
42,000
$ 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
Units produced
Units in ending inventory

0
65,000
15,000

Selling price per unit

$18

Manufacturing costs
Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Fixed overhead (total)

$3.00
$1.80
$1.20
$130,000

Selling and Administrative expenses

Variable (per unit)
Fixed (total)

$1.50
$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)
Direct labor (per unit)
Variable overhead (per unit)
Fixed overhead (per unit)
Total unit cost

3.00
1.80
1.20
2.00
$8.00

Unit cost using variable costing

Direct materials (per unit)
Direct labor (per unit)
Variable overhead (per unit)
Total unit cost

3.00
1.80
1.20
$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
Less: Cost of goods sold
Gross margin
Less: Selling and administrative expenses
Net income

$ 900,000
400,000
500,000
140,000
$360,000

Kimmel Corporation
Variable-Costing Income Statement
Sales revenue
Less variable expenses
Cost of goods sold
Variable selling and administrative expenses
Contribution margin
Less fixed expenses
Fixed overhead
Fixed selling and administrative expenses
Net income

$900,000
300,000
75,000
525,000
130,000
65,000
$330,000

Homework Problem 3
Steele Office Store
The following information is available for Steele Office Store for 2001.
Sales revenue
Variable costs
Direct fixed costs
Indirect fixed costs

3 disk mailer
$24,000
15,000
2,500
2,400

5 disk mailer
$18,000
9,000
2,200
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
Sales revenue
Less: Variable costs
Contribution margin
Less: Direct fixed costs
Segment margin
Common fixed costs
Net income

3 disk mailer
24,000
15,000
9,000
2,500
6,500

5 disk mailer
18,000
9,000
9,000
2,200
6,800

Total
42,000
24,000
18,000
4,700
13,300
4,200
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:
Sales revenue
Variable costs
Direct fixed costs
Indirect fixed costs

Tax preparation
$85,000
12,000
15,000
6,500

Consulting
$25,000
10,000
10,000
2,400

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

Sales revenue
Less: Variable costs
Contribution margin
Less: Direct fixed costs
Segment margin
Less: Common fixed costs
Net income

Tax preparation

Consulting

Total

$85,000
12,000
73,000
15,000
58,000

$25,000
10,000
15,000
10,000
5,000

$110,000
22,000
88,000
25,000
63,000
8,900
54,100