CH 09

CHAPTER 9 SOLUTUONS
Solutions to Questions for Review and Discussion
1. Using Figure 9.1 as a base, actual net income can differ from budgeted net income for the
following reasons:
 Actual revenues can be higher or lower due to changes in price, product mix, and total
quantity of products sold.
 Actual variable cost of goods sold can differ because of changes parallel to revenues for
product mix and total quantity sold and because of cost changes due to materials, labor, and
variable overhead costs differing from budgeted levels. (Notice: that the revenue price and
cost performance variances can be combined, as can the two quantity variances and the
two mix variances, to show a variance analysis of the contribution margin.)
 Actual variable operating expenses can differ from the budgeted level due to spending at a
higher or lower rate than budgeted.
 Actual fixed manufacturing costs and fixed operating expenses can be higher or lower than
budgeted.
While many reasons can produce the specific differences between actual and budgeted net
income, these are the only possible differences.
2. (a) The only changes that could cause February's revenue to be greater than January's
revenue would be:
 a change in prices per unit,

 a change in total unit sales, and
 a change in the mix of appliances sold.
(b) The only changes that could cause February's cost of sales to be greater than January's
cost of sales would be:
 a change in the costs per unit,

 a change in total unit sales, and
 a change in the mix of appliances sold.
3. Since only one product exists, a contribution margin analysis would explain the impacts of total
units sold and the prices and costs of that product relative to the budgeted amounts. No mix
variance could be calculated. Only revenue price and quantity variances and cost of sales
performance (purchase) and quantity variances can be found. Notice that the revenue price
and cost of sales performance variances can be combined, as can the two quantity variances,
to show a variance analysis of the contribution margin.
4. For a manufacturer, the differences are:
 First, the contribution margin analysis explains changes in the contribution margin revenue
minus all variable costs), while the gross margin analysis explains the changes in the gross
margin (revenue minus cost of goods sold including all production costs, both fixed and
variable).
 Gross margin analysis will include fixed manufacturing costs in product costs for the cost of
Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-1

sales, while the contribution margin analysis excludes these fixed costs.
 Contribution margin analysis will include variable operating expenses, while the gross
margin analysis excludes these variable costs.
For a merchandiser, the difference is only the inclusion of variable operating expenses in
contribution margin analysis but not in gross margin analysis.
5. The purchase price variances assume that the firm being analyzed is a merchandising firm. It
buys its products from a manufacturer or other merchandiser.
The cost performance variances assume that the firm manufactures its products and will have
the normal variances found arising from a standard costing system for materials, labor, and
overhead. A problem does arise here since the gross profit and the contribution margin
analyses use the sales quantities, while the cost performance variances use the production
quantities.
6. A manager might use these analytical tools to:
 Evaluate a "what if" scenario during the budgeting process to determine the impact of
pricing, quantity, or mix changes.
 Explain why the actual results are different from the budget that was the plan of action for
this time period.
 Show the causes of changes over time (from one period to another).
Many specific questions can be answered by these analyses, such as:
 What happened because we promoted Product X more vigorously?

 Did price cutting on Product Y result in higher sales and an overall higher contribution
margin from that product?
 Did higher sales of Product X cause sales of Product Y to go up or down? And what was
the impact on either contribution or gross margin from this action?
7. (a) If prices change, customers may shift from higher priced products to lower priced products.
(b) If customers shift to products with lower gross or contribution margins from those with higher
margins, lower margins and presumably lower net profits are generated.
(c) If higher priced products have higher unit costs and lower priced product s have lower unit
costs, the direction of change for revenue variances will be the same as product cost
variances. The total amounts of change will probably differ, but the direction of the change
will be the same.
8. A spending variance can be divided into price and quantity variances if the expense being
analyzed is a variable expense and if the expense can be calculated by multiplying a price (or
rate) times a quantity. An example is an expense such as a supply item that can be measured
quantitatively as in yards, pounds, hours, etc. Most commonly, these expenses are measured
as an input and not as a function of outputs (similar to materials and direct labor). This cannot
be done for fixed costs (a lump of costs).
9. In the vast majority of cases, the calculation order does not matter. In contribution margin and
gross margin analyses, it is the magnitude and direction that are the key areas of interest. The
order of calculation will cause the specific variance amounts to change but nearly always by
only a very small amount and only rarely in a different direction.
Traditionally, the price variance is calculated first, which is consistent with what is done in most

standard costing analyses. Different situations may suggest that either the mix variance or the
quantity variance be calculated next, but no general rule exists or is needed.
It is very rare that the order of calculation will cause a major variance to become minor or vice
versa. The difference in amounts comes from joint variances among price, mix, and quantity to
be combined with one base or another. These joint variances are nearly always small or at
least complementary to the variance with which it is being combined.
10. When outputs are not as clear as they are in a manufacturing situation, such as in staff areas
and internal service areas, cost performance is not as clear or as easily done. In these cases,
with carefully defined activities and costs definitions, comparisons with other firms performing
similar tasks can give insight into the relative efficiency and effectiveness of these tasks. If one
firm processes accounts payable at a cost of $20 per check written while another performs the
same task for $50 per check, the second firm may find significant cost savings opportunities.
Measuring ourselves against known efficient and effective operators allows an independent
assessment of our performance. To improve our efficiency, we may need the challenge of
"world-class" leaders.
11. The basic difference between variable costing and absorption costing is in the treatment of fixed
manufacturing costs. Absorption costing treats fixed manufacturing costs as product costs and
charges them to the individual units of product. Variable costing treats fixed manufacturing
costs as period costs and charges them directly to the income statement for the period in which
the costs were incurred.
12. (a) If production equals sales, variable costing and absorption costing have the same net
income. This occurs because all fixed costs incurred in manufacturing during the period are
charged to the same period through cost of goods sold. (Assume beginning and ending
inventory values are the same.)
(b) If production exceeds sales, absorption costing has the higher net income because fixed
costs of the current period are included in the ending inventory and shifted to the next
period. This leaves less costs to charge against the revenues of the current period.
(c) If production is less than sales, variable costing has the higher net income. Absorption
costing will charge the fixed costs of the current period plus fixed costs brought in from the
beginning inventory to the cost of goods sold of the current period. Variable.costing charges
only the current fixed costs to the current period income statement.
13. The more a company produces and the less it sells, the more fixed costs will be deferred to a
future period.
14. The four basic categories for discussing the advantages and disadvantages of either costing
method are:
 Short term versus long term.

 Unethical behavior of managers.
 Variable versus fixed costs.
 External versus internal reports.
15. A labor-intensive manufacturing process will have high variable costs because of labor and
comparatively lower fixed costs. The automation will significantly reduce the labor cost (thus,
the variable cost) and increase the fixed costs because of the new equipment. Under variable
costing and automation, the contribution margin will be higher because variable costs have
been reduced. But also under variable costing and automation, a significant amount of fixed
costs will be deducted in the current period. Under absorption costing, the higher fixed costs

will increase inventory valuation, and any work in process at the end of a period will defer some
amount of fixed costs.
16. The net incomes under variable costing and absorption costing are equal only when production
equals sales. At the break-even point, the contribution margin equals fixed costs, and profit
equals zero. Because absorption costing defers fixed costs in ending inventories, a portion of
the fixed costs is deferred to the next period. When production exceeds sales, absorption
costing will yield a profit for the current period even though the operations are at the break-even
point.
Solutions to Exercises
9-1. Variance analysis:

PaQa Price PbQa Quantity PbQb
Actual Variance Adjusted Variance Budget
Sales units 3,000 2,500
Sales $22,500 ($1,500) $24,000 $4,000 $20,000
Cost of sales 19,500 (1,500) 18,000 (3,000) 15,000
Gross margin $3,000 ($3,000) $6,000 $1,000 $5,000
The $2,000 difference results from selling 500 units more than budgeted but at lower prices than
budgeted. This generated a $3,000 unfavorable price variance and a $1,000 favorable quantity
variance. With only one product, no mix variance exists.
9-2.
(1) Yuma Lamps budget versus actual income statement:
Budget Actual Variance

Unit sales 24,000 25,000 1,000
Sales revenue M$528,000 M$500,000 (M$28,000)
Variable costs:
Cost of goods M$312,000 M$312,500 (M$500)
Variable operating expenses 24,000 28,000 (4,000)
Total variable expenses M$336,000 M$340,500 (M($4,500)
Contribution margin M$192,000 M$159,500 (M$32,500)
Direct fixed costs 46,000 50,000 (4,000)
Product net profit M$146,000 M$109,500 (M$36,500)
(2) Contribution margin analysis:

PaQa Price PbQa Quantity PbQb
Actual Variance Adjusted Variance Budget
Unit sales 25,000 24,000
Sales revenue M$500,000 (M$50,000) M$550,000 M$22,000 M$528,000
Variable costs:
Cost of goods M$312,500 M$12,500 M$325,000 (M$13,000) M$312,000
Variable oper exp 28,000 (3,000) 25,000 (1,000) 24,000
Total variable exp M$340,500 M$9,500 M$350,000 (M$14,000) M$336,000
Contribution margin M$159,500 (M$40,500) M$200,000 M$8,000 M$192,000

(3) The main reasons that profits are $36,500 below the budgeted $146,000 are:
 Yuma Lamps sold 1,000 extra units which should have increased profits by $8,000.
 And, the cost per unit was only $12.50 instead of the budgeted $13 per unit.
 However, the price per unit was $20 and not $22 as budgeted.
 And, the variable operating expenses were overspent by $3,000.
 And, the direct fixed expenses were overspent by $4,000.
These variances sum to the $36,500 decline in actual profits versus budgeted profits.
9-3.
(1) Revenue variances for Bland weddings:
Price: ($490 – $500) (24 + 15) (24  39) = $240 unfavorable
Quantity: ($500) (39 – 38) (24  39) = $308 favorable
Mix: ($500) (38) [(24  39) – (25  38)] = $817 unfavorable
Revenue variances for Grand weddings:

Price: ($420 – $390) (24 + 15) (15  39) = $450 favorable
Quantity: ($390) (39 – 38) (15  39) = $150 favorable
Mix: ($390) (38) [(15  39) – (13  38)] = $637 favorable
(2) Variable cost variances for Bland weddings:

Performance: ($135 – $125) (24 + 15) (24  39) = $240 unfavorable
Quantity: ($125) (39 – 38) (24  39) = $77 unfavorable
Mix: ($125) (38) [(24  39) – (25  38)] = $204 favorable
Variable cost variances for Grand weddings:

Performance: ($165 – $130) (24 + 15) (15  39) = $525 unfavorable
Quantity: ($130) (39 – 38) (15  39) = $50 unfavorable
Mix: ($130) (38) [(15  39) – (13  38)] = $212 unfavorable
9-4. Richman Company marketing and administrative expenses analysis:
Budget Sales
Actual Spending for Actual Quantity Budgeted
Spending Variance Sales Variance Sales
Variable expenses $9,600 ($600) $9,000

Fixed expenses 15,000 0 15,000
Total expenses $24,000 $600 $24,600 ($600) $24,000
It is difficult to determine what portion of each variance is the responsibility of the marketing
manager. Marketing expenses and administrative expenses should be separated for responsibility
purposes. Also, actual fixed and variable expenses should be separately identified. Probably, the
sales quantity variance is tied to sales volume and may be marketing related. The spending
variance needs more careful analysis to determine responsibility.

9-5.
(1) Contribution margin: 2008 2007 Difference
Revenues:
Partial $660,000 $1,000,000
Complete 2,242,000 1,800,000
Total $2,902,000 $2,800,000 $102,000
Costs:
Partial $372,000 $600,000
Complete 1,208,400 960,000
Total $1,580,400 $1,560,000 20,400
Contribution margin:
Partial $288,000 $400,000
Complete 1,033,600 840,000
Total $1,321,600 $1,240,000 $81,600
2008 2007
Price Quantity Mix % Cost Price Quantity Mix % Cost
Partial $5.50 120,000 0.24 $3.10 $5 200,000 0.4 $3.00
Complete 5.90 380,000 0.76 3.18 6 300,000 0.6 3.20
Total 500,000 1.00 500,000 1.0
Revenue P2Q2M2 P1Q2M2 P1Q1M2 P1Q1M1

2008 Price Adjusted Quantity Adjusted Mix 2007
Sales Variances Sales Variances Sales Variances Sales
Partial $660,000 $60,000 $600,000 $0 $600,000 ($400,000) $1,000,000
Complete 2,242,000 (38,000) 2,280,000 0 2,280,000 480,000 1,800,000
Total $2,902,000 $22,000 $2,880,000 $0 $2,880,000 $80,000 $2,800,000
Costs 2008 Cost Adjusted Quantity Adjusted Mix 2007

Costs Variances Costs Variances Costs Variances Costs
Partial $372,000 $12,000 $360,000 $ 0 $360,000 ($240,000) $600,000
Complete 1,208,400 (7,600) 1,216,000 0 1,216,000 256,000 960,000
Total $1,580,400 $4,400 $1,576,000 $0 $1,576,000 $16,000 $1,560,000
Contribution Margin 2008 Margin Adjusted Quantity Adjusted Mix 2007

Cont Mar Variances Cont Mar Variance Cont Mar Variances Cont Mar
Partial $288,000 $48,000 $240,000 $0 $240,000 ($160,000) $ 400,000
Complete 1,033,600 (30,400) 1,064,000 0 1,064,000 224,000 840,000
Total $1,321,600 $17,600 $1,304,000 $0 $1,304,000 $64,000 $1,240,000
(3) The largest portion, $64,000, of the $81,600 increase in contribution margin comes from the
change in mix between the two services. A very small reduction in the price of the complete
service generated a large increase in volume. The price increase for partial service caused a
dramatic drop in volume sold. The small changes in costs had less impact on the contribution
margin than did the price changes.
9-6.

Cheap $11 250,000 0.714286 $5.40 $10 240,000 0.666667 $5.00
Expensive 18 100,000 0.285714 7.50 18 120,000 0.333333 7.75
Total 350,000 1.000000 360,000 1.000000
Revenue PaQaMa PbQaMa PbQbMa PbQbMb

Actual Price Adjusted Quantity Adjusted Mix Budgeted
Cheap $2,750,000 $250,000 $2,500,000 ($71,429)$2,571,429 $171,429 $2,400,000
Expensive 1,800,000 0 1,800,000 (51,429) 1,851,429 (308,571) 2,160,000
Total $4,550,000 $250,000 $4,300,000 ($122,857)$4,422,857 ($137,143)$4,560,000
Costs Actual Cost Adjusted Quantity Adjusted Mix Budgeted

Cheap $1,350,000 $100,000 $1,250,000 ($35,714)$1,285,714 $85,714 $1,200,000
Expensive 750,000 (25,000) 775,000 (22,143) 797,143 (132,857) 930,000
Total $2,100,000 $75,000 $2,025,000 ($57,857) $2,082,857
$2,130,000
Contribution Margin Actual Margin Adjusted Quantity Adjusted Mix Budgeted

Cheap $1,400,000 $150,000 $1,250,000 ($35,714)$1,285,714 $85,714 $1,200,000
Expensive 1,050,000 25,000 1,025,000 (29,286) 1,054,286 (175,714) 1,230,000
Total $2,450,000 $175,000 $2,275,000 ($65,000)$2,340,000 ($90,000)$2,430,000
(2) The reason Dick Peppy can sell less and make more is primarily the price increase on the Cheap
product. The reduced quantity and an unfavorable shift in product mix from Expensive to Cheap
was more than offset by the increase in revenue and in quantity generated by the Cheap product.
9-7. Budget Sales Budget for

Spending Variance Garments Variance Garments
Variable operating expenses $101,000 $1,000 $102,000 ($2,000) $100,000
Fixed operating expenses 203,000 (3,000) 200,000 0 200,000
Total expenses $304,000 ($2,000) $302,000 ($2,000) $300,000
In total, the firm spent $4,000 more than the original budget. But, because 2,000 more garments
were processed than budgeted, variable costs were actually underspent. Fixed costs were
overspent by $3,000.
9-8. 3rd Quarter - This Year 3rd Quarter - Last Year

Reference Books Price Quantity Mix % Price Quantity Mix%
Medical dictionary $43 10,000 0.125 $41 12,000 0.16
Bible concordance 19 18,000 0.225 20 20,000 0.26667
Thesaurus 25 9,000 0.1125 26 8,000 0.10667
Global dictionary 41 43,000 0.5375 44 35,000 0.46667
Totals 80,000 1.00 75,000 1.00
PaQaMa PbQaMa PbQbMa PbQbMb

Reference Sales Price Adjusted Quantity Adjusted Mix Sales
Book This Year Variances Sales Variances Sales Variances Last Year
Medical dict $ 430,000 $20,000 $410,000 $25,625 $384,375 ($107,625) $ 492,000
Bible con 342,000 (18,000) 360,000 22,500 337,500 (62,500) 400,000
Thesaurus 225,000 (9,000) 234,000 14,625 219,375 11,375 208,000
Global dict 1,763,000 (129,000) 1,892,000 118,250 1,773,750 233,750 1,540,000

Totals $2,760,000 ($136,000) $2,896,000 $181,000 $2,715,000 $75,000 $2,640,000
By reducing the price of the global dictionary, Toco Hills increased its volume and generated
positive total mix and total quantity variances. It appears that price reductions did generate
more business and higher total revenues.
9-9. The following comments assume that absorption costing uses 1,000 units per year as normal
production for fixed cost absorption. The absorption unit cost is $2. Overapplied or underapplied
fixed overhead is transferred to cost of goods sold.
(a) Net income under variable costing is the same for 2008 and 2009.
2008 2009
Sales $2,200 $2,200
Variable costs 1,100 1,100
Contribution margin $1,100 $1,100
Fixed costs 1,000 1,000
Net income $100 $100
This is true, because sales units are the same in both years.
(b) Net income in 2006 is the same for both absorption costing and variable costing.
Variable costing 2006

Sales $2,000
Variable costs 1,000
Contribution margin $1,000
Fixed costs 1,000
Net income $0
Absorption costing: 2006

Sales $2,000
Cost of goods sold 2,000
Gross margin $0
Capacity variance 0
Net income $0
This is true, because production equals sales.
(c) The total five-year net income for absorption costing will be greater than the five-year net income
for variable costing.
Variable costing:
Units sold 5,500
Units produced 5,500
Sales $11,000
Fixed costs 5,000
Net income $500
Absorption costing:
Units sold 5,500

Sales $11,000
Gross margin $0
Capacity variance 500
Net income $500
This is true, because production equals sales. The annual normal production is 1,000 units;
therefore, for the five-year period, 500 units above normal were produced. This generates a $500
capacity variance.
(d) Under absorption costing, which year will show the highest profit? Why?
2006 2007 2008 2009 2010

Sales $2,000 $2,000 $2,200 $2,200 $2,600
Cost of goods sold 2,000 2,000 2,200 2,200 2,600
Gross margin $0 $0 $0 $0 $0
Capacity variance 0 500 (100) 100 0
Net income $0 $500 ($100) $100 $0
The highest profit was in 2007, because unit production was highest in that year.
(e) Under variable costing, which year will show the highest profit? Why?
2006 2007 2008 2009 2010

Sales $2,000 $2,000 $2,200 $2,200 $2,600
Variable costs 1,000 1,000 1,100 1,100 1,300
Contribution margin $1,000 $1,000 $1,100 $1,100 $1,300
Fixed costs 1,000 1,000 1,000 1,000 1,000
Net income $0 $0 $100 $100 $300
The highest profit was in 2010, because unit sales were highest in that year.
(f) Why is net income for the two methods different in 2008? Explain in dollars.
Variable costing: 2008

Units sold 1,100
Units produced 900
Sales $2,200
Fixed costs 1,000
Net income $100
Absorption costing: 2008

Units sold 1,100
Units produced 900
Sales $2,200
Gross margin $0
Capacity variance (100)
Net income ($100)
The difference is $200. This is the fixed cost of $1 per unit times the difference between units sold

and units produced.
9-10.
(1) Absorption costing: (44,000 + 17,000 + 8,000 + 15,000)  24,000 = NT$3.50
(2) Variable costing: (44,000 + 17,000 + 8,000)  24,000 = NT$2.88
9-11.
(1) Production = 250,000 + 142,000 – 135,000 = 257,000 units
Unit cost = 19,000,000 / 257,000 = 73.93
(2) Unit cost = (19,000,000 + 8,000,000) / 257,000 = 105.06
(3) Cost of goods sold = 7,000,000 + 105.06(250,000 – 135,000) = 19,081,900
9-12.
(1) Variable costing income statement:
Springhill Lake Products, Inc.

Income Statement (Variable Costing)
Sales revenue (14,500 x $12) $174,000
Variable costs:
Manufacturing costs:
Direct materials $44,000
Direct labor 36,000
Factory overhead 16,000 $96,000
Minus inventory [(96,000 16,000) x 1,500 units] (9,000) $87,000
Marketing and administration expenses 12,000 99,000
Fixed costs:
Manufacturing costs $40,000
Marketing and administration 20,000 60,000
Profit before income taxes $15,000
(2) Absorption costing income statement:
Springhill Lake Products, Inc.

Income Statement (Absorption Costing)
Sales revenue (14,500 x $12) $174,000
Cost of goods sold:
Variable costs:
Manufacturing costs:
Direct materials $44,000
Direct labor 36,000
Factory overhead 16,000 $96,000
Fixed factory overhead 40,000 $136,000
Minus inventory [(136,000 16,000) x 1,500 units] (12,750) 123,250

Gross profit $50,750
Marketing and administration expenses
Variable $12,000
Fixed 20,000 32,000
(3) Reconciliation of methods:
Beginning inventory units 0
Ending inventory units 1,500
Change in units 1,500
Fixed rate ($40,000 16,000) x $2.50
Difference in profit $3,750
Plus variable costing profit 15,000
Absorption costing profit $18,750
Absorption costing profit is higher than variable costing profit because production exceeded sales.
9-13. Variable costing income statement:
NAHMIAS BEE HIVES

Income Statement (Variable Costing)
Sales revenue $2,000,000
Variable costs:
Production costs [$1,500,000 – (250,000 x $3)] $750,000
Operating expenses 125,000 875,000
Contribution margin $1,125,000
Fixed costs:
Production costs (250,000 x $3) $750,000
Operating expenses ($225,000 – $125,000) 100,000 850,000
Income taxes 110,000
Profit after income taxes $165,000
9-14.
HELFAND LOGGING COMPANY

Estimated Income Statement (Absorption Costing) For The Year 2004
Cost of goods sold:
Beginning inventory, January 1 $600,000
Current production cost [($600,000  20,000) x 400,000 units] 12,000,000
Goods available for sale $12,600,000
Minus inventory, December 31 (70,000 units x $30) 2,100,000 10,500,000
Gross profit $7,000,000
Unit costs: Variable [($600,000 – $400,000)  20,000 units] $10

Fixed ($400,000  20,000 units) 20
Total ($600,000  20,000 units) $30
Note: Units produced 400,000 Units sold 350,000

HELFAND LOGGING COMPANY

Estimated Income Statement (Variable Costing) For The Year 2004
Variable costs:
Beginning inventory, January 1 (20,000 units x $10) $200,000
Current production cost ($10 x 400,000 units) 4,000,000
Goods available for sale $4,200,000
Minus inventory, December 31 (70,000 units x $10) 700,000 3,500,000
Fixed costs (400,000 units x $20) 8,000,000
Net profit $6,000,000
Note: Units produced 400,000 Units sold 350,000

Profit – absorption costing $7,000,000
Add: Fixed costs brought into period through beginning
inventory ($20 x 20,000 units) 400,000
$7,400,000
Minus: Fixed costs deferred in ending inventory ($20 x 70,000) (1,400,000)
Profit – variable costing $6,000,000
9-15.
GERSHON MEMORY CHIPS

Income Statement (Absorption Costing) For The Year 2004
Sales revenue (200,000 units x $20) $4,000,000
Cost of goods sold (200,000 units x $17) 3,400,000
Gross profit $600,000
Unit costs: Variable (given) $9

Fixed ($1,360,000 – 170,000 units) 8
Total $17
Units sold: 80,000 + 170,000 – 50,000 = 200,000

GERSHON MEMORY CHIPS
Income Statement (Variable Costing) For The Year 2004
Sales revenue (200,000 units x $20) $4,000,000
Variable cost of goods sold (200,000 units x $9) 1,800,000
Fixed costs 1,360,000
Profit $840,000

Beginning inventory units 80,000
Ending inventory units 50,000
Change in inventory units (30,000)
Fixed costs per unit x $8
Fixed overhead released from inventory ($240,000)
Profit – variable costing 840,000
Profit – absorption costing $600,000
Variable costing profit is higher than that of absorption costing because inventories decreased.
Solutions to Problems
9-16.
(1) Gross margin analysis:
First half analysis:
Average Month – 1st Half Budgeted Month

Able $18 12,000 0.324324 $10 $20 10,000 0.333333 $10
Baker 25 14,000 0.378378 15 30 10,000 0.333333 15
Charlie 38 11,000 0.297297 20 40 10,000 0.333333 20
Total 37,000 1.00 30,000 1.00
Revenues PaQaMa PbQaMa PbQbMa PbQbMb

Actual 1st Price Adjusted Quantity Adjusted Mix Budgeted
Able $216,000 ($24,000) $240,000 $ 45,405 $194,595 ($5,405) $200,000
Baker 350,000 (70,000) 420,000 79,459 340,541 40,541 300,000
Charlie 418,000 (22,000) 440,000 83,243 356,757 (43,243) 400,000
Total $984,000 ($116,000)$1,100,000 $208,108 $891,892 ($8,108) $900,000
Costs Actual 1st Cost Adjusted Quantity Adjusted Mix Budgeted

Able $120,000 $0 $120,000 $22,703 $97,297 ($2,703) $100,000
Baker 210,000 0 210,000 39,730 170,270 20,270 150,000
Charlie 220,000 0 220,000 41,622 178,378 (21,622) 200,000
Total $550,000 $0 $550,000 $104,054 $445,945 ($4,054) $450,000
Gross Margin Actual 1st Margin Adjusted Quantity Adjusted Mix Budgeted
Gross Mar Variances Gross Mar Variance Gross Mar Variances Gross Mar
Able $96,000 ($24,000) $120,000 $ 22,703 $97,297 ($2,703) $100,000
Baker 140,000 (70,000) 210,000 39,730 170,270 20,270 150,000
Charlie 198,000 (22,000) 220,000 41,622 178,378 (21,622) 200,000
Total $434,000 ($116,000) $550,000 $104,054 $445,946 ($4,054) $450,000
Second half analysis:
Average Month – 2nd Half Budgeted Month

Able $22 9,000 0.300000 $10 $20 10,000 0.333333 $10
Baker 29 11,000 0.366667 15 30 10,000 0.333333 15
Charlie 43 10,000 0.333333 20 40 10,000 0.333333 20
Total 30,000 1.00 30,000 1.00

Actual 2nd Price Adjusted Quantity Adjusted Mix Budgeted
Able $198,000 $18,000 $180,000 $0 $180,000 ($20,000) $200,000
Baker 319,000 (11,000) 330,000 0 330,000 30,000 300,000
Charlie 430,000 30,000 440,000 0 400,000 0 400,000
Total $947,000 $37,000 $910,000 $0 $910,000 $10,000 $900,000
Costs Actual 2nd Cost Adjusted Quantity Adjusted Mix Budgeted

Able $90,000 $0 $90,000 $0 $90,000 ($10,000) $100,000
Baker 165,000 0 165,000 0 165,000 15,000 150,000
Charlie 200,000 0 220,000 0 200,000 0 200,000
Total $455,000 $0 $455,000 $0 $455,000 $5,000 $450,000
Gross Margin Actual 2nd Margin Adjusted Quantity Adjusted Mix Budgeted
Able $108,000 $18,000 $90,000 $0 $90,000 ($10,000) $100,000
Baker 154,000 (11,000) 165,000 0 165,000 15,000 150,000
Charlie 230,000 30,000 200,000 0 200,000 0 200,000
Total $492,000 $37,000 $455,000 $0 $455,000 $5,000 $450,000
(2) Comparison of commission payments: Budget 1st Half 2nd Half

Able commissions $10,000 $10,800 $10,800
Baker commissions 15,000 17,500 15,400
Charlie commissions 20,000 20,900 23,000
Total $45,000 $49,200 $49,200
(3) Interestingly, the total commission amounts for the first and second half average month are the
same. However, the second half shows a higher gross margin by $58,000. If the impact of the
revised system is reflected in the actual numbers, the revised commission system generated
higher profits than the old system. Both systems generated higher sales than the budget.
Salespersons seem less likely to cut prices to make more sales. Rather they seem to raise prices
and hold quantities constant.
9-17.
(1) Gross margin analysis:
Actual Budget
NearBy $162.25 3,200 0.336842 $120.07 $166 3,000 0.333333 $116.2
FarAway 95.50 6,300 0.663158 70.67 97 6,000 0.666667 67.9
Total 9,500 1.00 9,000 1.00

NearBy $519,000 ($12,000) $531,200 $27,958 $503,242 $5,242 $498,000
FarAway 601,650 (9,450) 611,100 32,163 578,937 (3,063) 582,000
Total $1,120,850 ($21,450)$1,142,300 $60,121 $1,082,179 $2,179 $1,080,000

NearBy $384,224 $12,384 $371,840 $19,571 $352,269 $3,669 $384,600
FarAway 445,221 17,451 427,770 22,514 405,256 (2,144) 407,400
Total $829,445 $29,835 $799,610 $42,085 $757,525 $1,525 $756,000
Gross Margin Actual Margin Adjusted Quantity Adjusted Mix Budgeted

NearBy $134,976 ($24,384) $159,360 $8,387 $150,937 $1,573 $149,400
FarAway 156,429 (26,901) 183,330 9,649 173,681 (919) 174,600
Total $291,405 ($51,285) $342,690 $18,036 $324,654 $654 $324,000
(2) Operating expense analysis: Budget Sales Budget for

Spending Variance Units Sold Variance Units
Variable operating expenses $? $? $95,000 ($5,000) $90,000
Fixed operating expenses ? ? 84,000 0 84,000
Total expenses $198,000 ($19,000) $179,000 ($51000) $174,000
(3) Reasons for the decline in net income from the budgeted level of $150,000 to the actual level of
$93,405 include:
 Unit sales prices were lower than budgeted for both products.
 Unit costs were higher than budgeted for both products.
 Spending on operating expenses was $19,000 higher than the adjusted budget for these
expenses.
These three negative factors overwhelmed the higher profits earned from selling higher quantities
of both products and having a more profitable product mix.
9-18. Actual Budgeted

Rates Balance Mix % Rates Balance Mix %
Investments 0.042 $250 0.268817 0.040 $300 0.333333
Short-term loans 0.089 400 0.430108 0.090 300 0.333333
Long-term loans 0.095 280 0.301075 0.100 300 0.333333
Total 0.078 $930 1.00 0.077 $900 1.00
Deposits 0.040 $930 1.00 0.038 $900 1.00
Interest margin 0.038 0.039
RaQaMa RbQaMa RbQbMa RbQbMb

Actual Rate Adjusted Quantity Adjusted Mix Budgeted
Interest Income: Interest Variances Interest Variances Interest Variances Interest
Invest $10.50 $0.50 $10.00 $0.32 $9.68 ($2.32) $12.00
S-T loans 35.60 (0.40) 36.00 1.16 34.84 7.84 27.00
L-T loans 26.60 (1.40) 28.00 0.90 27.10 (2.90) 30.00
Total $72.70 ($1.30) $74.00 $2.39 $71.61 $2.61 $69.00
Interest expense:
Deposits 37.20 1.86 35.34 1.14 34.20 0.00 34.20
Interest margin:
Total margin $35.50 ($3.16) $38.66 $1.25 $37.41 $2.61 $34.80
The extra interest margin came from having higher total assets and liabilities and from having a
higher earning mix of assets (more short-term loans and fewer investments). These higher

earning opportunities overcame lower earnings from loans and higher deposit interest rates. Of
concern to the Friendly Bank is the fact that the interest margin percentage dropped from 3.9
percent in the budget to 3.8 percent in the actual results.
About a third of the increased interest margin earned from quantity and mix variances to cover the
higher interest rates and the higher interest margin came from having more assets ($1.25 million).
9-19. Lace price and quantity variances (in euros):

Actual cost of lace used 16,024.0
Budgeted cost of lace used (0.25 per inch x 67,650 inches) 16,912.5
Cost of lace variance (favorable) 888.5
Budgeted cost of lace used (0.25 per inch x 67,650 inches) 16,912.5
Cost of budgeted lace (0.25 x 8,250 letters x 8 inches) 16,500.0
Lace per letter variance (unfavorable) 412.5
Cost of budgeted lace used (0.25 x 8,250 letters x 8 inches) 16,500

Cost of budgeted letter used (0.25 x 250 verses x 30 letters x 8) 15,000
Letters per verse variance (unfavorable) 1,500
Cost of budgeted letter used (0.25 x 250 verses x 30 letters x 8) 15,000

Budget costs for budgeted verses (0.25 x 200 x 30 x 8) 12,000
Verse variance (unfavorable) 3,000
Total variance (unfavorable) 4,024
Pat has two major variances. First, she sold more verses than expected, which required 3,000
euros more lace than budgeted. This is an unfavorable variance but is good news since business
was better than expected. Second, the number of letters per verse was higher than expected.
The actual verses averaged 33 letters, 3 above the budgeted 30 letters. This cost Pat l,500 euros
more than budgeted. This may require a revision of how she prices the verses if it continues.
She used slightly more lace per letter than expected but was able to purchase lace at a lower cost
than budgeted.
9-20.
(1) Comparative income statements: Actual Forecast Difference
Revenues:
New York City trips $2,730,000 $2,400,000 $330,000
Cape Cod trips 330,000 525,000 (195,000)
Williamsburg trips 2,000,000 1,350,000 650,000
Total revenue $5,060,000 $4,275,000 $785,000
Variable costs:
New York City trips $1,785,000 $1,500,000 $285,000
Cape Cod trips 175,000 262,500 (87,500)
Williamsburg trips 1,400,000 900,000 500,000
Total variable costs $3,360,000 $2,662,500 $697,500
Contribution margin $1,700,000 $1,612,500 $87,500
Fixed costs 810,000 800,000 (10,000)
Net income $890,000 $812,500 $77,500

Actual Budgeted
New York $390 7,000 0.583333 $255 $400 6,000 0.60 $250
Cape Cod 330 1,000 0.083333 175 350 1,500 0.15 175
Williamsburg 500 4,000 0.333333 350 540 2,500 0.25 360
Total 12,000 1.00 10,000 1.00

New York $2,730,000 ($70,000)$2,800,000 $466,667 $2,333,333 ($66,667)$2,400,000
Cape Cod 330,000 (20,000) 350,000 58,333 291,667 (233,333) 525,000
Williamsburg 2,000,000 (160,000) 2,160,000 360,000 1,800,000 450,000 1,350,000
Total $5,060,000 ($250,000)$5,310,000 $885,000 $4,425,000 $150,000 $4,275,000

New York $1,785,000 $35,000 $1,750,000 $291,667 $1,458,333 ($41,667)$1,500,000
Cape Cod 175,000 0 175,000 29,167 145,833 (116,667) 262,500
Willamsburg 1,400,000 (40,000) 1,440,000 240,000 1,200,000 300,000 900,000
Total $3,360,000 ($5,000)$3,365,000 $560,833 $2,840,167 $141,667 $2,662,500
Contrib Margin Actual Margin Adjusted Quantity Adjusted Mix Budgeted

New York $945,000 ($105,000)$1,050,000 $175,000 $875,000 ($25,000) $900,000
Cape Cod 155,000 (20,000) 175,000 29,167 145,833 (116,667) 262,500
Williamsburg 600,000 (120,000) 720,000 120,000 600,000 150,000 450,000
Total $1,700,000 ($245,000)$1,945,000 $324,167 $1,620,833 $8,333 $1,612,500
(3) Comments on the variation in net income:
The main reasons for the higher net income are the much higher volumes of business for the New
York and Williamsburg trips. Quantity variances are large for both of these trips. Cost differences
are insignificant, as is the net impact of changes in the mix of products. Cutting prices severely
reduced contribution margin, but the lower prices apparently attracted many more customers.
The Cape Cod trip lost favor relative to the other trips, but it was the least important trip in the
budget. Fixed costs were slightly higher but had little impact on total profitability.
9-21.
(1) Comparative income statements:
Original Flexible Actual
Budget Difference Budget Difference Results
Revenue $8,100,000 $675,000 $8,775,000 ($585,000) $8,190,000
Cost of program 6,390,000 532,500 6,922,500 (292,500) 6,630,000
Gross margin $1,710,000 $142,500 $1,852,500 ($292,500) $1,560,000
Operating expenses:
Adm. salaries $97,200 $600 $97,800 ($1,000) $96,800
Sales salaries 70,800 900 71,700 1,900 73,600
Utilities & supplies 56,500 3,750 60,250 (2,190) 58,060
Training 369,000 30,750 399,750 15,500 415,250
Depreciation 61,000 0 61,000 0 61,000

Property taxes 2,000 0 2,000 (150) 1,850
Total $656,500 $36,000 $692,500 $14,060 $706,560
Net income $1,053,500 $106,500 $1,160,000 ($278,440) $853,440
(2) Gross margin analysis: Actual Price/Cost Flexible Quantity Original

Results Variance Budget Variances Budget
Revenue $8,190,000 ($585,000) $8,775,000 $675,000 $8,100,000
Cost of program 6,630,000 (292,500) 6,922,500 532,500 6,390,000
Gross margin $1,560,000 ($292,500) $1,852,500 $142,500 $1,710,000
(3) The increased volume of activity does not seem to be reflected in administrative salaries and
utilities and supplies. The training costs seem to have jumped because of the increased activity,
perhaps new employees were hired and had to be trained to handle the increased demand.
Thus, training expenses may not be entirely variable with volume but rather partially variable with
the change in demand.
9-22. Contribution margin analysis:
Actual Budgeted
Clerical $14.432 4,400 0.55 $9.800 $15 4,500 0.5625 $9
Secretarial 20.333 3,600 0.45 12.379 20 3,500 0.4375 13
Total 8,000 1.00 8,000 1.00

Clerical $63,500 ($2,500) $66,000 $0 $66,000 ($1,500) $67,500
Secretarial 73,200 1,200 72,000 0 72,000 2,000 70,000
Total $136,700 ($1,300) $138,000 $0 $138,000 $500 $137,500

Clerical $43,122 $3,522 $39,600 $0 $39,600 ($900) $40,500
Secretarial 44,565 (2,235) 46,800 0 46,800 1,300 45,500
Total $87,687 $1,287 $86,400 $0 $86,400 $400 $86,000
Contrib Marg Actual Margin Adjusted Quantity Adjusted Mix Budgeted

Clerical $20,378 ($6,022) $26,400 $0 $26,400 ($600) $27,000
Secretarial 28,635 3,435 25,200 0 25,200 700 24,500
Total $49,013 ($2,587) $51,600 $0 $51,600 $100 $51,500
Overhead exp 36,400 $1,400 35,000

Monthly profit $12,613 $16,500
The major reasons for the reduced net profit were:

 Fixed overhead expenses were overspent by $1,400.
 Revenues from clerical temps dropped by $2,500 because of lower rates.
 The profitability of clerical services dropped by about $6,600 from budget, while secretarial
profits jumped by about $4,100 from budget.

9-23. (l) a. to (1) d. Income statement:
PRESUPUESTO CO.
Estimated Income Statement for Next Year
Total Rakes Shovels
Units sold 400,000 240,000 160,000
Sales revenue $1,800,000 $840,000 $960,000
Variable costs 860,000 420,000 440,000
Contribution margin $940,000 $420,000 $520,000
Fixed manufacturing costs 360,000 120,000 240,000
Direct profit $580,000 $300,000 $280,000
Corporate overhead 300,000
Profit $280,000
$3 hourly rate  6 rakes per hour = $0.50 fixed overhead per unit of product
$3 hourly rate  2 rakes per hour = $1.50 fixed overhead per unit
(2) Expected unit cost: Rakes Shovels

Variable costs $1.75 $2.75
Fixed costs 0.50 1.50
Total manufacturing cost $2.25 $4.25
(3) Apportionment of corporate overhead and development of total unit costs:
$300,000  [(240,000  6) + (160,000 2)] = $300,000  (40,000 + 80,000) = $2.50 per hour
Apportionment:
Rakes: $300,000 x (40,000  120,000) = $100,000
Shovels: $300,000 x (80,000  120,000) = $200,000
Unit costs:
Rakes: $2.50 per hour  6 = $0.417 per unit
Shovels: $2.50 per hour  2 = $1.25 per unit
Rakes Shovels
Variable costs $1.750 $2.75
Fixed costs 0.500 1.50
Corporate overhead 0.417 1.25
Total unit cost $2.667 $5.50
(4) If cost-based pricing is required, the best unit cost figures to use are those that include all costs.
Therefore, the costs with corporate overhead are appropriate for the situation described in the
problem.
9-24.
ROBBINS SUPPLY COMPANY

Income Statement (Absorption Costing) For 2008
Sales (206,000 units x $35) $7,210,000
Cost of goods sold:

January 1 inventory [30,000 units x ($20 + $10)] $900,000
Production costs:
Variable (309,000 units x $20) $6,180,000
Fixed (309,000 units x $10) 3,090,000 9,270,000
Costs in production $10,170,000
December 31 inventory (133,000 x $30) 3,990,000 6,180,000
Gross profit $1,030,000
Marketing and administrative expenses 90,000
Net profit $940,000
ROBBINS SUPPLY COMPANY

Income Statement (Variable Costing) For 2008
Sales (206,000 units x $35) $7,210,000
Variable costs:
January 1 inventory (30,000 units x $20) $600,000
Production costs (309,000 units x $20) 6,180,000
Variable costs in production $6,780,000
December 31 inventory (133,000 units x $20) 2,660,000 4,120,000
Fixed costs:
Production $3,090,000
Marketing and administrative expenses 90,000 3,180,000
Net loss ($90,000)
(3) A profit was made at the break-even point, because the company increased the inventory of
finished goods by 103,000 units. As a result, net fixed costs of $1,030,000 (103,000 units x $10)
were transferred out of 2008 and into 2009.
(4) For financial reporting, the debate over which income statement method is more realistic will rage
on for many years. For internal purposes of decision making and control, the variable costing
method is more appropriate. Absorption costing allows too much opportunity for profit
manipulation by altering production levels.
9-25.
YAFFE ELECTRICAL SUPPLY COMPANY

Income Statement (Variable Costing) For The Year 2003 (in thousands)
Utility Household Commercial Total

Net sales $6,200 $5,150 $6,300 $17,650
Variable cost of sales:
Beginning inventory $180 $90 $50 $320
Production cost 1,800 1,500 1,400 4,700
Variable costs in production $1,980 $1,590 $1,450 $5,020
Ending inventory 300 240 300 840
Variable cost of sales $1,680 $1,350 $1,150 $4,180
Contribution margin $4,520 $3,800 $5,150 $ 13,470
Fixed overhead 3,600 2,500 2,800 8,900
Manufacturing profit $920 $1,300 $2,350 $4,570

(2) Reconciliation of manufacturing profits under both methods:

Manufacturing profit, absorption costing $1,160 $1,550 $2,850 $5,560
Fixed costs in beginning inventory 360 150 100 610
$1,520 $1,700 $2,950 $6,170
Fixed costs in ending inventory 600 400 600 1,600
Manufacturing profit, variable costing $920 $1,300 $2,350 $4,570
(3) New fixed costs carried forward to 2004:

Fixed costs in beginning inventory $360 $150 $100 $610
Fixed costs in ending inventory 600 400 600 1,600
Incremental fixed cost $240 $250 $500 $990
The incremental fixed cost also represents the difference in manufacturing profit between
absorption costing and variable costing.
9-26.
(1) Ruby plans to produce well in excess of sales requirements. With the inventory increase, a large
part of the fixed costs will be held in inventory and not charged off as cost of goods sold. As a
result, profits will be increased.
(2) Estimated income statement for this year:
Unit sales (400,000 x 0.8) 320,000

Net sales (320,000 x $45) $14,400,000
Cost of goods sold:
Inventory, Jan 1 $175,000
Production costs [($35 – 20) (500,000) + ($20) (400,000)] 15,500,000
Inventory, Dec 31 [(l85,000  500,000) ($15,500,000)] 5,735,000 $9,940,000
Estimated gross profit $4,460,000
$18,000,000 net sales  400,000 units sold = $45 unit selling price
$14,000,000 production costs  400,000 units = $35 unit cost
Inventory, January 1: $175,000  $35 per unit = 5,000 units
5,000 + 500,000 – 320,000 = 185,000 units in ending inventory
(3) Recast income statements on variable costing basis:
The past year:

Unit production and sales 400,000
Net sales (400,000 x $45) $18,000,000
Variable cost of goods sold:
Inventory, January 1 [($35 – $20) x 5,000] $75,000
Production costs [($35 – $20) x 400,000] 6,000,000
Inventory, December 31 75,000 6,000,000
Fixed costs ($20 x 400,000) 8,000,000
Net income $4,000,000

The next year:
Unit sales (400,000 x 0.8) 320,000
Net sales (320,000 x $45) $14,400,000
Variable cost of goods sold:
Inventory, January 1 $75,000
Production costs [($35 – $20) (500,000)] 7,500,000
Inventory, December 31 [($35 – $20) (185,000)] 2,775,000 4,800,000
Fixed costs 8,000,000
Estimated net income $1,600,000
(4) Ruby's behavior is unethical, because his sole purpose for increasing inventories is to manipulate
profit in order to earn a bonus
9-27.
(1) Three-year comparative income statement using absorption costing:
RIPANS FRAME FACTORY

Income Statement (Absorption Costing) for 2003, 2004, & 2005
2003 2004 2005

Units sold 50,000 55,000 60,000
Units produced 60,000 60,000 50,000
Sales revenue $750,000 $825,000 $900,000
Cost of sales:
Beginning inventory $0 $100,000 $150,000
Variable production costs 480,000 480,000 400,000
Fixed production costs 120,000 120,000 120,000
Costs in production $600,000 $700,000 $670,000
Ending inventory 100,000 150,000 52,000*
Cost of sales $500,000 $550,000 $618,000
Gross profit $250,000 $275,000 $282,000
Marketing and administrative:
Variable $187,500 $206,250 $225,000
Fixed 35,000 35,000 35,000
Total $222,500 $241,250 $260,000
Net income $27,500 $33,750 $22,000
* 5,000 units x [2.80 + 4.70 + 0.50 + ($120,000  50,000)]
(2) Three-year comparative income statement using variable costing:
RIPANS FRAME FACTORY

Income Statement (Variable Costing) for 2003, 2004, & 2005
2003 2004 2005

Units sold 50,000 55,000 60,000
Units produced 60,000 60,000 50,000
Sales revenue $750,000 $825,000 $900,000

Variable costs:
Variable cost of sales:
Beginning inventory $0 $80,000 $120,000
Variable production costs 480,000 480,000 400,000
Costs in production $480,000 $560,000 $520,000
Ending inventory 80,000 120,000 40,000
Variable cost of sales $400,000 $ 440,000 $ 480,000
Marketing and administration 187,500 206,250 225,000
Total variable costs $587,500 $646,250 $705,000
Contribution margin $162,500 $178,750 $195,000
Fixed costs:
Fixed production costs $120,000 $120,000 $120,000
Marketing and administrative 35,000 35,000 35,000
Total fixed costs $155,000 $155,000 $155,000
Net income $7,500 $23,750 $40,000
(3) Reconciliation of profits between the two methods:

2003 2004 2005
Profit-absorption costing $27,500 $33,750 $22,000
Plus fixed costs brought into period through
beginning inventory 0 20,000 30,000
$27,500 $53,750 $52,000
Minus fixed costs deferred in ending inventory 20,000 30,000 12,000
Profit-variable costing $7,500 $23,750 $40,000
(4) Graph:
$40
30
Absorption costing
Net Income 20
(Thousands) Variable costing
10
0 Differences
-10
-20
50 52 54 56 58 60
Sales Units (Thousands)
(5) One thing we learn from the graph is that net income moves in the same direction as sales under
variable costing. Net income under absorption costing does not move in the same direction as
sales. In fact, production has a greater impact on net income than do sales.
9-28.
Total variable costs = $10,000 - $2,000 = $8,000
Average variable cost per unit = $8,000  160 = $50

Sales $22,000
Variable cost of sales ($50 x 200) (10,000)
Contribution margin 12,000
Fixed overhead (2,000)
Fixed selling & admin expenses (3,700)
Operating income $6,300
(2) Reconciliation:
Fixed overhead per unit = $2,000  160 = $12.50
Decrease in inventory = 200 – 160 = 40 units
$12.50 x 40 units = $500
Absorption costing income $5,800

Add: Decrease in inventory x fixed overhead per unit 500
Variable costing income $6,300
Solution to the Case
CASE 9 – MERLIS RANGES
(1) The revenue decline of $19,120 can be decomposed into the following variances:
Variances*
Eye
Lanes Ear Muffs Goggles Totals
Revenue Price Variance (RPV) 14,895 (2,900) (6,510) 5,485
Revenue Quantity Variance (RQV) (9,083) (1,853) (1,196) (12,132)
Revenue Mix Variance (RMV) (16,102) 2,873 756 (12,473)
Variance Totals (10,290) (1,880) (6,950) 19,120
* Parentheses indicate unfavorable variances.
The RPV were computed using the following formula:
RPV = (2008 price – 2007 price) (total 2008 volume) (2008 mix percentage)
Lanes ($11.40 – $10.95) (33,100 + 29,000 + 21,700) (33,100  83,800) = $14,895

Ear muffs ($2.45 – $2.55) (33,100 + 29,000 + 21,700) (29,000  83,800) = ($2,900)
Eye goggles ($1.90 – $2.20) (33,100 + 29,000 + 21,700) (21,700  83,800) = ($6,510)
The RQV were computed using the following formula:
RQV = (2007 price) (total 2008 volume – total 2007 volume) (2008 mix percentage)
Lanes ($10.95) (83,800 – 85,900) (33,100  83,800) = ($9,083)

Ear muffs ($2.55) (83,800 – 85,900) (29,000  83,800) = ($1,853)
Eye goggles ($2.20) (83,800 – 85,900) (21,700  83,800) = ($1,196)
The RMV were computed using the following formula:
RMV = (2007 price) (total 2007 volume) (2008 mix percentage – 2007 mix percentage)

Lanes ($10.95) (85,900) [(33,100  83,800) – (35,400  85,900)] = ($16,102)
Ear muffs ($2.55) (85,900) [(29,000  83,800) – (28,600  85,900)] = $2,873
Eye goggles ($2.20) (85,900) [(21,700  83,800) – (21,900  85,900)] = $756
The total price variance was favorable, while the total quantity and mix variances were
unfavorable. Looking at the price variances, the increase in rental price for lanes more than offset
the decreases experienced for ear muffs and eye goggles. The quantity variances are all
unfavorable since rentals declined as a whole from 2007 to 2008. The mix variances show an
unfavorable picture because the mix decreased for lanes (from 41.2% to 39.5%), while it
increased for ear muffs (from 33.3% to 34.6%) and for eye goggles (from 25.5% to 25.9%). That
is, the mix shifted away from the high revenue item to the lower revenue items.
The materials and labor variances are determined as follows:
Materials Price Variance (1,590,000) ($0.19 – $0.16) = $47,700 Unfavorable

Materials Usage Variance ($0.16) (1,590,000 – 1,575,000) = $2,400 Unfavorable
Labor Rate Variance (21,240) ($10.60 – $10.30) = $6,372 Unfavorable
Labor Efficiency Variance ($10.30) (21,240 – 22,050) = $8,343 Favorable
Merlis Ranges obtained materials at a higher price than expected, resulting in a highly
unfavorable price variance. This, together with a small unfavorable materials usage variance and
a modest unfavorable labor rate variance, dwarfed the favorable variance attributable to the
efficiency of the workers.
(2) Profit for reloads on an absorption costing basis is determined as follows:
Total production cost for 31,500 boxes = $302,100 + $225,144 + $45,029 + $90,058
= $662,331
Since 25,900 boxes were sold, cost of goods sold = (25,900 / 31,500)( $662,331)
= $544,583
Revenue $594,405
Cost of goods sold (544,583)
Gross margin 49,882
Selling and administrative (19,000)
Net income $30,822
NI  Revenue 5.2%
Jan Siegelman would receive his bonus since the profit is over 5 percent of total revenue.
Profit for reloads on a variable costing basis is determined as follows:
Variable production cost for 31,500 boxes = $302,100 + $225,144 + $45,029 = $572,273
Since 25,900 boxes were sold, cost of goods sold = (25,900 / 31,500) ( $572,273)
= $470,535

Revenue $594,405
Cost of goods sold (470,535)
Gross margin 123,870
Fixed overhead (90,058)
Selling and administrative (19,000)
Net income $14,812
NI  Revenue 2.5%
Since the profit is below 5 percent of revenues, Siegelman would not receive a bonus if variable
costing were used.
Reconciliation of the $16,010 difference in profits under the two approaches:

Fixed overhead in ending inventory = $90,058 x (5,600  31,500) = $16,010
(3) Siegelman was not able to adequately control costs (notably materials costs, as shown earlier), so
he lowered unit costs by increasing production above current period demand. Building up a large
inventory of ammunition does not serve the best interests of the company unless production costs
are expected to increase significantly in the following year. In the absence of such a forecast,
Siegelman has increased production solely to achieve his bonus. This action represents unethical
behavior because it is detrimental to the company.
(4) Unless inventories are increased even further the following year, the previous year's build-up will
have an adverse effect on the 2009 absorption costing net income. Assuming that 2009
production will be lower than sales, the fixed overhead expensed in 2009 will be greater than the
fixed overhead cost incurred that year. This occurs because the fixed overhead deferred from
2008 will now be expensed in 2009 and this amount will be greater than any fixed overhead
deferred to 2010.

CH 09

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CH 09

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CHAPTER 9 SOLUTUONS

Solutions to Questions for Review and Discussion

 a change in prices per unit,

 a change in the costs per unit,

4. For a manufacturer, the differences are:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-1

6. A manager might use these analytical tools to:

Many specific questions can be answered by these analyses, such as:

 What happened because we promoted Product X more vigorously?

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-2

 Short term versus long term.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-3

9-1. Variance analysis:

Budget Actual Variance

(2) Contribution margin analysis:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-4

Revenue variances for Grand weddings:

(2) Variable cost variances for Bland weddings:

Variable cost variances for Grand weddings:

9-4. Richman Company marketing and administrative expenses analysis:

Variable expenses $9,600 ($600) $9,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-5

(2) Contribution margin analysis:

Revenue P2Q2M2 P1Q2M2 P1Q1M2 P1Q1M1

Costs 2008 Cost Adjusted Quantity Adjusted Mix 2007

Contribution Margin 2008 Margin Adjusted Quantity Adjusted Mix 2007

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-6

Revenue PaQaMa PbQaMa PbQbMa PbQbMb

Costs Actual Cost Adjusted Quantity Adjusted Mix Budgeted

Contribution Margin Actual Margin Adjusted Quantity Adjusted Mix Budgeted

9-7. Budget Sales Budget for

9-8. 3rd Quarter - This Year 3rd Quarter - Last Year

PaQaMa PbQaMa PbQbMa PbQbMb

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-7

Variable costing 2006

Absorption costing: 2006

This is true, because production equals sales.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-8

2006 2007 2008 2009 2010

2006 2007 2008 2009 2010

Variable costing: 2008

Absorption costing: 2008

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-9

(2) Variable costing: (44,000 + 17,000 + 8,000)  24,000 = NT$2.88

Unit cost = 19,000,000 / 257,000 = 73.93

(2) Unit cost = (19,000,000 + 8,000,000) / 257,000 = 105.06

(3) Cost of goods sold = 7,000,000 + 105.06(250,000 – 135,000) = 19,081,900

Springhill Lake Products, Inc.

(2) Absorption costing income statement:

Springhill Lake Products, Inc.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-10

9-13. Variable costing income statement:

NAHMIAS BEE HIVES

HELFAND LOGGING COMPANY

Unit costs: Variable [($600,000 – $400,000)  20,000 units] $10

Note: Units produced 400,000 Units sold 350,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 9, Page 9-11

HELFAND LOGGING COMPANY

Note: Units produced 400,000 Units sold 350,000

(3) Reconciliation of methods:

GERSHON MEMORY CHIPS

Unit costs: Variable (given) $9

(2) Variable costing income statement: