Escopete, Debbie Jane L.

BSA 301

ASSIGNMENT: ABSORPTION COSTING

TRUE OR FALSE

TRUE 1. When a company is planning to enter a new market, variable costing provides useful
information.
TRUE 2. Another name for variable costing is direct costing.
FALSE 3. Under variable costing, inventoriable cost include direct materials, direct labor and all
overhead costs.
FALSE 4. Fixed manufacturing overhead is shown after the contribution margin on an
absorption costing income statement.
FALSE 5. Operating Income (OI), under variable costing is greater than OI under absorption
costing when there is an inventory buildup.
FALSE 6. Variable costing is supported by the Internal Revenue Service.
FALSE 7. Common fixed costs are deducted from the contribution margin to arrive at a
segment’s margin.
TRUE 8. Segment reporting is useful because it allows management to identify troubled
segments.
FALSE 9. For a multiproduct firm, C-V-P analysis cannot be accomplished with segmented
data.
TRUE 10. In reconciling variable costing income to absorption costing income, fixed overhead
in the beginning inventory is deducted.

MULTIPLE CHOICE
Use the following information to answer questions 1-5.

The Wickwood Company a manufacturer of diskettes for personal computers, incurred the
following during May of the current year:
Sales (30,000 x $4.25) $127,500
Costs of the period:
Direct Materials $12,000
Direct Labor 18,000
Variable overhead 30,000
Fixed overhead 21,000
Fixed Administrative costs 20,000
Total Costs 101,000
Operating Income $26,500
There was no change in inventory levels during the month.
Solution:
Sales 127,000
Less: COGS 81,000
GROSS MARGIN 46,500
Less: Fixed administrative 20,000
Net Income 26,500
 Sales 127,500
Less: Variable cost 60,000
Contribution Margin 67,500
Less: Fixed cost 41,000
Net Income: 26,500

1. The gross margin for May was:

a. $26,500
b. $46,500
c. $67,500
d. $97,500

2. The variable cost of goods available was:

a. $46,500
b. $60,500
c. $67,500
d. $81,500

3. The contribution margin was:

a. $26,500
b. $46,500
c. $67,500
d. $97,500

4. The variable cost manufacturing margin was:

a. $46,500
b. $60,500
c. $67,500
d. $81,500

5. In addition to the information above, assume the company also had $8,000 of variable
marketing costs. The variable cost manufacturing margin and the contribution margin
would be:
a. $59,500 and $59,500
b. $59,500 and $67,500
c. $67,500 and $67,500
d. $67,500 and $59,500

Use the following information to answer questions 6-8.

Quorim Corporation incurred the following activity for its two product lines recently:
Product 1 Product 2
Sales $120,000 $182,000
Prime cost 32,000 41,000
Variable Overhead 18,000 18,000
Fixed Overhead* 30,000 40,000
 Variable marketing and admin. 10,000 15,000
Fixed marketing and admin.** 20,000 25,000
*Fixed overhead is 40% directly related to product and 60% common cost.
**Fixed marketing and administrative is 100% common cost.
Solution:
1 2
Sales 120,000 182,000
Less: Variable cost 60,000 74,000
Contribution Margin 60,000 108,000
Less: Traceable fixed cost 12,000 16,000
Product Line segment margin 48,000 92,000
Common Fixed cost 44,000
Divisional segment margin 96,000

6. The contribution margin for product 1 was:

a. $10,000
b. $48,000
c. $60,000
d. $70,000

7. The segment margin for product 1 was:

a. $10,000
b. $48,000
c. $60,000
d. $70,000

8. The contribution margin and segment margin respectively for product 2 was:
a. $92,000 and $108,000
b. $108,000 and $92,000
c. $123,000 and 92,000
d. $23,000 and $108,000

Use the following information to answer questions 9-10.

Castleberry Corporation calculated that its operating income for the current years was $728,000
using absorption costing. During the year inventory declined from 182,000 units to 160,000
units. The overhead application rate was $20 per unit, of which $12 is for variable overhead.
9. The variable costing operating income would be:
a. $464,000
b. $552,000
c. $904,000
d. $992,000
Solution:
182,000 – 160,000 = 22,000 X 12 = 264,000
728,000 – 264,000 = 464,000
 10. Assume the same facts except the operating income of $728,000 was derived by using the
variable costing approach. The absorption costing operating income would be:
a. $464,000
b. $552,000
c. $904,000
d. $992,000
Solution:
182,000 – 160,000 = 22,000 X 8 = 176,000
728,000 + 176,000 = 904,000

11. Variable costing provides useful information for managerial decisions in all of the
following except:
a. Discontinuing a product line.
b. Taking a special order at less than full price.
c. Completing the corporate tax return.
d. Making or buying component parts.

EXERCISES
Use the following information to answer questions 1-4.

Glasglo Corporation manufactures and sells three products: X,Y, and Z. The management is
concerned about the profitability of product Y since it has shown a loss for the last three quarters
on the external financial statement. The following data comes from the fourth quarter of the
current year:
Per Unit X Y Z
Selling Price $5.00 $15.50 $7.00
Prime Costs 1.00 9.00 1.00
Variable Overhead 1.00 2.00 3.00
Additional Data:
Units sold 10,000 30,000 20,000
Fixed Overhead* $5,000 $25,000 $20,000
Fixed admin.** $20,000 $30,000 $20,000
*All units during the quarter were sold.
**Fixed administrative costs for all 3 products is 30% direct and 70% common.
1. Prepare a segmented income statement using the absorption costing approach.
PRODUCT X Y Z
Sales 50,000 375,000 140,000
Less: COGS 25,000 355,000 100,000
GROSS MARGIN 25,000 20,000 40,000
Less: Fixed administrative 3,000 9,000 6,000
PRODUCT LINE MARGIN 22,000 11,000 34,000
Less: Common Cost 42,000
Divisional segment margin 25,000

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

PRODUCT X Y Z
Sales 50,000 375,000 140,000
Less: Variable cost 20,000 330,000 80,000
Contribution Margin 30,000 45,000 60,000
Less: Fixed cost 15,000 55,000 40,000
Net Income 15,000 (5,000) 20,000

3. Why are the gross margin and contribution margin different?

Gross margin and contribution margin differs in variable and absorption costing
method because of the treatment of overhead. In absorption costing, all manufacturing
overhead either fixed or variable is treated as product cost and as to variable costing, the
fixed overhead is treated as period cost which makes the gross and contribution margin of
each costing method different.

4. Should product Y be discontinued?

Based on the computation above, the product Y should be discontinued because
although it earns an income in the absorption costing method, it incurred a loss in the
variable costing.