Dr.

Sawsan Halbouni

MBA 641
Managerial Accounting
Class Exercises Chapter 6: Variable Costing and Segment
Reporting

QUESTION 1

The following data are available from the accounting records of Suwanee Co. for the month
ended May 31, 2012. 17,000 units were manufactured and sold during the accounting
period at a price of $60 per unit. There was no beginning inventories and all units
were completed (no work in process).

m
e r as
Cost Total Cost Number of Units Unit Cost

co
Manufacturing costs:

eH w
Variable $442,000 17,000 $26

o.
Fixed rs e 170,000 17,000 10
Total $612,000 $36
ou urc
Selling and administrative expenses:
Variable ($2 per unit sold) $34,000
Fixed 32,000
o

Total $66,000
aC s
v i y re

(a) Prepare a variable costing income statement.

(b) Prepare an absorption costing income statement.

ANS:
ed d

(a)
ar stu

Suwanee Co.
Variable Costing Income Statement
For the Month Ended May 31, 2012
$1,020,000
sh is

442,000
Th

Manufacturing margin $ 578,000

Variable selling and administrative expenses 34,000
Contribution margin $ 544,000
Fixed costs:
Fixed manufacturing costs $170,000
Fixed selling and administrative expenses 32,000 202,000
Income from operations $ 342,000

(b)
Suwanee Co.
Absorption Costing Income Statement
For the Month Ended May 31, 2012
$1,020,000
Cost of goods sold 612,000

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 Dr. Sawsan Halbouni
Gross profit $ 408,000
Selling and administrative expenses 66,000
Income from operations $ 342,000

QUESTION 2:
BB Company manufactures bowling balls. The following data are available for last
month. All of the bowling balls in beginning finished goods inventory were sold last
month.
Table 1
Beginning finished goods inventory 0
Goods manufactured 12,000 balls
Ending finished goods inventory 2,000 balls
Sales commissions $3.00 per ball sold

m
Fixed manufacturing overhead $36,000

e r as
Fixed marketing expenses $10,000

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Sales 10,000 balls at $30 each

eH w
Variable costs of manufacturing 1 bowling ball $10.00

o.
rs e
ou urc
1) Refer to Table 1 above, Prepare BB Company’s absorption costing income
statement for last month.
o

Answer:
aC s
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BB Company
Conventional (Absorption Costing) Income Statement
Month Ended ------
Sales revenue (10,000  $30) $300,000
ed d

Less: Cost of Goods Sold:

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Beginning finished goods inventory $ 0

Cost of goods manufactured (12,000  $13*) 156,000
Cost of goods available for sale 156,000
sh is

Ending finished goods inventory (2,000  $13) (26,000)

Cost of goods sold 130,000
Th

Gross profit 170,000

Operating expenses [(10,000  $3) + $10,000] 40,000
Operating income $ 130,000
__________
*Variable manufacturing expense per unit of $10 plus $3 fixed manufacturing
expense per unit ($36,000 fixed manufacturing overhead/12,000 units produced.)

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 Dr. Sawsan Halbouni

QUESTION 3:
Refer to Table 1 above. Prepare BB Company’s variable costing contribution margin
income statement for last month.

Answer:
BB Company
Contribution Margin (Variable Costing) Income Statement
Month Ended ------
Sales revenue (10,000  $30) $300,000
Variable expenses:
Variable cost of goods sold:
Beginning finished goods inventory $ 0

m
Variable cost of goods

e r as
(12,000  $10)
120,000
manufactured

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Variable cost of goods

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120,000
available for sale

o.
rs e Ending finished goods inventory
(2,000  $10)
(20,000)
ou urc
Variable cost of goods sold 100,000
Sales commission expense
(10,000  $3) 30,000 130,000
o

Contribution margin 170,000

aC s

Fixed expenses:
v i y re

Fixed manufacturing overhead $36,000

Fixed marketing expense 10,000 46,000
Operating income $ 124,000
ed d
ar stu

QUESTION 4:
Refer to Table 1 above; Does an absorption costing income statement or a variable
costing income statement show higher operating income? Why?
sh is
Th

Answer: Absorption costing operating income is higher than variable costing income.
This is because absorption costing defers 2,000 bowling balls x $4.00 fixed
manufacturing overhead per ball which equals $8,000 of manufacturing overhead as
an asset in ending inventory. In contrast, variable costing expenses all fixed
manufacturing overhead so variable costing operating income is $8,000 less than
absorption costing income. ($128,000 - $120,000).

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 Dr. Sawsan Halbouni

QUESTION 5:
Refer to Table 1 above; BB’s president believes that a new sales campaign that costs
$30,000 would increase sales by 3,000 bowling balls. Should the company go ahead
with the promotion? Why or why not?

Answer:

Contribution margin per unit:

Sales price $30
Variable manufacturing cost $10
Variable operating cost
(sales commissions) 3 (13)
Contribution margin per unit $17

m
e r as
Increase in contribution margin (3,000 x $17) $51,000

co
Increase in fixed expenses

eH w
30,000
Increase in operating income

o.
$21,000
rs e
ou urc
BB Company should go ahead with the promotion since it will increase operating
income $21,000.
o

QUESTION 6
aC s

Gerry’s Gym provides monthly memberships as well as personal training sessions.

v i y re

The personal trainers earn 50% of the revenue for all personal training sessions. The
gym also sells nutrition products. Gerry’s general ledger accounts indicate the
ed d

following for the year. The front desk staff wages expense remains the same
ar stu

throughout the year.

Table 2
Account Amount Account Amount
sh is

Membership revenue $100,000 Personal trainer wages expense ?

Th

Personal training revenue 50,000 Space rental expense 24,000

Product sales 75,000 Straight line depreciation 4,000
expense
Cost of product sold 40,000 Rental insurance expense 2,000
Front desk staff wages exp. 10,000
Refer to Table 2; Prepare Gerry’s Gym’s income statement using the traditional
format.

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 Dr. Sawsan Halbouni
Answer:
Gerry’s Gym
Income Statement
Period Ended ------
Revenue:
Membership revenue $100,000
Training revenue 50,000
Product sales revenue 75,000
Total Revenue $225,000
Less: Cost of Goods Sold 40,000
Gross Margin 185,000
Less Operating Costs:
Depreciation expense $4,000

m
Front desk staff wages expense 10,000

e r as
Personal trainers’ wages expense 25,000

co
Space rental expense 24,000

eH w
Rental Insurance expense 2,000

o.
Total operating costs
rs e 65,000
Operating Income $120,000
ou urc
QUESTION 7
2) Refer to Table 2; Prepare Gerry’s Gym’s income statement using the contribution
o

margin format.
aC s
v i y re

Answer:
Gerry’s Gym
Income Statement
ed d

Period Ended ------

ar stu

Revenue:
Membership revenue $100,000
Personal training revenue 50,000
sh is

Product sales revenue 75,000

Th

Total Revenue $225,000

Less: Variable costs
Cost of Goods Sold $40,000
Personal trainers’ wages expense 25,000
Total variable costs 65,000
Contribution margin 160,000
Less: Fixed costs
Depreciation expense 4,000
Front desk staff wages expense 10,000
Space rental expense 24,000
Rental insurance expense 2,000
Total fixed costs 40,000
Operating Income $120,000

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 Dr. Sawsan Halbouni

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