Acc 202 Chapter 6

Sample Exam Question: Absorption/Variable Costing Income Statements Yuvil Corporation produces a single product. At the end of the company's first year of operations, 1,000 units of inventory remained on hand. Its variable manufacturing overhead cost is 45 per unit and its fixed manufacturing overhead cost is 10 per unit. Yuvil's absorption costing net operating income would be higher than its variable costing net operating income by:

$10,000 Variable costing means that all of fixed manufacturing overhead is subtracted from sales. Absorption costing means that fixed manufacturing overhead is assigned to individual sold products. 1,000 is left in inventory and $10 is the fixed manufacturing overhead per unit 1,000 x 10 = 10,000 Because 10,000 of manufacturing overhead was deferred in inventory, absorption costing net operating income was 10,000 higher than variable costing net operating income.

Tennison Corporation has two major business segments-Consumer and Commercial. Data for the segment and for the company for May appear below: Sales revenues, Consumer 970,000 Sales revenues, Commercial 580,000 Variable expenses, Consumer 514,000 Variable expenses, Commercial 267,000 Traceable fixed expenses, Consumer 184,000 Traceable fixed expenses, Commercial 110,000 In addition, common fixed expenses totaled 371,000 and were allocated as follows: 186,000 to the Consumer business segment and 185,000 to the Commercial business segment. The net income of the company as a whole is:

$104,000 Consumer and Commercial Sales (970,000 + 580,000) 1,550,000 Variable expenses (514,000 + 267,000) 781,000 CM 769,000 Traceable fixed expenses (184,000 + 110,000) 294,000 Segment margin (272,000 + 203,000) 475,000 Common fixed expenses 371,000 Net operating income 104,000

Sample Exam Question: Variable Costing Income Statement A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price $140 Units in beginning inventory 0 Units produced 1,200 Units sold 800 Units in ending inventory 400 Variable costs per unit: Direct materials 25 Direct labor 41 Variable manufacturing overhead 6 Variable selling and admin 6 Fixed costs: Fixed manufacturing overhead 24,000 Fixed selling and admin 12,000 What is the net operating income for the month under variable costing?

$13,600 Variable costing unit product cost = Direct materials + Direct labor + Variable manufacturing overhead Variable costing unit product cost = 25 + 41 + 6 = 72 Variable costing income statement: Sales (800 x 140) 112,000 Variable cost of goods sold (800 x 72) 57,600 Variable selling and admin (800 x 6) 4,800 Contribution margin 49,600 Fixed manufcaturing overhead 24,000 Fixed selling and admin 12,000 Net operating income 13,600

Tennison Corporation has two major business segments-Consumer and Commercial. Data for the segment and for the company for May appear below: Sales revenues, Consumer 970,000 Sales revenues, Commercial 580,000 Variable expenses, Consumer 514,000 Variable expenses, Commercial 267,000 Traceable fixed expenses, Consumer 184,000 Traceable fixed expenses, Commercial 110,000 In addition, common fixed expenses totaled 371,000 and were allocated as follows: 186,000 to the Consumer business segment and 185,000 to the Commercial business segment. The CM of the Commercial business segment is:

$313,000 Commercial Sales 580,000 Variable expenses 267,000 CM 313,000

Sample Exam Question: Segment Break Even Gough Corporation has two divisions: Domestic and Foreign. Data from the most recent month appear below: Total Company Domestic Foreign Sales 668,000 347,000 321,000 Variable expenses 220,530 72,870 147,660 Contribution margin 447,470 274,170 173,340 Traceable fixed expenses 335,000 221,000 134,000 Segment margin 112,470 73,130 39,340 Common fixed expenses 73,480 Net income 38,990 The break-even in sales dollars for the company as a whole is closest to:

$609,794 Overall company: CM ratio = CM / Sales Cm ratio = 447,470 / 668,000 = .67 Total fixed expenses = 408,480 Dollar sales to break even = Fixed expenses / CM ratio Dollar sales to break even = 408,480 / .67 = 609,794 (using rounded decimals)

Sample Exam Question: Reconciling Absorption and Variable Income Statements Sipho Corporation manufactures a single product. Last year, the company's variable costing net operating income was 90,900. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to 21,900. What was the absorption costing net operating income last year?

$69,000 Variable costing net operating income 90,900 - Fixed manufacturing overhead costs released from inventory under absorption costing 21,900 Absorption costing net operating income = 69,000

Sample Exam Question: Absorption Costing Income Statement A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price $126 Units in beginning inventory 0 Units produced 8,500 Units sold 8,300 Units in ending inventory 200 Variable costs per unit: Direct materials $36 Direct labor $52 Variable manufacturing overhead 2 Variable selling and admin 9 Fixed costs: Fixed manufacturing overhead 127,500 Fixed selling and admin 91,300 What is the net operating income for the month under absorption costing?

$8,300 Unit product cost under absorption costing = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead Fixed manufacturing overhead = 127,500 / 8,500 = 15 Unit product cost = 36 + 52 + 2 + 15 = 105 Absorption costing income statement: Sales (8,300 x 126) 1,045,800 Cost of good sold (8,300 x 105) 871,500 Gross margin 174,300 Selling and admin expenses ((8,300 x 9) + 91,300) 166,000 Net operating income 8,300

Sample Exam Question: Variable Costing Unit Cost Abe Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $126 Units in beginning inventory 0 Units produced 8,700 Units sold 8,400 Units in ending inventory 300 Variable costs per unit: Direct materials 30 Direct labor 48 Variable manufacturing overhead 3 Variable selling and admin 7 Fixed costs: Fixed manufacturing overhead 156,600 Fixed selling and admin 151,200 What is the unit product cost for the month under variable costing?

81 Product cost under variable costing = Direct materials + Direct labor + Variable manufacturing overhead Product cost = 30 + 48 + 3 = 81

Sample Exam Question: Absorption Costing Unit Cost Abe Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $126 Units in beginning inventory 0 Units produced 8,700 Units sold 8,400 Units in ending inventory 300 Variable costs per unit: Direct materials 30 Direct labor 48 Variable manufacturing overhead 3 Variable selling and admin 7 Fixed costs: Fixed manufacturing overhead 156,600 Fixed selling and admin 151,200 What is the unit product cost for the month under absorption costing?

99 Product costs under absorption costing = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead cost Product cost = 30 + 48 + 3 + 18 = 99 Fixed manufacturing overhead cost = 156,600 / 8,700 units produced

Quick Check Assume that Hoagland's Lakeshore prepared its segmented income statement as shown. Hoagland's Lakeshore Bar Restaurant Sales 800,000 100,000 700,000 Variable expenses 310,000 60,000 250,000 CM 490,000 40,000 450,000 Traceable FC 246,000 26,000 220,000 Segment margin 244,000 14,000 230,000 Common expenses 200,000 Net operating profit 44,000 A. How much of the common fixed expense of 200,000 can be avoided by eliminating the bar? B. Suppose square feet is used as the basis for allocating the common fixed expense of 200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? C. If Hoagland's allocates its common fixed expenses to the bar and the restaurant, what would be the reported profit of each segment?

A. None of it. Common fixed expenses cannot be eliminated by dropping one of the segments. B. 20,000 The bar would be allocated 1/10 of the cost or 20,000. C. The bar shows an operating loss of 6,000 and the restaurant shows a profit of 50,000.

Variable vs. Absorption Costing

Absorption Costing: Fixed manufacturing costs must be assigned to products to properly match revenues and costs. Variable Costing: Fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced.

Quick Check Which method will produce the highest values for work in process and finished goods inventories?

Absorption costing

Company-Wide Income Statements

Both U.S. GAAP and IFRS require absorption costing for external reports. Since absorption costing is required for external reporting, most companies also use it for internal reports.

Segmented Financial Information

Both U.S. GAAP and IFRS require publicly traded companies to include segmented financial data in their annual reports. 1. Companies must report segmented results to shareholders using the same methods that are used for internal segmented reports. 2. The requirement motivated managers to avoid using the contribution approach for internal reporting purposes because if they did they would be required to: share this sensitive data with the public, reconcile these reports with applicable rules for consolidated reporting purposes.

Common Fixed Costs

Common fixed costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated.

Reconciling Difference Between Absorption and Variable Income

Fixed manufacturing overhead / Units produced

Variable Costing Product and Period Costs

Product costs: Direct materials, direct labor, variable manufacturing overhead Period costs: Fixed manufacturing overhead, variable selling and admin expenses, and fixed selling and admin expenses

Absorption Costing Product and Period Costs

Product costs: Direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead Period costs: Variable selling and admin expenses and fixed selling and admin expenses

Segment Magin

Segment margin = CM - traceable fixed costs of segment The best gauge of the long-run profitability of a segment.

Traceable Fixed Costs

Traceable fixed costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared.

Unit Product Cost

Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost. Under variable costing, only the variable production costs are included in product costs.

Relation Between Production and Sales with Variable and Absorption Incomes

Units produced = units sold, no change in inventory, absorption = variable Units produced greater than units sold, inventory increases, absorption greater than variable Units produced less than units sold, inventory decreases, absorption less than variable