Managerial Accounting, by Garrison 14th Edition Solution Manual Test Bank SM Ch06

Managerial Accounting, by Garrison 14th Edition Solution Manual Test Bank

cover
Solutions Manual + Test Bank -- $35  Buy Now


Click here to download the sample chapter.

* Contact us if you need help.







______________________________________________________________________

SM Ch06



Questions

6–1
What is the basic difference between absorption costing and variable costing?

6–2 Are selling and administrative expenses treated as product costs or as period costs under variable costing?

6–3 Explain how fixed manufacturing overhead costs are shifted from one period to another under absorption costing.

6–4 What are the arguments in favor of treating fixed manufacturing overhead costs as product costs?

6–5 What are the arguments in favor of treating fixed manufacturing overhead costs as period costs?

6–6 If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?

6–7 If the units produced exceed unit sales, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?

6–8 If fixed manufacturing overhead costs are released from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?

6–9 Under absorption costing, how is it possible to increase net operating income without increasing sales?

6–10 How does Lean Production reduce or eliminate the difference in reported net operating income between absorption and variable costing?

6–11 What is a segment of an organization? Give several examples of segments.

6–12 What costs are assigned to a segment under the contribution approach?

6–13 Distinguish between a traceable cost and a common cost. Give several examples of each.

6–14 Explain how the segment margin differs from the contribution margin.

6–15 Why aren’t common costs allocated to segments under the contribution approach?

6–16 How is it possible for a cost that is traceable to a segment to become a common cost if the segment is divided into further segments?
Exercises
All applicable exercises are available with McGraw-Hill’s
Connect™ Accounting.

EXERCISE 6–1 Variable and Absorption Costing Unit Product Costs [
LO1]
S
hastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city’s crowded streets that it sells for 500 rupees. (Indian currency is denominated in rupees, denoted by R.) Selected data for the company’s operations last year follow:

Required:

1
. Assume that the company uses absorption costing. Compute the unit product cost for one bicycle.
2. Assume that the company uses variable costing. Compute the unit product cost for one bicycle.

EXERCISE 6–2 Variable Costing Income Statement; Explanation of Difference in Net
Operating Income [
LO2]
R
efer to the data in EXERCISE 6–1 for Shastri Bicycle. The absorption costing income statement prepared by the company’s accountant for last year appears below:

Required:

1
. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.
2. Prepare an income statement for the year using variable costing. Explain the difference in net operating income between the two costing methods.

EXERCISE 6–3 Reconciliation of Absorption and Variable Costing Net Operating
Incomes [
LO3]
H
igh Tension Transformers, Inc., manufactures heavy-duty transformers for electrical switching stations. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data:
The company’s fixed manufacturing overhead per unit was constant at $450 for all three years.

Required:

1
. Determine each year’s absorption costing net operating income. Present your answer in
1. Determine each year’s absorption costing net operating income. Present your answer in the form of a reconciliation report.
2. In Year 4, the company’s variable costing net operating income was $240,200 and its absorption costing net operating income was $267,200. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?

EXERCISE 6–4 Basic Segmented Income Statement [LO4]
C
altec, Inc., produces and sells recordable CD and DVD packs. Revenue and cost information relating to the products follow:
Common fixed expenses in the company total $105,000 annually. Last year the company produced and sold 37,500 CD packs and 18,000 DVD packs.

Required:

P
repare a contribution format income statement for the year segmented by product lines.

EXERCISE 6–5 Deducing Changes in Inventories [LO3]
F
erguson Products Inc., a manufacturer, reported $130 million in sales and a loss of $25 million in its absorption costing income statement provided to shareholders. According to a CVP analysis prepared for management, the company’s break-even point is $120 million in sales.

Required:

A
ssuming that the CVP analysis is correct, is it likely that the company’s inventory level increased, decreased, or remained unchanged during the year? Explain.

EXERCISE 6–6 Inferring Costing Method; Unit Product Cost [LO1]
A
mcor, Inc., incurs the following costs to produce and sell a single product.
During the last year, 30,000 units were produced and 25,000 units were sold. The Finished
Goods inventory account at the end of the year shows a balance of $85,000 for the 5,000 unsold units.

Required:

1
. Is the company using absorption costing or variable costing to cost units in the Finished
Goods inventory account? Show computations to support your answer.
2. Assume that the company wishes to prepare financial statements for the year to issue to its stockholders.
a. Is the $85,000 figure for Finished Goods inventory the correct amount to use on these statements for external reporting purposes? Explain.
b. At what dollar amount should the 5,000 units be carried in inventory for external reporting purposes?

EXERCISE 6–7 Variable and Absorption Costing Unit Product Costs and Income
Statements [
LO1, LO2]
M
axwell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:
During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company’s product is $50 per unit.

Required:

1
. Assume that the company uses absorption costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.
2. Assume that the company uses variable costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.
3. The company’s controller believes that the company should have set last year’s selling price at $51 instead of $50 per unit. She estimates the company could have sold 15,000 units at a price of $51 per unit, thereby increasing the company’s gross margin by $2,000 and its net operating income by $4,000. Assuming the controller’s estimates are accurate, do you think the price increase would have been a good idea?

EXERCISE 6–8 Segmented Income Statement [LO4]
M
ichaels Company segments its income statement into its East and West Divisions. The company’s overall sales, contribution margin ratio, and net operating income are $600,000,
50%, and $50,000, respectively. The West Division’s contribution margin and contribution margin ratio are $150,000 and 75%, respectively. The East Division’s segment margin is $70,000. The company has $60,000 of common fixed costs that cannot be traced to either division.

Required:

P
repare an income statement for Michaels Company that uses the contribution format and is segmented by divisions. In addition, for the company as a whole and for each segment, show each item on the segmented income statements as a percent of sales.

EXERCISE 6–9 Variable Costing Unit Product Cost and Income Statement; Break-Even [LO1, LO2]
C
ompuDesk, Inc., makes an oak desk specially designed for personal computers. The desk sells for $200. Data for last year’s operations follow:

Required:

1
. Assume that the company uses variable costing. Compute the unit product cost for one computer desk.
2. Assume that the company uses variable costing. Prepare a contribution format income statement for the year.
3. What is the company’s break-even point in terms of units sold?

EXERCISE 6–10 Absorption Costing Unit Product Cost and Income Statement [ LO1,
L
O2]
R
efer to the data in EXERCISE 6–9 for CompuDesk. Assume in this exercise that the company uses absorption costing.

Required:

1
. Compute the unit product cost for one computer desk.
2. Prepare an income statement.

EXERCISE 6–11 Segmented Income Statement [LO4]
B
ovine Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement below:
In an effort to isolate the problem, the president has asked for an income statement segmented by geographic market. Accordingly, the Accounting Department has developed the following data:

Required:

1
. Prepare a contribution format income statement segmented by geographic market, as desired by the president.
2. The company’s sales manager believes that sales in the Central geographic market could be increased by 15% if monthly advertising were increased by $25,000. Would you recommend the increased advertising? Show computations to support your answer.

EXERCISE 6–12 Variable and Absorption Costing Unit Product Costs and Income
Statements [
LO1, LO2, LO3]
F
letcher Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:
During its first year of operations, Fletcher produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $50 per unit.

Required:

1
. Assume the company uses variable costing:
a. Compute the unit product cost for year 1 and year 2.
b. Prepare an income statement for year 1 and year 2.
2. Assume the company uses absorption costing:
a. Compute the unit product cost for year 1 and year 2.
b. Prepare an income statement for year 1 and year 2.
3. Explain the difference between variable costing and absorption costing net operating income in year 1. Also, explain why the two net operating incomes differ in year 2.

EXERCISE 6–13 Variable Costing Income Statement; Reconciliation [LO2, LO3]
M
orey Company has just completed its first year of operations. The company’s absorption costing income statement for the year appears below:
The company’s selling and administrative expenses consist of $300,000 per year in fixed expenses and $3 per unit sold in variable expenses. The company’s $21 per unit product cost given above is computed as follows:

Required:

1
. Redo the company’s income statement in the contribution format using variable costing.
2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement.

EXERCISE 6–14 Working with a Segmented Income Statement [LO4]
M
arple Associates is a consulting firm that specializes in information systems for construction and landscaping companies. The firm has two offices—one in Houston and one in Dallas. The firm classifies the direct costs of consulting jobs as variable costs. A segmented contribution format income statement for the company’s most recent year is given below:

Required:

1
. By how much would the company’s net operating income increase if Dallas increased its sales by $75,000 per year? Assume no change in cost behavior patterns.
2. Refer to the original data. Assume that sales in Houston increase by $50,000 next year
2. Refer to the original data. Assume that sales in Houston increase by $50,000 next year and that sales in Dallas remain unchanged. Assume no change in fixed costs.
a. Prepare a new segmented income statement for the company using the above format.
Show both amounts and percentages.
b. Observe from the income statement you have prepared that the CM ratio for Houston has remained unchanged at 70% (the same as in the above data) but that the segment margin ratio has changed. How do you explain the change in the segment margin ratio?

EXERCISE 6–15 Working with a Segmented Income Statement [LO4]
R
efer to the data in EXERCISE 6–14. Assume that Dallas’ sales by major market are as follows:
The company would like to initiate an intensive advertising campaign in one of the two markets during the next month. The campaign would cost $8,000. Marketing studies indicate that such a campaign would increase sales in the construction market by $70,000 or increase sales in the landscaping market by $60,000.

Required:

1
. In which of the markets would you recommend that the company focus its advertising campaign? Show computations to support your answer.
2. In EXERCISE 6–14, Dallas shows $90,000 in traceable fixed expenses. What happened to the $90,000 in this exercise?
Problems
All applicable problems are available with McGraw-Hill’s
Connect™ Accounting.
PROBLEM 6-16 Variable and Absorption Costing Unit Product Costs and Income
Statements; Explanation of Difference in Net Operating Income [
LO1, LO2, LO3]
W
iengot Antennas, Inc., produces and sells a unique type of TV antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been provided for the first month of the plant’s operation in the form of a worksheet.
Because the new antenna is unique in design, management is anxious to see how profitable it will be and has asked that an income statement be prepared for the month.

Required:

1
. Assume that the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for the month.
2. Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for the month.
3. Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income.
PROBLEM 6-17 Variable and Absorption Costing Unit Product Costs and Income
Statements [
LO1, LO2]
N
ickelson Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
During its first year of operations Nickelson produced 60,000 units and sold 60,000 units.
During its second year of operations it produced 75,000 units and sold 50,000 units. In its third year, Nickelson produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $56 per unit.

Required:

1
. Compute the company’s break-even point in units sold.
2. Assume the company uses variable costing:
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3.
3. Assume the company uses absorption costing:
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3.
4. Compare the net operating income figures that you computed in requirements 2 and 3 to the break-even point that you computed in requirement 1. Which net operating income figures seem counterintuitive? Why?
PROBLEM 6-18 Variable Costing Income Statement; Reconciliation [LO2, LO3]
D
uring Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:
The company’s $34 unit product cost is computed as follows:
Production and cost data for the two years are given below:

Required:

1
. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and variable costing net operating income figures for each year.
PROBLEM 6-19 Segment Reporting and Decision Making [LO4]
T
he most recent monthly contribution format income statement for Reston Company is given below:
Management is disappointed with the company’s performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following:
a. The company is divided into two sales territories—Central and Eastern. The Central
Territory recorded $400,000 in sales and $208,000 in variable expenses during May.
The remaining sales and variable expenses were recorded in the Eastern Territory. Fixed expenses of $160,000 and $130,000 are traceable to the Central and Eastern Territories, respectively. The rest of the fixed expenses are common to the two territories.
b. The company is the exclusive distributor for two products—Awls and Pows. Sales of
Awls and Pows totaled $100,000 and $300,000, respectively, in the Central Territory during May. Variable expenses are 25% of the selling price for Awls and 61% for Pows.
Cost records show that $60,000 of the Central Territory’s fixed expenses are traceable to
Awls and $54,000 to Pows, with the remainder common to the two products.

Required:

1
. Prepare contribution format segmented income statements, first showing the total company broken down between sales territories and then showing the Central Territory broken down by product line. In addition, for the company as a whole and for each segment, show each item on the segmented income statements as a percent of sales.
2. Look at the statement you have prepared showing the total company segmented by sales territory. What points revealed by this statement should be brought to management’s attention?
3. Look at the statement you have prepared showing the Central Territory segmented by product lines. What points revealed by this statement should be brought to management’s attention?
PROBLEM 6-20 Comprehensive Problem with Labor Fixed [LO1, LO2, LO3]
A
dvance Products, Inc., has just organized a new division to manufacture and sell specially designed tables using select hardwoods for personal computers. The division’s monthly costs are shown in the schedule below:
Advance Products regards all of its workers as full-time employees and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The tables sell for $250 each.
During the first month of operations, the following activity was recorded:

Required:

1
. Compute the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare an income statement for the month using absorption costing.
3. Prepare a contribution format income statement for the month using variable costing.
4. Assume that the company must obtain additional financing. As a member of top management, which of the statements that you have prepared in (2) and (3) above would you prefer to take with you to negotiate with the bank? Why?
5. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.
PROBLEM 6-21 Prepare and Reconcile Variable Costing Statements [LO1, LO2, LO3]
L
inden Company manufactures and sells a single product. Cost data for the product follow:
The product sells for $40 per unit. Production and sales data for May and June, the first two months of operations, are as follows:
Income statements prepared by the accounting department, using absorption costing, are presented below:

Required:

1
. Determine the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare contribution format variable costing income statements for May and June.
3. Reconcile the variable costing and absorption costing net operating incomes.
4. The company’s Accounting Department has determined the break-even point to be
28,000 units per month, computed as follows:
Upon receiving this figure, the president commented, “There’s something peculiar here. The controller says that the break-even point is 28,000 units per month. Yet we sold only 26,000 units in May, and the income statement we received showed a $2,000 profit. Which figure do we believe?” Prepare a brief explanation of what happened on the May income statement.
PROBLEM 6-22 Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO1, LO2, LO3]
S
andi Scott obtained a patent on a small electronic device and organized Scott Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows:
Ms. Scott is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.
Selected cost data relating to the product and to the first month of operations follow:

Required:

1
. Complete the following:
a. Compute the unit product cost under absorption costing.
b. Redo the company’s income statement for the month using absorption costing.
c. Reconcile the variable and absorption costing net operating income (loss) figures.
2. Was the CPA correct in suggesting that the company really earned a “profit” for the month? Explain.
3. During the second month of operations, the company again produced 50,000 units but sold 60,000 units. (Assume no change in total fixed costs.)
a. Prepare a contribution format income statement for the month using variable costing.
b. Prepare an income statement for the month using absorption costing.
c. Reconcile the variable costing and absorption costing net operating incomes.
PROBLEM 6-23 Restructuring a Segmented Income Statement [LO4]
B
rabant NV of the Netherlands is a wholesale distributor of Dutch cheeses that it sells throughout the European Community. Unfortunately, the company’s profits have been declining, which has caused considerable concern. To help understand the condition of the company, the managing director of the company has requested that the monthly income statement be segmented by sales territory. Accordingly, the company’s accounting department has prepared the following statement for March, the most recent month. (The Dutch currency is the euro which is designated by €.)
Cost of goods sold and shipping expenses are both variable; other costs are all fixed. Brabant
NV purchases cheeses at auction and from farmers’ cooperatives, and it distributes them in the three territories listed above. Each of the three sales territories has its own manager and sales staff. The cheeses vary widely in profitability; some have a high margin and some have a low margin. (Certain cheeses, after having been aged for long periods, are the most expensive and carry the highest margins.)

Required:

1
. List any disadvantages or weaknesses that you see to the statement format illustrated above.
2. Explain the basis that is apparently being used to allocate the corporate expenses to the territories. Do you agree with these allocations? Explain.
3. Prepare a new segmented contribution format income statement for May. Show a Total column as well as data for each territory. In addition, for the company as a whole and for each sales territory, show each item on the segmented income statement as a percent of sales.
4. Analyze the statement that you prepared in (3) above. What points that might help to improve the company’s performance would you bring to management’s attention?
PROBLEM 6-24 Incentives Created by Absorption Costing; Ethics and the Manager [LO2]
A
ristotle Constantinos, the manager of DuraProducts’ Australian Division, is trying to set the production schedule for the last quarter of the year. The Australian Division had planned to sell
100,000 units during the year, but current projections indicate sales will be only 78,000 units in total. By September 30 the following activity had been reported:
Demand has been soft, and the sales forecast for the last quarter is only 18,000 units.
The division can rent warehouse space to store up to 30,000 units. The division should maintain a minimum inventory level of at least 1,500 units. Mr. Constantinos is aware that production must be at least 6,000 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,000 units per quarter.
Due to the nature of the division’s operations, fixed manufacturing overhead is a major element of product cost.

Required:

1
. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? (The basic formula for computing the required production for a period in a company is: Expected sales + Desired ending inventory – Beginning inventory = Required production.) Show computations and explain your answer. Will the number of units scheduled for production affect the division’s reported profit for the year? Explain.
2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on the division’s net operating income. If Mr. Constantinos wants to maximize his division’s net operating income for the year, how many units should be scheduled for production during the last quarter? [See the formula in (1) above.] Explain.
3. Identify the ethical issues involved in the decision Mr. Constantinos must make about the level of production for the last quarter of the year.
PROBLEM 6-25 Prepare and Interpret Statements; Changes in Both Sales and
Production; Lean Production [
LO1, LO2, LO3]
M
emotec, Inc., manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis):
Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. Memotec had expected sales to remain constant at 50,000 units for the year; production was set at 60,000 units in order to build a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that spurts in demand were unlikely and that the inventory was excessive. To work off the excessive inventories, Memotec cut back production during Year 3, as shown below:
Additional information about the company follows:
a. The company’s plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only $4 per unit, and fixed manufacturing overhead costs total $600,000 per year.
b. Fixed manufacturing overhead costs are applied to units of product on the basis of each year’s production. That is, a new fixed overhead rate is computed each year.
c. Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $70,000 per year.
d. The company uses a FIFO inventory flow assumption.
Memotec’s management can’t understand why profits tripled during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

1
. Prepare a contribution format variable costing income statement for each year.
2. Refer to the absorption costing income statements on the previous page.
a. Compute the unit product cost in each year under absorption costing. (Show how much of this cost is variable and how much is fixed.)
b. Reconcile the variable costing and absorption costing net operating incomes for each year.
3. Refer again to the absorption costing income statements. Explain why net operating income was higher in Year 2 than it was in Year 1 under the absorption approach, in light of the fact that fewer units were sold in Year 2 than in Year 1.
4. Refer again to the absorption costing income statements. Explain why the company suffered a loss in Year 3 but reported a profit in Year 1, although the same number of units was sold in each year.
5.
a. Explain how operations would have differed in Year 2 and Year 3 if the company had been using Lean Production with the result that ending inventory was zero.
b. If Lean Production had been in use during Year 2 and Year 3, and the predetermined overhead rate is based on 50,000 units per year, what would the company’s net operating income (or loss) have been in each year under absorption costing? Explain the reason for any differences between these income figures and the figures reported by the company in the statements on the previous page.
PROBLEM 6-26 Segmented Income Statements [LO4]
V
ega Foods, Inc., has recently purchased a small mill that it intends to operate as one of its subsidiaries. The newly acquired mill has three products that it offers for sale—wheat cereal, pancake mix, and flour. Each product sells for $10 per package. Materials, labor, and other variable production costs are $3.00 per bag of wheat cereal, $4.20 per bag of pancake mix, and $1.80 per bag of flour. Sales commissions are 10% of sales for any product. All other costs are fixed.
The mill’s income statement for the most recent month is given below:
The following additional information is available about the company:
a. The same equipment is used to mill and package all three products. In the above income statement, equipment depreciation has been allocated on the basis of sales dollars. An analysis of equipment usage indicates that it is used 40% of the time to make wheat cereal, 50% of the time to make pancake mix, and 10% of the time to make flour.
b. All three products are stored in the same warehouse. In the above income statement, the warehouse rent has been allocated on the basis of sales dollars. The warehouse contains
24,000 square feet of space, of which 8,000 square feet are used for wheat cereal,
14,000 square feet are used for pancake mix, and 2,000 square feet are used for flour.
The warehouse space costs the company $0.50 per square foot per month to rent.
c. The general administration costs relate to the administration of the company as a whole.
In the above income statement, these costs have been divided equally among the three product lines.
d. All other costs are traceable to the product lines.
Vega Foods’ management is anxious to improve the mill’s 2.5% margin on sales.

Required:

1
. Prepare a new contribution format segmented income statement for the month. Adjust the allocation of equipment depreciation and warehouse rent as indicated by the additional information provided.
2. After seeing the income statement in the main body of the problem, management has decided to eliminate the wheat cereal because it is not returning a profit, and to focus all available resources on promoting the pancake mix.
a. Based on the statement you have prepared, do you agree with the decision to eliminate the wheat cereal? Explain.
b. Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the pancake mix? Assume that an ample market is available for all three products. (Hint: compute the contribution margin ratio for each product.)
Cases
All applicable cases are available with McGraw-Hill’s
Connect™ Accounting.
CASE 6-27 Variable and Absorption Costing Unit Product Costs and Income Statements [
LO1, LO2]
O
’Donnell Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
During its first year of operations, O’Donnell produced 100,000 units and sold 80,000 units.
During its second year of operations, it produced 75,000 units and sold 90,000 units. In its third year, O’Donnell produced 80,000 units and sold 75,000 units. The selling price of the company’s product is $70 per unit.

Required:

1
. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3.
2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3.
3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3.
4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):
a. Compute the unit product cost for year 1, year 2, and year 3.
b. Prepare an income statement for year 1, year 2, and year 3.
CASE 6-28 Service Organization; Segment Reporting [LO4]
T
he American Association of Acupuncturists is a professional association for acupuncturists that has 10,000 members. The association operates from a central headquarters but has local chapters throughout North America. The association’s monthly journal, American Acupuncture , features recent developments in the field. The association also publishes special reports and books, and it sponsors courses that qualify members for the continuing professional education credit required by state certification boards. The association’s statement of revenues and expenses for the current year is presented below:
The board of directors of the association has requested that you construct a segmented income statement that shows the financial contribution of each of the association’s four major programs— membership service, journal, books and reports, and continuing education. The following data have been gathered to aid you:
a. Membership dues are $60 per year, of which $15 covers a one-year subscription to the association’s journal. The other $45 pays for general membership services.
b. One-year subscriptions to American Acupuncture are sold to nonmembers and libraries at $20 per subscription. A total of 1,000 of these subscriptions were sold last year. In addition to subscriptions, the journal generated $50,000 in advertising revenues. The costs per journal subscription, for members as well as nonmembers, were $4 for printing and $1 for mailing.
c. A variety of technical reports and professional books were sold for a total of $70,000 during the year. Printing costs for these materials totaled $25,000, and mailing costs totaled $8,000.
d. The association offers a number of continuing education courses. The courses generated revenues of $230,000 last year.
e. Salary costs and space occupied by each program and the central staff are as follows:
f. The $120,000 in occupancy costs incurred last year includes $20,000 in rental cost for a portion of the warehouse used by the Membership Services program for storage purposes. The association has a flexible rental agreement that allows it to pay rent only on the warehouse space it uses.
g. Printing costs other than for journal subscriptions and for books and reports related to
Continuing Education.
h. Distributions to local chapters are for general membership services.
i. General and administrative expenses include costs relating to overall administration of the association as a whole. The association’s central staff does some mailing of materials for general administrative purposes.
j. The expenses that can be traced or assigned to the central staff, as well as any other expenses that are not traceable to the programs, will be treated as common costs. It is not necessary to distinguish between variable and fixed costs.

Required:

1
. Prepare a contribution format segmented income statement for the American Association of Acupuncturists for last year. This statement should show the segment margin for each program as well as results for the association as a whole.
2. Give arguments for and against allocating all costs of the association to the four programs.