William Wenceslao - BA 202 Topic 6 Assignment - BY WILL

BA 202 ASSIGNMENT (75 points)
TOPIC: Variable Costing and Segment Reporting
Please be guided by the review questions one and two in answering few questions of this
assignment.
1. How product cost is computed under variable costing and absorption costing? How the
fixed manufacturing overhead is treated under variable and absorption costing. How
would that difference impact the company’s profit (net income) and asset inventory
under the following scenarios? (5 points each)
a. All inventory produced during the period are sold;
b. A quarter of the inventory produced during the period was remained on hand by
period-end.
ANSWER:
a. Under variable costing, unit product cost is computed by adding all variable
production costs and divide to total units produced, while under Absorption
Costing, fixed manufacturing overhead is included in product costs – to get
the unit value we divide the total fixed manufacturing overhead to a number
of total units produced. When the entire inventories produced during the
period were sold, absorption and variable costing net income would be equal.
b. Under absorption costing, the remaining inventory produced during the

period will be deferred in the inventory. Absorption costing net income is
higher than the variable costing net income. Furthermore, under variable
costing the fixed manufacturing cost shall be treated as a period expense in
the month incurred.
2. In January, the absorption unit product cost at Weber Light Aircraft is $95,000, but the
variable portion of this cost is only $25,000. The fixed overhead costs of $70,000 are
commingled with variable production costs. Express the implication of this to company’s
pricing decision and decision to drop this product’s production. 5 points
ANSWER:
On January, Weber Light Aircraft produced and sold one unit of product, there
is no remaining inventory is left. The cost of the product during this period is
somewhat higher; the reason for this is that under absorption product
costing, fixed manufacturing overhead cost is distributed to each unit
produced. The capacity cost of the company during this period was solely
absorbed by only one unit produced, so pricing of this product would be
higher compared to the other months.
3. ABC Company sells a single product for P25. It had no beginning inventories. Operating
data follow.
Sales, 20,000 units P500,000
Normal capacity 30,000 units
Production costs:
Variable per unit P13
Fixed production P150,000
Selling and administrative expenses:
Variable per unit sold P2
Fixed selling P20,000
Number of units produced 32,500 units
a. Prepare ABC’s income statement under variable costing. 5 points

ANSWER:
SP 25
Sales 500,000
Variable Cost 300,000
Contribution Margin 200,000
Fixed Cost 170,000
Net Income 30,000
b. Prepare ABC’s income statement under absorption costing. 5 points

ANSWER:
Fixed Production rate = 4.62
Sales 500,000
Variable COGS 352,400
Gross margin 147,600
Selling and Admin expenses 60,000
Net Income 87,600
c. Reconcile the variable costing and absorption costing operating income. Why is
operating income under variable costing and absorption costing differ? What observation
do you have when you do the reconciliation? 5 points
ANSWER:
Variable Costing Income

Net Income 30,000
Add: Fixed manufacturing Overhead Cost
Deferred in Inventory(12,500 unit x 4.62) 57,750
87,750
Fixed Overhead rate is 4.62, since I made round off over here. The net income is
almost closely reconciled to absorption costing net income, the only difference is
150.
4. Conmed, a surgical device maker in Utica, New York, switched to lean manufacturing by
replacing its assembly lines with U-shaped production cells. It also started producing only
enough units to satisfy customer demand rather than producing as many units as possible
and storing them in warehouses. The company calculated that its customers use one of its
disposable surgical devices every 90 seconds, so that is precisely how often it produces a
new unit. Its assembly area for fluid-injection devices used to occupy 3,300 square feet of
space and contained $93,000 worth of parts. Now the company produces its fluid-injection
devices in 660 square feet of space while maintaining only $6,000 of parts inventory. When
Conmed adopted lean manufacturing, it substantially reduced its finished goods inventories.
What impact do you think this initial reduction in inventories may have had on net operating
income? Why? 10 points
ANSWER:
As an initial reduction of production and producing only enough units to

satisfy the customer demand, net income for the first month would be lower,
as stated above company holds more inventories before switching to lean
manufacturing.
5. How do you differentiate traceable fixed costs from common fixed costs? Give specific
examples of these costs from the company you are currently connected with or you were
employed in the past. Why do think it is not appropriate to include common fixed cost in
analyzing the segment’s performance using the CVP analysis? 15 points
ANSWER:
I am working in the manufacturing company where the rental expense

of the manufacturing facility is the company’s common fixed costs so whether
we do not produce special & ordinary bread and pastries (Product uses cake
flour and soft flour) company still can incur this kind of expense. In addition
net income derived from the above mentioned segment is quite smaller
compare to packed products (Product uses Hard flour). Overall profitability of
the company will reduce if we drop this segment because the operating
expenses of the company as a whole will cover by this segment’s income.
6. Go and ask your company accountant or any accountant you know about the treatment of
(1) company’s president’s monthly salary, and (2) segment’s/ department’s manager salary
in the financial statement. Based on the answer provided by your accountant or any
accountant you know, how would that treatment differ when assessing the performance of a
segment? 10 points
ANSWER:
According to our accounting manager, the company’s president salary is recorded as salaries
and wages and considered as fixed expenses. Same as with the department manager.
However, the difference is the manner in which they are presented in the financial and
operational performance of a specific department. The salary of the department manager is
presented as fixed expenses in full but the salary of the president is not included in the
performance measurement of the specific department.
7. A company has 5 different stores located in the same building. Store A occupies 30%, Store
B 25%, Store C 20%, Store D 15%, and Store E 5 %. The remaining 5% of the building is
occupied for administrative purposes. Based on what you’ve read everything about
traceable and common fixed costs and segment reporting, express your thoughts about the
treatment of the building’s depreciation in (10 points)
1. Financial reporting purposes
ANSWER:
In using absorption costing income statement costs are classified as either

manufacturing costs (Product Cost) or non-manufacturing costs (Period Cost).
For reporting purposes the depreciation costs can be allocated as a product or
period cost too. Depreciation costs are spread across the periods using
systematic and rationale allocation method. In this case, the proportion of
depreciation costs specifically allocated to administrative shall be expensed
under Period cost.
2. Managerial accounting purposes

ANSWER:
In using a contribution format income statement costs are classified as either

variable or fixed cost. Depreciation cost is a fixed cost and its cost must be
allocated to 5 different stores as traceable cost, and the remaining portion of it
(5%) would be to administrative.

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BA 202 ASSIGNMENT (75 points)

TOPIC: Variable Costing and Segment Reporting

b. Under absorption costing, the remaining inventory produced during the

a. Prepare ABC’s income statement under variable costing. 5 points

b. Prepare ABC’s income statement under absorption costing. 5 points

Fixed Production rate = 4.62

Variable Costing Income

As an initial reduction of production and producing only enough units to

I am working in the manufacturing company where the rental expense

In using absorption costing income statement costs are classified as either

2. Managerial accounting purposes

In using a contribution format income statement costs are classified as either

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