Chapter 6
Variable Costing and Segment Reporting:
Tools for Management
Solutions to Questions
6-1 Absorption and variable costing differ in period as inventory. When the units are finally
how they handle fixed manufacturing overhead. sold, the fixed manufacturing overhead cost that
Under absorption costing, fixed manufacturing has been carried over with the units is included
overhead is treated as a product cost and hence as part of that period’s cost of goods sold.
is an asset until products are sold. Under
variable costing, fixed manufacturing overhead 6-4 Absorption costing advocates argue that
is treated as a period cost and is immediately absorption costing does a better job of matching
expensed on the income statement. costs with revenues than variable costing. They
argue that all manufacturing costs must be
6-2 Selling and administrative expenses are assigned to products to properly match the costs
treated as period costs under both variable of producing units of product with the revenues
costing and absorption costing. from the units when they are sold. They believe
that no distinction should be made between
6-3 Under absorption costing, fixed variable and fixed manufacturing costs for the
manufacturing overhead costs are included in purposes of matching costs and revenues.
product costs, along with direct materials, direct
labor, and variable manufacturing overhead. If 6-5 Advocates of variable costing argue that
some of the units are not sold by the end of the fixed manufacturing costs are not really the cost
period, then they are carried into the next of any particular unit of product. If a unit is
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 6 381
,made or not, the total fixed manufacturing costs cannot change from one period to another and
will be exactly the same. Therefore, how can absorption costing and variable costing will
one say that these costs are part of the costs of report the same net operating income.
the products? These costs are incurred to have
the capacity to make products during a 6-11 A segment is any part or activity of an
particular period and should be charged against organization about which a manager seeks cost,
that period as period costs according to the revenue, or profit data. Examples of segments
matching principle. include departments, operations, sales
territories, divisions, and product lines.
6-6 If production and sales are equal, net
operating income should be the same under 6-12 Under the contribution approach, costs
absorption and variable costing. When are assigned to a segment if and only if the
production equals sales, inventories do not costs are traceable to the segment (i.e., could
increase or decrease and therefore under be avoided if the segment were eliminated).
absorption costing fixed manufacturing overhead Common costs are not allocated to segments
cost cannot be deferred in inventory or released under the contribution approach.
from inventory.
6-13 A traceable fixed cost of a segment is a
6-7 If production exceeds sales, absorption cost that arises specifically because of the
costing will usually show higher net operating existence of that segment. If the segment were
income than variable costing. When production eliminated, the cost would disappear. A common
exceeds sales, inventories increase and under fixed cost, by contrast, is a cost that supports
absorption costing part of the fixed more than one segment, but is not traceable in
manufacturing overhead cost of the current whole or in part to any one of the segments. If
period is deferred in inventory to the next the departments of a company are treated as
period. In contrast, all of the fixed segments, then examples of the traceable fixed
manufacturing overhead cost of the current costs of a department would include the salary
period is immediately expensed under variable of the department’s supervisor and depreciation
costing. of machines used exclusively by the department.
Examples of common fixed costs would include
6-8 If fixed manufacturing overhead cost is the salary of the general counsel of the entire
released from inventory, then inventory levels company, the lease cost of the headquarters
must have decreased and therefore production building, corporate image advertising, and
must have been less than sales. depreciation of machines shared by several
departments.
6-9 Under absorption costing net operating
income can be increased by simply increasing 6-14 The contribution margin is the difference
the level of production without any increase in between sales revenue and variable expenses.
sales. If production exceeds sales, units of The segment margin is the amount remaining
product are added to inventory. These units after deducting traceable fixed expenses from
carry a portion of the current period’s fixed the contribution margin. The contribution margin
manufacturing overhead costs into the inventory is useful as a planning tool for many decisions,
account, reducing the current period’s reported particularly those in which fixed costs don’t
expenses and causing net operating income to change. The segment margin is useful in
increase. assessing the overall profitability of a segment.
6-10 Differences in reported net operating 6-15 If common fixed costs were allocated to
income between absorption and variable costing segments, then the costs of segments would be
arise because of changing levels of inventory. In overstated and their margins would be
Lean Production, goods are produced strictly to understated. As a consequence, some segments
customers’ orders. With production tied to sales, may appear to be unprofitable and managers
inventories are largely (or entirely) eliminated. If may be tempted to eliminate them. If a segment
inventories are completely eliminated, they were eliminated because of the existence of
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 6
,arbitrarily allocated common fixed costs, the national TV and print advertising might be
overall profit of the company would decline and traceable to a specific product line, but be a
the common fixed cost that had been allocated common fixed cost of the geographic sales
to the segment would be reallocated to the territories in which that product line is sold.
remaining segments—making them appear less
profitable. 6-17 No, a company should not allocate its
common fixed costs to business segments.
6-16 There are often limits to how far down These costs are not traceable to individual
an organization a cost can be traced. Therefore, segments and will not be affected by segment-
fixed costs that are traceable to a segment may level decisions.
become common as that segment is divided into
smaller segment units. For example, the costs of
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
Solutions Manual, Chapter 6 383
, Chapter 6: Applying Excel
The completed worksheet is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 6
Variable Costing and Segment Reporting:
Tools for Management
Solutions to Questions
6-1 Absorption and variable costing differ in period as inventory. When the units are finally
how they handle fixed manufacturing overhead. sold, the fixed manufacturing overhead cost that
Under absorption costing, fixed manufacturing has been carried over with the units is included
overhead is treated as a product cost and hence as part of that period’s cost of goods sold.
is an asset until products are sold. Under
variable costing, fixed manufacturing overhead 6-4 Absorption costing advocates argue that
is treated as a period cost and is immediately absorption costing does a better job of matching
expensed on the income statement. costs with revenues than variable costing. They
argue that all manufacturing costs must be
6-2 Selling and administrative expenses are assigned to products to properly match the costs
treated as period costs under both variable of producing units of product with the revenues
costing and absorption costing. from the units when they are sold. They believe
that no distinction should be made between
6-3 Under absorption costing, fixed variable and fixed manufacturing costs for the
manufacturing overhead costs are included in purposes of matching costs and revenues.
product costs, along with direct materials, direct
labor, and variable manufacturing overhead. If 6-5 Advocates of variable costing argue that
some of the units are not sold by the end of the fixed manufacturing costs are not really the cost
period, then they are carried into the next of any particular unit of product. If a unit is
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 6 381
,made or not, the total fixed manufacturing costs cannot change from one period to another and
will be exactly the same. Therefore, how can absorption costing and variable costing will
one say that these costs are part of the costs of report the same net operating income.
the products? These costs are incurred to have
the capacity to make products during a 6-11 A segment is any part or activity of an
particular period and should be charged against organization about which a manager seeks cost,
that period as period costs according to the revenue, or profit data. Examples of segments
matching principle. include departments, operations, sales
territories, divisions, and product lines.
6-6 If production and sales are equal, net
operating income should be the same under 6-12 Under the contribution approach, costs
absorption and variable costing. When are assigned to a segment if and only if the
production equals sales, inventories do not costs are traceable to the segment (i.e., could
increase or decrease and therefore under be avoided if the segment were eliminated).
absorption costing fixed manufacturing overhead Common costs are not allocated to segments
cost cannot be deferred in inventory or released under the contribution approach.
from inventory.
6-13 A traceable fixed cost of a segment is a
6-7 If production exceeds sales, absorption cost that arises specifically because of the
costing will usually show higher net operating existence of that segment. If the segment were
income than variable costing. When production eliminated, the cost would disappear. A common
exceeds sales, inventories increase and under fixed cost, by contrast, is a cost that supports
absorption costing part of the fixed more than one segment, but is not traceable in
manufacturing overhead cost of the current whole or in part to any one of the segments. If
period is deferred in inventory to the next the departments of a company are treated as
period. In contrast, all of the fixed segments, then examples of the traceable fixed
manufacturing overhead cost of the current costs of a department would include the salary
period is immediately expensed under variable of the department’s supervisor and depreciation
costing. of machines used exclusively by the department.
Examples of common fixed costs would include
6-8 If fixed manufacturing overhead cost is the salary of the general counsel of the entire
released from inventory, then inventory levels company, the lease cost of the headquarters
must have decreased and therefore production building, corporate image advertising, and
must have been less than sales. depreciation of machines shared by several
departments.
6-9 Under absorption costing net operating
income can be increased by simply increasing 6-14 The contribution margin is the difference
the level of production without any increase in between sales revenue and variable expenses.
sales. If production exceeds sales, units of The segment margin is the amount remaining
product are added to inventory. These units after deducting traceable fixed expenses from
carry a portion of the current period’s fixed the contribution margin. The contribution margin
manufacturing overhead costs into the inventory is useful as a planning tool for many decisions,
account, reducing the current period’s reported particularly those in which fixed costs don’t
expenses and causing net operating income to change. The segment margin is useful in
increase. assessing the overall profitability of a segment.
6-10 Differences in reported net operating 6-15 If common fixed costs were allocated to
income between absorption and variable costing segments, then the costs of segments would be
arise because of changing levels of inventory. In overstated and their margins would be
Lean Production, goods are produced strictly to understated. As a consequence, some segments
customers’ orders. With production tied to sales, may appear to be unprofitable and managers
inventories are largely (or entirely) eliminated. If may be tempted to eliminate them. If a segment
inventories are completely eliminated, they were eliminated because of the existence of
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 6
,arbitrarily allocated common fixed costs, the national TV and print advertising might be
overall profit of the company would decline and traceable to a specific product line, but be a
the common fixed cost that had been allocated common fixed cost of the geographic sales
to the segment would be reallocated to the territories in which that product line is sold.
remaining segments—making them appear less
profitable. 6-17 No, a company should not allocate its
common fixed costs to business segments.
6-16 There are often limits to how far down These costs are not traceable to individual
an organization a cost can be traced. Therefore, segments and will not be affected by segment-
fixed costs that are traceable to a segment may level decisions.
become common as that segment is divided into
smaller segment units. For example, the costs of
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
Solutions Manual, Chapter 6 383
, Chapter 6: Applying Excel
The completed worksheet is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 6
