Variable and Absorption Costing—Three Products Winslow Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows: Winslow Inc. Product Income Statements—Absorption Costing For the Year Ended December 31, 20Y1 Cross Training Shoes Golf Shoes Running Shoes Revenues $535,800 $337,600 $293,700 Cost of goods sold 278,600 165,400 196,800 Gross profit $257,200 $172,200 $96,900 Selling and administrative expenses 221,200 124,000 161,800 Income (loss) from operations $36,000 $48,200 $(64,900) In addition, you have determined the following information with respect to allocated fixed costs: Cross Training Shoes Golf Shoes Running Shoes Fixed costs: Cost of goods sold $85,700 $43,900 $41,100 Selling and administrative expenses 64,300 40,500 41,100 These fixed costs are used to support all three product lines. In addition, you have determined that the inventory is negligible. The management of the company has deemed the profit performance of the running shoe line as unacceptable. As a result, it has decided to eliminate the running shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the running shoe line, management expects the profits of the company to increase by $64,900. a. Are management’s decision and conclusions correct? Management’s decision and conclusion are . The profit be improved because the fixed costs used in manufacturing and selling running shoes be avoided if the line is eliminated. Feedback Incorrect b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number using a minus sign; enter all other amounts as positive numbers. Winslow Inc. Variable Costing Income Statements—Three Product Lines For the Year Ended December 31, 20Y1 Cross Training Shoes Golf Shoes Running Shoes Revenues $ $ $ Variable cost of goods sold Manufacturing margin $ $ $ Variable selling and administrative expenses Contribution margin $ $ $ Fixed costs: Fixed manufacturing costs $ $ $ Fixed selling and administrative expenses Total fixed costs $ $ $ Income from operations $ $ $ Feedback When recasting the variable costing income statement, remember that under variable costing, all fixed factory overhead costs are deducted in the period incurred. Revenues - Variable Cost of Goods Sold = Manufacturing Margin; Manufacturing Margin - Variable Selling and Administrative Expenses = Contribution Margin; Contribution Margin - (Fixed Manufacturing Costs + Fixed Selling and Administrative Expenses) = Income from Operations Learning Objective 2 and Learning Objective 3. c. Use the report in (b) to determine the profit impact of eliminating the running shoes line, assuming no other changes. If the running shoes line were eliminated, then the contribution margin of the product line would be eliminated and the fixed costs would not be eliminated. Thus, the profit of the company would actually decline by $. Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Variable and Absorption Costing—Three Products
Winslow Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows:
| Winslow Inc. Product Income Statements—Absorption Costing For the Year Ended December 31, 20Y1 |
||||||
| Cross Training Shoes | Golf Shoes | Running Shoes | ||||
| Revenues | $535,800 | $337,600 | $293,700 | |||
| Cost of goods sold | 278,600 | 165,400 | 196,800 | |||
| Gross profit | $257,200 | $172,200 | $96,900 | |||
| Selling and administrative expenses | 221,200 | 124,000 | 161,800 | |||
| Income (loss) from operations | $36,000 | $48,200 | $(64,900) |
In addition, you have determined the following information with respect to allocated fixed costs:
| Cross Training Shoes | Golf Shoes | Running Shoes | ||||
| Fixed costs: | ||||||
| Cost of goods sold | $85,700 | $43,900 | $41,100 | |||
| Selling and administrative expenses | 64,300 | 40,500 | 41,100 |
These fixed costs are used to support all three product lines. In addition, you have determined that the inventory is negligible.
The management of the company has deemed the profit performance of the running shoe line as unacceptable. As a result, it has decided to eliminate the running shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the running shoe line, management expects the profits of the company to increase by $64,900.
a. Are management’s decision and conclusions correct?
Management’s decision and conclusion are . The profit be improved because the fixed costs used in manufacturing and selling running shoes be avoided if the line is eliminated.
b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number using a minus sign; enter all other amounts as positive numbers.
| Winslow Inc. | |||
| Variable Costing Income Statements—Three Product Lines | |||
| For the Year Ended December 31, 20Y1 | |||
| Cross Training Shoes | Golf Shoes | Running Shoes | |
| Revenues | $ | $ | $ |
| Variable cost of goods sold | |||
| Manufacturing margin | $ | $ | $ |
| Variable selling and administrative expenses | |||
| Contribution margin | $ | $ | $ |
| Fixed costs: | |||
| Fixed manufacturing costs | $ | $ | $ |
| Fixed selling and administrative expenses | |||
| Total fixed costs | $ | $ | $ |
| Income from operations | $ | $ | $ |
When recasting the variable costing income statement, remember that under variable costing, all fixed
Learning Objective 2 and Learning Objective 3.
c. Use the report in (b) to determine the profit impact of eliminating the running shoes line, assuming no other changes.
If the running shoes line were eliminated, then the contribution margin of the product line would be eliminated and the fixed costs would not be eliminated. Thus, the profit of the company would actually decline by $. Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs.
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