C6 ACCT 202S

n its first year of operations, Kelley Company produced 10,000 units and sold 7,000 units. Its direct materials, direct labor, variable manufacturing overhead, and variable selling and administrative unit costs were $12, $8, $2, and $1, respectively. Its total fixed manufacturing overhead for the year was $50,000. What is the amount of cost of goods sold under variable costing? $220,000. $161,000. $154,000. $230,000. What is the amount of cost of goods sold under absorption costing? $189,000. $196,000. $179,000. $186,000.

$154,000 The variable costing unit product cost is $22 ($12 + $8 + $2). The cost of goods sold is $154,000 (7,000 units sold × $22 per unit). The variable selling and administrative expense is a period cost, not a product cost. $189,000 The absorption costing fixed manufacturing overhead cost per unit is $5 ($50,000 ÷ 10,000 units). The absorption costing unit product cost is $27 ($12 + $8 + $2 + 5). The cost of goods sold is $189,000 (7,000 units sold × $27 per unit).

2. Smith Company produces and sells one product for $40 per unit. The company has no beginning inventories. Its variable manufacturing cost per unit is $18 and the variable selling and administrative expense per unit is $4. The fixed manufacturing overhead and fixed selling and administrative expense total $80,000 and $20,000, respectively. If Smith Company produces 8,000 units and sells 7,500 units during the year, then its net operating income under variable costing would be: $65,000 $41,250 $40,000 $35,000

$35,000 The contribution margin per unit equals $18 ($40 - $18 - $4). The number of units sold (7,500 units) multiplied by the contribution margin per unit ($18 per unit) minus the total fixed costs ($100,000) equals the net operating income ($35,000).

3. Smith Company produces and sells one product for $40 per unit. The company has no beginning inventories. Its variable manufacturing cost per unit is $18 and the variable selling and administrative expense per unit is $4. The fixed manufacturing overhead and fixed selling and administrative expense total $80,000 and $20,000, respectively. If Smith Company produces 8,000 units and sells 7,500 units during the year, then its net operating income under absorption costing would be $65,000 $41,250 $40,000 $35,000

$40,000 The unit product cost of $28 includes $18 of variable manufacturing costs and $10 of fixed manufacturing overhead ($80,000 ÷ 8,000 = $10 per unit). The gross margin per unit is $12 ($40 - $28) and the total gross margin is $90,000 (7,500 units × $12 = $90,000). The gross margin of $90,000 minus variable selling and administrative expense of $30,000 (7,500 units × $4 per unit = $30,000) and fixed selling and administrative expense of $20,000 equals net operating income of $40,000.

Equation form of manufacturing overhead deferred in (released from) inventory:

= Fixed manufacturing overhead in ending inventories - Fixed manufacturing overhead in beginning inventories

Absorption Costing (full cost method)

A costing method that includes all manufacturing cost - direct materials, direct labor, and both variable and fixed manufacturing overhead - in unit product costs.

Variable Costing (direct or marginal costing)

A costing method that includes only variable manufacturing costs - direct materials, direct labor, and variable manufacturing overhead - in unit product costs.

Traceable Fixed Cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.

Common Fixed Costs

A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segment.

Segment

A part or activity of an organization about which managers seek cost, revenue, or profit data.

Segment Margin

A segment's contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs.

7. Which of the following statements is true? (You can select more than one answer.) a. A segment's contribution margin minus its traceable fixed expenses equals the segment margin. b. A company's common fixed costs should be evenly allocated to business -segments when computing the dollar sales for a segment to break even. c. A segment's traceable fixed costs should include only those costs that would -disappear over time if the segment disappeared. d. Fixed costs that are traceable to one segment may be a common cost of another segment.

A, C, D Common fixed costs should not be allocated to business segments.

Which of the following statements is false? (You may select more than one answer.) a. Under variable costing, only those manufacturing costs that vary with output are treated as product costs. b. Under variable costing, variable selling and administrative expenses are treated as product costs. c. Under absorption costing, fixed manufacturing overhead is treated as a product cost. d. Under absorption costing, fixed selling and administrative expenses are treated as period costs.

B Under variable costing, variable selling and administrative expenses are treated as period costs.

When comparing Kelley's absorption costing net operating income to its variable costing net operating income, which of the following will be true? a. Its absorption costing net operating income will be $35,000 lower than its variable costing net operating income. b. Its absorption costing net operating income will be $35,000 higher than its variable costing net operating income. c. Its absorption costing net operating income will be $15,000 lower than its variable costing net operating income. d. Its absorption costing net operating income will be $15,000 higher than its variable costing net operating income.

D Absorption costing income is $15,000 higher because it defers $15,000 (3,000 units × $5 per unit) of fixed manufacturing overhead in inventory, whereas variable costing expenses the entire $50,000 of fixed manufacturing overhead during the current period.

Formula for a company wide break-even analysis

Dollar Sales for Company to Break Even = (Traceable Expenses + Common Fixed Expenses) / Overall CM Ratio

Formula for the break-even point for a business segment, the formula is as follows:

Dollar Sales for a segment to break even = Segment traceable fixed expenses / Segment CM Ratio

True or False: Changes in inventories do not affect absorption costing net operating income; they do affect variable costing net operating income.

False! Changes in inventories affect absorption costing net operating income—they do not affect variable costing net operating income, providing that variable manufacturing costs per unit are stable.

_ & _ Expenses are never treated as product costs, regardless of the costing method.

Selling & Administrative Expenses

Three Common Mistakes of Segmented Income Statements

They omit some costs, inappropriately assign traceable fixed costs, and arbitrarily allocate common fixed costs.