Chapter 6

Match the costing method with the way costs are separated for the method.

Absorption costing -> Manufacturing and selling and administrative Variable costing -> Variable and fixed

Costs are categorized by function when using ________________ costing and by behavior when using ___________ costing

absorption variable OR contribution

Fixed manufacturing overhead costs are expensed as units are sold as part of cost of goods sold under __________________ costing, and expensed in full with period costs under ___________________ costing.

absorption OR full variable, marginal, OR direct

For external reporting, income statements are generally prepared using _____________________ costing, while _________________ costing is used for internal decision making purposes.

absorption OR full variable, marginal, OR direct

The two general costing approaches used by manufacturing companies to prepare income statements are _______________ costing and _______________ costing

absorption OR full variable, marginal, OR direct

Fixed manufacturing overhead costs are included as part of Work in Process inventory under ______.

absorption costing only

When a segment is eliminated, a ______.

common fixed cost will remain unchanged traceable fixed cost will disappear

Variable costing income statements are based upon a ______ format.

contribution

The difference between reported net income on variable costing and absorption costing income statements is based on how ______.

fixed overhead is accounted for

A variable costing income statement ______.

focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs calculates contribution margin while the absorption costing income statement calculates gross margin

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product

U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

require

Assigning common fixed costs to segments impacts ______.

segment margin only

Costs that can be traced directly to a segment ______.

should not be allocated to other segments

Discontinuing a profitable segment results in ______.

the loss of the segment's revenues a reduction in the overall profits of the company

Bart's Inc. operates retail stores in various cities. Segmented income statements are prepared for each store and for each product line in each store. The property tax for the store is a(n) ______________ fixed cost for the store, and a(n) ____________________ fixed cost for each product line sold in the store.

traceable, traced, OR direct common

Segment contribution margin equals segment revenue minus the _________________ expenses for the segment.

variable

The variable costing income statement separates ______.

variable and fixed expenses

Product costs under absorption costing include ______.

variable manufacturing overhead fixed manufacturing overhead direct materials direct labor

Costs are separated between variable and fixed expenses when using ______ costing, whereas ______ costing separates costs between product and period.

variable, absorption

Because nonmanufacturing costs are not included as costs of a product, the use of ____________ costing can lead to the omission of segment costs.

absorption or full

Because nonmanufacturing costs are not included as costs of a product, the use of ________________________ costing can lead to the omission of segment costs.

absorption or full

Financial statement users need to be aware of changes in inventory levels when using ___________________ costing.

absorption or full

An otherwise profitable segment may appear to be unprofitable if _____________ fixed costs are allocated to it.

common, nontraceable, or untraceable

One mistake companies make when preparing segmented income statements is arbitrarily assigning _____________ fixed costs to segments.

common, nontraceable, or untraceable

One mistake companies make when preparing segmented income statements is arbitrarily assigning ______________ fixed costs to segments.

common, nontraceable, or untraceable

Direct costing or marginal costing are other terms for ___________________ costing.

variable

An example of a traceable fixed cost for General Motors' Corvette Division is the ______.

depreciation cost on the equipment used to manufacture the Corvettes

SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by ______.

$11,000 Reason: Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 saved from stopping catalog sales = $11,000.

Comfy Cozy Chairs makes and sells rockers. Each rocker requires $45 of direct materials and $37 of direct labor. Variable manufacturing overhead is $8 per unit, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs are $15 per unit, and fixed selling and administrative costs total $102,000. During the period, 2,000 rockers were produced and 1,640 were sold. The unit product cost using absorption costing is ______.

$119 Reason: $45 + $37 + $8 + ($58,000 ÷ 2,000) = $119

Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit; Direct labor: $75/unit; Variable manufacturing overhead: $27/unit; Fixed manufacturing overhead: $30,000; Units produced: 10,000; Units sold: 6,000.

$155 Reason: $50 + $75 + $27 + ($30,000 ÷ 10,000) = $155 per unit

JPL Company has two segments - Retail and Commercial. The Retail segment has a contribution margin ratio of 40% and traceable fixed expenses of $70,000. Commercial has traceable fixed expenses of $50,000 and a contribution margin ratio of 55%. The company also has $30,000 of common fixed expenses. The break-even point in dollar sales for the Retail segment equals ______.

$175,000 $70,000 ÷ 40% = $175,000

Place the following line items in order to construct a contribution format income statement.

1. Sales 2.Variable expenses 3. Contribution margin 4, Fixed expenses 5. Net operating income

True or false: Absorption costing and variable costing always result in the same net operating income each year.

False

True or false: A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

True

In order to comply with GAAP and IFRS, the ______ costing method must be used for external reporting in the United States.

absorption

When preparing a segment margin income statement ______.

cost of goods sold consists of only variable manufacturing costs traceable fixed expenses are deducted from contribution margin

Using variable costing and the contribution approach for internal decision making ______.

enables CVP analysis supports decision making facilitates explaining changes in net income

Absorption costing net operating income may not agree with the net operating income calculated for CVP analysis due to the way in which ______ is handled in absorption costing.

fixed manufacturing overhead

Incorrectly or arbitrarily assigning common costs to segments ______.

holds managers responsible for costs they cannot control distorts the profitability of segments could reduce the overall profits of the company

Common mistakes made by companies when assigning costs to segments include ______.

inappropriately assigning traceable fixed costs arbitrarily allocating common fixed costs omitting costs that should be included

Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ______ in total as the number of units produced increases.

increase Reason: When fixed costs are put on a per unit basis, it appears that the total cost will increase as the number of units increase.

A traceable fixed cost ______.

is incurred because of the existence of the segment

Segmented income statements ______.

may be prepared for activities at many levels in a company

Segment break-even calculations include ______ fixed expenses.

only traceable

When calculating the profit impact of discontinuing a segment, consider _____.

the segment's traceable fixed costs the segment's contribution margin

Only costs that would disappear over time if a segment disappeared should be treated as _____________ fixed costs.

traceable

Only costs that would disappear over time if a segment disappeared should be treated as _________________ fixed costs.

traceable

Arbot Co. manufactures appliances at three manufacturing facilities in the United States. Each location has a plant manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for each product manufactured in the plant. The salary of each plant manager is a ______ for the individual product lines made in the plant.

traceable fixed cost to the plant and a common fixed cost

Using absorption costing for segmented income statements can lead to ______.

under-costing of segments omission of upstream and downstream costs

Absorption costing is ______.

used by most companies for both internal and external reports required by GAAP and IFRS

Variable costing treats fixed manufacturing overhead as a(n) _______________ cost.

period

Decision-making problems that could occur when using absorption costing include inappropriate ______ decisions, and decisions made to ______ products that are, in fact, profitable.

pricing; drop

GAAP and IFRS rules ______.

require that the same method be used for both internal and external segment reporting require segmented financial data be included in annual reports create problems in reconciling internal and external reports

Frames, Inc. manufactures large wooden picture frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced, and variable selling and administrative expense is $13 per frame sold. The company produces 5,000 units each month and total fixed manufacturing overhead cost per month is $15,000. The unit product cost of each frame using variable costing is $_____________________

68

Which of the following statements are correct regarding income statements prepared under variable and absorption costing?

Both income statements include product and period costs. Reported net income on the statements often differ.

Why is CVP analysis more difficult when using absorption costing than when using variable costing?

CVP analysis requires costs to be broken down between variable and fixed which is not done in absorption costing.

When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead ______.

deferred in the inventory account on the balance sheet

The number of units produced does not affect net operating income when using ______________________ costing.

variable

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per unit and fixed manufacturing overhead cost is $19,000 in total. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. Last period, 800 gloves were produced, and 585 gloves were sold. The unit product cost using variable costing is ______ per unit.

$47 Reason: $22 + $18 + $7 = $47. Selling and administrative costs are never considered part of product cost.