Chapter 6

A traceable fixed cost ______.

is incurred because of the existence of the segment

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 variable

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

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

A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n) fixed cost.

common

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

common

When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units

produced

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

When preparing a segment margin income statement ______.

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

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

variable

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

variable

Variable costing income statements separate expenses from expenses.

variable fixed

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

variable,abosprtion

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

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

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

When a segment is eliminated, a ______.

traceable fixed cost will disappear common fixed cost will remain unchanged

The Quaint Quilt produces and sells handmade quilts. Variable manufacturing costs total $140 per quilt. Fixed manufacturing overhead totals $68,250 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. The total variable cost reported on Quaint Quilt's variable costing income statement is ______.

$124,020

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

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 Reason: $70,000 ÷ 40% = $175,000

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.

True or false: Under absorption costing, fixed overhead is treated like a variable cost because a portion of the total cost is allocated to each unit produced, rather than being expensed as one large sum.

True

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

absorption

Under absorption costing product costs consist of ______.

both variable and fixed manufacturing costs

Incorrectly or arbitrarily assigning common costs to segments ______.

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

Under variable costing the cost of a unit of inventory does not contain

fixed manufacturing overhead

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

fixed overhead is accounted for

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

increase

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

omission of upstream and downstream costs under-costing of segments

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

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

The difference in net operating income between absorption costing and variable costing is due to the ______.

time when fixed overhead is expensed

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

traceable

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 common

Absorption costing is ______.

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

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.

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

If a segment is entirely eliminated, common fixed costs will ______.

not change

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.

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

Citrus Scents produces body sprays. Each bottle has a unit product cost of $5.38. The company produced 1,490 bottles this month and sold 1,203 of those bottles. Total cost of goods sold was ______.

$6,472.14

Blissful Breeze manufactures and sells ceiling fans. Each fan has a unit product cost of $112 and a unit selling price of $190. If Blissful Breeze produces 900 fans and sells 842 fans this month, the total cost of goods sold will be $

$94303

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

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

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 9+40+19

Pearls, Pearls, Pearls! manufactures and sells jewelry. The total variable cost of goods sold this month is $72,490. Variable selling and administrative cost is $22 per unit sold. If 350 units are produced and 314 units are sold this month, the total variable cost reported on the income statement for the month is $

79,398

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

absorption costing only

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

absorption/ variable

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

common

When using variable costing, fixed manufacturing overhead is ______.

expensed in the period incurred

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

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

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