Accounting 2020 Ch. 4

Absorption Costing

-income statements that are used for external purposes -opposite of variable costing

Variable Costing

-income statements that rely on the contribution format for internal decision making purposes -opposite of absorption costing

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

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

Product costs under absorption costing are:

1. Fixed manufacturing overhead 2. Direct materials 3. Variable manufacturing overhead 4. Direct labor

2 terms that are used for Variable Costing:

1. Marginal Costing 2. Direct Costing

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

1. Reported net income on the statements often differ. 2. Both income statements include product and period costs.

Discontinuing a profitable segment results in:

1. a reduction in the overall profits of the company 2. the loss of the segment's revenues

When a segment is eliminated, a:

1. common fixed cost will remain unchanged 2. traceable fixed cost will disappear

Using variable costing and the contribution approach for internal decision making:

1. facilitates explaining changes in net income 2. enables CVP analysis 3. supports decision making

Incorrectly or arbitrarily assigning common costs to segments:

1. holds managers responsible for costs they cannot control 2. could reduce the overall profits of the company 3. distorts the profitability of segments

Common mistakes made by companies when assigning costs to segments include:

1. inappropriately assigning traceable fixed costs 2. arbitrarily allocating common fixed costs 3. omitting costs that should be included

GAAP and IFRS rules:

1. require that the same method be used for both internal and external segment reporting 2. create problems in reconciling internal and external reports 3. require segmented financial data be included in annual reports

Absorption costing is:

1. required by GAAP and IFRS 2. used by most companies for both internal and external reports

Using absorption costing for segmented income statements can lead to:

1. under-costing of segments 2. omission of upstream and downstream costs

When preparing a contribution margin income statement:

1. variable and fixed costs are listed in separate sections of the statement 2. cost of goods sold consists of only variable manufacturing costs

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

Absorption Costing

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

The general guideline is to treat as traceable only those costs that would _________ over time if the segment was discontinued.

disappear

When using variable costing, fixed manufacturing overhead is:

expensed in the period incurred

Absorption and variable costing net income are usually different due to the accounting for:

fixed manufacturing overhead

A traceable fixed cost:

is incurred because of the existence of the segment

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product

Differences in net operating income between absorption costing and variable costing is due to the:

timing of when fixed manufacturing overhead is expensed

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 Rationale: $70,000/40% = $175,000

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:

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

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:

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

Variable costs categorize expenses based on:

Cost behavior

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

False

variable expenses are reported separately from:

Fixed Expenses

the way costs are separated (Variable Costing)

Fixed and Variable

Term used for Absorption Costing:

Full Cost Method

the way costs are separated (Absorption Costing)

Manufacturing and Selling and Administrative

Segmented income statements:

may be prepared for activities at many levels in a company

Segment break-even calculations include:

only traceable fixed expenses

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

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:

traceable fixed cost to the plant and a common fixed cost for the individual product lines made in the plant

The use of _____________ costing can lead to the omission of segment costs because non-manufacturing costs are not included as costs of a product.

variable

Absorption costing income statements ignore:

variable and fixed cost distinctions