Accounting Chapter 7

Costs are categorized by function when using ____ costing and by behavior when using ____ costing.

absorption, variable

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

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

fixed manufacturing overhead

Segment break-even calculations include ______ fixed expenses.

only traceable

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

When a segment cannot cover its own costs, that segment should

probably be dropped

Costs that can be traced directly to a segment

should not be allocated to other segments

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

traceable

Discontinuing a profitable segment results in

The loss of the segment's revenues; A reduction in the overall profits of the company

When inventory increases, which costing method generally results in higher net income?

absorption

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

absorption costing

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

common

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)

common fixed cost

Variable costing income statements are based upon a ______ format.

contribution margin

When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead divided by units

produced

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product cost

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

sales, variable expenses, contribution margin, fixed expenses, net operating income

Assigning common fixed costs to segments impacts

segment margin only

The segment margin represents the

the margin available after a segment has covered all of its own costs

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

variable

What type of costing is used for internal decisions making purposes?

variable

The two general costing approaches used by manufacturing companies to prepare income statements are what two types of costing?

variable and absorption

Variable costing income statements separate ______ expenses from _______ expenses.

variable and fixed

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

variable costing

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

variable, absorption

Product costs under absorption costing include

fixed manufacturing overhead, direct materials, variable manufacturing overhead, direct labor

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

fixed overhead is accounted for

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

If a segment is eliminated, ______ fixed costs that are not traced to the segment will not change.

common

Direct costing or marginal costing are other terms for _____ costing

variable

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.

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

Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal

$42,000 + $59,000 = $101,000

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

$5.38 × 1,203 = $6,472.14

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.

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

Blink sells and manufactures frames for eyeglasses. The unit product cost for frame #47320 is $76.35. Last period, Blink produced 200 frames and sold 155 of them. Total cost of goods sold equals

$76.35 × 155 = $11,834.25

Citrus Scents produces body sprays. Variable selling and administrative expense is $1.05 per bottle and fixed selling and administrative expense is $4,500 per month. The company produced 1,490 bottles this month, and sold 1,203 of those bottles. Total selling and administrative expense for the month was

($1.05 × 1,203) + $4,500 = $5,763.15

GAAP and IFRS rules

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

Blissful Breeze manufactures and sells ceiling fans. Variable selling and administrative expense is $11.50 per fan and fixed selling and administrative expense is $7,800 per month. If Blissful Breeze produces 900 fans and sells 842 fans this month, total selling and administrative expenses will be $

17483

The unit product cost of a blender is $24. If 900 blenders are produced and 849 blenders are sold, the total cost of goods sold is $

20376

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expense is $6,200. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9,290. An income statement prepared using variable costing shows $______ as the total fixed expenses.

28990

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

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 $______

79398

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.

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

absorption

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

absorption

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

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

Net operating income is less under absorption costing than under variable costing when inventory for the period

decreases

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

depreciation cost on the equipment used to manufacture the Corvettes

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

fixed manufacturing overhead

Absorption costing net income is calculated by subtracting selling and administrative expenses from

gross margin

An absorption costing income statement calculates

gross margin by deducting cost of goods sold from sales

A segment should probably be dropped when the segment

has a contribution margin that cannot cover traceable fixed costs cannot cover its own costs

A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company

has an overall net operating loss of $10,000

The company-wide break-even sales will always be ______ the sum of the segment break-even sales.

higher than

When units sold exceed units produced, net income under variable costing will generally be _______ net income under absorption costing.

higher than

When units produced exceed units sold, net income will generally be ______ costing.

higher under absorption costing than under variable

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

increase

Segmented income statements

may be prepared for activities at many levels in a company

When calculating the profit impact of discontinuing a segment, consider

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

The segment margin equals the segment's contribution margin less the segment's ____- fixed costs.

traceable

When a segment is eliminated, a

traceable fixed cost will disappear common fixed cost will remain unchanged

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

When inventory decreases, cost of goods sold under absorption costing will generally be ______ cost of goods sold under variable costing.

more than

If a segment is entirely eliminated, common fixed costs will

not change

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

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

For external reporting, income statements are generally prepared using

absorption costing