Chapter 6 ACCT

absorption costing

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

variable 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 cost

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 segments.

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.

segment

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

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

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 __________ fixed cost

common

allocating ________ fixed costs to a segment may cause an otherwise profitable segment to appear unprofitable

common

one mistake companies make when preparing segmented income statements is arbitrarily assigning __________ fixed costs to segments

common

variable costing net income may be computed by multiplying the number of units sold by the ____________ ___________ per unit and subtracting total ________ expenses

contribution margin, fixed

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 Motor's corvette division is the:

depreciation cost on the equipment used to manufacture the corvettes

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

fixed overhead is accounted for

variable costing income statements separate _______ expenses from _______ expenses

fixed, variable

a company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. AS a results, the company:

has an overall net operating loss of $10,000

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 there is no change in inventory, net operating income will be:

the same under both absorption costing and variable costing

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

timing of when fixed manufacturing overhead is expensed

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 5000 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 $_____

$19 + $40 + $9 = $68

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expenses is $6,200. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9290. An income statement prepared using variable costing shows $__________ as the total fixed expenses

$19,700 + $9290 = $28,990

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:

$22 + $18 + $7 = $47

advocates of variable costing believe fixed manufacturing costs

- are period expenses - are not caused by and cannot be meaningfully traced to specific units of production

when preparing a contribution margin income statement

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

GAAP and IFRS rules

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

product costs under absorption costing are

- direct labor - direct materials - fixed manufacturing overhead - variable manufacturing overhead

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

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 is:

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

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 $________

849 x $24 = $20,376

when the number of units produced equals the number of units sold

- under both absorption costing and variable costing, all fixed overhead incurred flows to the income statement - absorption costing net income is equal to variable costing net income

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 $______

842 x $112 = $94,304

net income computed under _________ costing may not agree with the results of CVP analysis

absorption

the segment margin is obtained by deducting the _______ fixed costs of a segment from the segment's ________

traceable; contribution margin

when using absorption costing, fixed manufacturing overhead cost per unit = total fixed manufacturing overhead divided by:

units produced

segment contribution margin equals segment revenue minus the ___________ expenses for the segment

variable