Chapter 7 Accounting 2

Absorption costing

INTERNAL manufacturing and selling and administrative

When the number of units produced equals the 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

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

-reported net income on the statements differ -both income statements include product and period cost

discontinuing a profitable segment results in

-the loss of the segments revenues -a reduction in the overall profits of a company

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

Variable Costing

EXTERNAL variable and fixed

Which of the following statements about the segment margin is not true?

The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin.

Which of the following is a common mistake made by companies when assigning costs to segments?

They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.

Which of the following costing approaches is best suited for cost-volume-profit analysis?

Variable

Under absorption costing product cost consist of

both variable and fixed manufacturing costs

An example of a traceable fixed cost for general motors corvette division is the

depreciation cost on the equipment used to manufacture the corvettes

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

fixed manufacturing overhead

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________.

fixed overhead costs

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________.

less than absorption costing net operating income

Net income computer under absorption costing

may not agree with the results of CVP analysis

The use of absorption costing can lead to

the omission of segment costs because non manufacturing costs are not included as costs of a product

Absorption costing income statements ignore ________.

variable and fixed cost distinctions