Chapter 7: Variable Costing and Segment Reporting

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

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

increase

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

manufactured

The segment margin represents the ______.

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

Segmented income statements ______.

may be prepared for activities at many levels in a company

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

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

produced

The segment margin is a valuable tool for assessing the long-run ______ of a segment.

profitability

A part or activity within an organization about which managers would like cost, revenue or profit data is called a(n) _____

segment

Assigning common fixed costs to segments impacts ______.

segment margin only

Selling and administrative expenses are ______ on both the absorption and variable costing income statements.

the same amount

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

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

Absorption costing and variable costing net operating income will be equal when ______.

there is no beginning and no ending inventory the number of units produced equals the number of units sold

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

traceable

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

variable, absorption

When the number of units produced equals the number of units sold, ______.

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

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

depreciation cost on the equipment used to manufacture the Corvettes

On an absorption costing income statement, selling and administrative expenses ______.

equal the amounts reported on a variable costing income statement are reported as a single amount

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

Dollar break-even for a company is calculated as ______.

(Traceable fixed expenses + Common fixed expenses) ÷ Overall CM ratio

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 $

17,483

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

A company has two segments with total sales of $500,000 and total variable costs of $343,750. Traceable fixed expenses are $50,000 and common fixed expenses are $80,000. The break even in dollars for the company as a whole equals $

416000

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

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 $

94304

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: Absorption costing net income may be computed by multiplying the number of units sold by the contribution margin per unit and subtracting total fixed expenses.

False

Under both variable costing and absorption costing, variable and fixed selling and administrative costs are treated as ______ costs.

Period

Absorption costing treats fixed manufacturing overhead as a ______ cost.

Product

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.

Reason: $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 ______.

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

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 ______.

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

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 ______.

Reason: $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.

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

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 ______.

Reason: $70,000 ÷ 40% = $175,000

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 ______.

Reason: $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 ______.

Reason: ($1.05 × 1,203) + $4,500 = $5,763.15

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 ______.

Reason: ($140 + $19) × 780 quilts sold = $124,020

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 ______.

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.

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

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

A company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories, which are known as _____

Segment

From a decision making point of view, _____ margin is most useful for major capacity decisions and _____ margin is most useful for short-term sales volume decisions.

Segment; contribution

Direct costing or marginal costing are other terms for _____ costing.

Variable

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

Variable, Absorption

The two general costing approaches used by manufacturing companies to prepare income statements are _____ costing and _____ costing.

Variable, Absorption

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

absorption

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

absorption costing

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 _____

absorption, variable

Selling and administrative expenses ______.

are always treated as period costs

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

common

Variable costing income statements are based upon a ______ format.

contribution margin

Variable costing net income may be computed by multiplying the number of units sold by the _____ _____ per unit and subtracting total _____

contribution margin, fixed

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

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

An absorption costing income statement calculates ______.

gross margin by deducting cost of goods sold from sales

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

gross; margin

A segment should be discontinued 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

Net operating income under absorption costing is generally ______ net operating income under variable costing in periods in which inventory increases.

higher than

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

higher than

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

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

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

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

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

variable

The variable costing income statement separates ______.

variable and fixed expenses