Managerial Accounting Chapter 6

SPS Products has two divisions-Catalog Sales and Online Sales. For the last quarter the Catalog Sales segement margin was ($5000). Online sales were 100,00. Online Sales contribution margin was 60,000 and its segment margin was $40,000. If Cataog Sales are discontinued, it is estimated that online sales will increase by 10%. Calculate the expected profit impact of Discontinuing Catalog Sales.

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

Comfy Cozy Chairs makes and sells rockers. The production of each rocker requires $45 direct material and 37 of direct labor. Variable manufacturing overhead amounts to 8 per unit, fixed manufacturing overhead totals 58000. What is the product cost using absorption?

$119 (45+37+8) + (58000/2000)=119

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200; its fixed manufacturing overhead is $19,700; and its fixed selling and administrative cost is $9,290. An income statement using variable costing would show ______ as the total fixed costs.

$28,990 (fixed manufacturing overhead of $19,700 + fixed selling and admin cost of $9,290 = total fixed expenses of $28,990)

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 is able to produce 900 fans and sell 842 fans this period, the total cost of goods sold would be $_____

$94,304 Total cost of goods sold = 842 * $112 = $94,304

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(Variable selling and administrative expenses * units sold) + administrative expense

Dollar break-even for a company is calculated as:

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

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

Place the following line items in order to construct a contribution format income statement Sales variable expenses fixed expenses contribution margin net operating income

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

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

Absorption costing

A variable costing income statement

Calculates contribution margin while the absorption costing income statement calculates gross margin. Focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs.

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

Facilitates explaining changes in net income. Enables CVP analysis. Supports decision making.

T/F: Absorption costing and variable costing always result in the same net operating income each year

False

Advocates of ____ costing believe fixed costs are an essential part of product production.

absorption

For external reporting, income statements are generally prepared using ____ costing, and ____ costing is used for internal decision making processes

absorption, variable

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 the total ____ expenses

contribution margin, fixed

When preparing a contribution margin income statement (check all that apply):

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

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

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

fixed manufacturing overhead

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

fixed manufacturing overhead

An absorption costing income statement calculates

gross profit by deducting cost of goods sold from sales

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 ________________ (2 words) net income under absorption costing

higher than

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

traceable

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

variable

Blissful Breeze manufactures and sells ceiling fans. Variable selling and administrative expense is $11.50 per fan and fixed selling and administrative expense is $7800 per month. If Blissful Breeze produces 900 fans and sells 842 fans this month, total selling and administrative expenses will be $_____

$17483 842(11.50)+7800=17483

JPL Company has two segments - Retail and Commercial. The Retail segment has a contribution margin ratio of 40% and traceable fixed expense 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 (70000/40% = 175000)

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 $_____.

$20,376 (849 x $24 = $20,376)

T/F: Cost, profit and investment centers are segments, but sales territories, manufacturing plants, and service departments are not segments

False

Selling and administrative expenses

are always treated as period costs

Advocates of variable costing believe fixed manufacturing costs

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

a segment should be discontinued when the segment:

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

A fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment is a(n) ____ fixed cost

common

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

common

Incorrectly or arbitrarily assigning common costs to segments

holds managers responsible for costs they can't control distorts profitability of segments could reduce the overall profits of the company

Costs should be allocated to segments for internal decision-making purposes:

only when the allocation base actually drives the cost being allocated

Decision-making problems that could occur when using absorption costing include inappropraite ____ decisions, and decisions made to ___ products that are, in fact profitable

pricing, drop

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

Absorption costing treats fixed manufacturing overhead as a ____ cost

product

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

Costs that can be traced directly to a segment

should not be allocated to other segments

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. Each store sells various products. Segmented income statements are prepared for each store. Within each store, segmented income statements are further broken down by product line. The property tax for the store will be a(n) _______________ fixed cost for the store, and a(n) _______________ fixed cost for each product line sold in the store.

traceable, common

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

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 15000 the unit product cost of each frame using variable costing is

unit product cost of each frame using variable costing is=(Direct materials+Direct labor+Variable manufacturing overhead_)' =(19+40+9)_ = $68/unit

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

units produced

Variable costing income statements separate ____ expenses from ____ expenses

variable, fixed

Absorption costing is

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

The use of ___ costing can lead to the omission of segment costs because nonmanufacturing costs are not included as costs of a product

variable

Under variable costing the cost of a unit of inventory contains

variable manufacturing overhead, direct materials, direct labor