ACCT 201B - Chapter 7: Absorption vs Variable Costing (Smartbook)

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.

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

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

fixed overhead is accounted for

Absorption costing categorized by:

function

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 If all three segments are at the break-even point, common fixed expenses have not been covered.

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

higher than Company-wide will always be higher because segment break-even does not include common fixed expenses.

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 Blank______ in total as the number of units produced increases.

increase When fixed costs are put on a per unit basis, it appears that the total cost will increase as the number of units increase.

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 fixed costs are put on a per unit basis, it appears that the total cost will increase as the number of units increase.

A traceable fixed cost ______.

is incurred because of the existence of the segment

If a segment is entirely eliminated, common fixed costs will ______.

not change

Segment break-even calculations include _______ fixed expenses.

only traceable

Variable costing treats ______ manufacturing costs as product costs.

only variable

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 Blank______.

probably be dropped

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

produced.

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product

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 $

product cost X amount sold$112 X 842 = $94,304

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

profitability

U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

require

Assigning common fixed costs to segments impacts Blank______.

segment margin only

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

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

traceable

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

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

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 of a store is the __________ fixed cost of the store and the __________ fixed cost of each product line sold in the store.

- traceable - common

When a segment is eliminated, a ______.

- traceable fixed cost will disappear - common fixed cost will remain unchanged

Using absorption costing for segmented income statements can lead to:

- under-costing of segments. -omission of upstream and downstream costs.

GAAP and IFRS rules for publicly traded companies ______.

-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

Costs are categorized by function when using variableBlank 1Blank 1 variable , __________ costing and by behavior when using _______ absorption costing.

1. absorption 2. variable

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

1. sales 2. variable expenses 3. contribution margin 4. fixed expenses 5. net operating income

Absorption costing is Blank______.

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

Discontinuing a profitable segment results in ______.

- the loss of the segment's revenues - a reduction in the overall profits of the company

Common mistakes made by companies when assigning costs to segments include ______.

- omitting costs that should be included - arbitrarily allocating common fixed costs - inappropriately assigning traceable fixed costs

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

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 ______.

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

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 ______.

$11,000 Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 saved from stopping catalog sales = $11,000.

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 ______.

$11,834.25 $76.35 × 155 = $11,834.25

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 Blank______.

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

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 ______.

$175,000 ($70,000 / 40% = $175,000)

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 24*849=20376

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.

$55 $50 + $75 + $27 + ($30,000 ÷ 10,000) = $155 per unit

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 ______.

$6,472.14 $5.38 × 1,203 = $6,472.14

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. The unit product cost of each frame using variable costing is $

$68 19+40+9=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 $

$79,398 (72490 + (22 * 314) = 79398)

Which of the following statements are correct regarding income statements prepared under variable and absorption costing? - Absorption costing categorizes costs based on cost behavior. - Reported net income on the statements often differ. - Both income statements include product and period costs. - The difference between the statements is how total manufacturing overhead is accounted for.

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

A segment should probably be dropped when the segment ______.

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

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.

Incorrectly or arbitrarily assigning common costs to segments:

- could reduce the overall profits of the company. - distorts the profitability of segments. - holds managers responsible for costs they cannot control.

Using variable costing and the contribution approach for internal decision making Blank______.

- enables CVP analysis - supports decision making - facilitates explaining changes in net income

Product costs under absorption costing include ______.

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

The two general costing approaches used by manufacturing companies to prepare income statements are __________ costing and __________costing. (Enter only one word per blank.)

1. variable 2. variable

For external reporting, income statements are generally prepared using ______________ costing, while __________________ costing is used for internal decision making purposes. (Enter only one word per blank.)

1. variable or full 2. variable, marginal or direct

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 ______.

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

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. (Enter your answer as a whole number.)

28990 19700+9290=28990

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. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. The unit product cost using variable costing is ______ per unit.

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

Which of the following is NOT a common mistake made in preparing segmented income statements?

Computing contribution margin instead of gross margin.

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 Although fixed manufacturing overhead is a fixed cost, absorption costing treats it as though it were a variable cost by allocating the fixed costs to units of product (just like variable product costs.)

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

absorption

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

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 States.

absorption

Managers who believe that all manufacturing costs must be assigned to products in order to properly match the cost of production with sales are advocates of ________ costing.

absorption

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

absorption

Net income computed under ______ costing may not agree with the results of CVP analysis.

absorption CVP analysis requires that costs be broken down into fixed and variable components.

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

absorption costing only

Variable costing income statements are based upon a ______ format.

contribution margin

Variable costing categorized by:

behavior

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

common

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

A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

true Reason: All traceable costs should be assigned to segments when possible.

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

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

variable

The variable costing income statement separates Blank______.

variable and fixed expenses