ACCT Chapters 6&7

Why do both methods reported have the same total net operating income?

This is because over an extended period of time sales cannot exceed production, nor can production much exceed sales

why is the common fixed expense sometimes different then the actual profit of the two divisions?

depreciation on machinery

organization sustaining

do not relate to product or batch ex: electricity for factory

When units produced are equal to units sold, the absorption costing net operating income is _____ the variable costing net operating income.

equal to

A true common fixed cost would disappear if a segment was entirely eliminated? T) F)

false

In an ABC system, batch-level activities should be combined with unit-level activities.

false

It is necessary to compute an activity rate for the "Other" category of costs? T) F)

false

The costs of direct materials and direct labor costs are allocated to cost objects using the first-stage allocation. T) F)

false

The traditional absorption costing method assigns selling and administrative expenses to products.

false

The variable costing contribution format income statement categorizes costs based on their function.

false

When the units produced during a period are less than the units sold, the absorption costing net operating income will be more than the variable costing net operating income.

false

Activity-based costing uses the _________ process to divide overhead costs among activity cost pools.

first-stage allocation

dollar sales for a segment to break even

segment traceable fixed expenses / segment CM ratio

dollar sales to attain a target profit

(target profit + fixed expenses) / CM Ratio

dollar sales for company to break even

(traceable fixed expenses + common fixed expenses) / overall CM ratio

What are segmented income statements used for?

* decision making - to know the impact of discontinuing a product or product line on the profit * evaluate managerial performance

ABC costing: 5 levels of activity

1. unit-level 2. batch-level 3. customer-level 4. product-level 5. organization-sustaining

Common mistakes when assigning costs to segments?

1.) omit some costs 2.) inappropriately assign traceable fixed costs 3.) arbitrarily allocate common fixed costs

When we reconcile variable costing with absorption costing income, which costs must be considered?

Fixed manufacturing overhead

Manufacturing overheard deferred in (released from) inventory

Fixed manufacturing overhead in ending inventories - fixed manufacturing overhead in beginning inventories

Max, Inc., has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000 respectively. What is the segment margin for the South Division?

$200,000

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. What is the segment margin of the mobile phone division, assuming the traceable fixed costs of the television division are $300,000?

$400,000

Steps for implementing activity based costing

1. define activities, activity cost pools, and activity measures 2. assign overhead costs to activity cost pools 3. calculate activity rates 4. assign overhead costs to cost objects using activity rates and activity measurements 5. prepare management reports

Which of the following is an allocation base commonly used under the traditional methods for allocation of overhead costs?

Direct labor-hours

Variable costing (unit product cost)

Direct materials + Direct labor + variable manufacturing overhead

Which of the following is an example of a common fixed cost?

Salary of the CEO

In an absorption costing income statement, in addition to direct materials and direct labor, cost of goods sold also includes:

Variable manufacturing overhead and fixed manufacturing overhead

Manager salary? a) traceable fixed cost b) common fixed cost

a) traceable fixed cost

product level

activities that support a product line ex: advertising a product

Activity-based costing accumulates costs for each ___________ .

activity

An example of a product-level activity is _____________ .

advertising

CEO salary? a) traceable fixed cost b) common fixed cost

b) common fixed cost

Activity-based costing estimates the costs of the resources consumed by_________ .

cost objects

Activity based costing model

cost objects - activities - consumption of resources - cost

First-stage allocations are usually based on the results of ______ .

interviews with employees

batch level

number of batches produced ex: machine set up cost

If the segment never existed what happens to the traceable fixed cost?

the traceable fix cost would not be incurred

The contribution approach income statement can be used for cost-volume-profit analysis because costs are separated as fixed and variable.

true

Absorption costing (unit product cost)

Direct materials + Direct labor + variable manufacturing overhead + fixed manufacturing overhead

Segmented income statement in the contribution format

Sales - variable expenses: variable cost of goods sold other variable expenses Total variable expense: -traceable fixed cost = divisional segment margin

Segmented income statement

Sales - variable expenses: variable cost of goods sold other variable expenses total variable expenses: = contribution margin - traceable fixed expense = divisional segment margin - common fixed expense = net operating income

Absorption costing income statement

Sales Rev - Cost of goods sold ( DM, DL, VMOH, FMOH) = gross margin - selling and admin ( variable selling and admin, Fixed selling and admin = net operating income

Variable costing income statement

Sales Rev - Variable cost cost of goods sold ( DM, DL, VMOH) - Variable selling and admin = contribution margin - fixed MOH - fixed selling and admin = net operating income

When units produced exceed the units sold, the absorption costing net operating income is _____ the variable costing net operating income.

greater than

When the units produced are fewer than the units sold, the absorption costing net operating income is _____ the variable costing net operating income.

less than

variable costing. If sales go down, what happens to net operating income

net operating goes down

variable costing. If sales go up, what happens to net operating income?

net operating goes up

The use of absorption costing for segmented income statements results in:

omission of upstream and downstream costs.

What does the "Other" category consist of?

organization-sustaining costs and costs of idle capacity

Assume variable costing is used. Product cost? Period cost?

product cost = direct materials, direct labor, variable manufacturing overhead period cost= fixed selling and admin, variable selling and admin, fixed manufacturing overhead

Common fixed cost ___________ the operations of the company.

support

customer level

support customers ex: sales rep visits for repairs

activity rate =

total cost for each activity / total activity

If the segment was eliminated what happens to the traceable fixed cost?

traceable fix cost would dissapear

Total fixed expenses =

traceable fixed expense + common fixed expense

In absorption costing, fixed manufacturing overhead is recorded as a product cost.

true

In activity-based costing, products are charged only for the costs of the capacity they use.

true

unit level

units produced ex: installing golf cart wheels