CH. 6 - Variable Costing and Segment Reporting: Tools for Management, Chapter 6 Learnsmart COST ACCT

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Variable costing income statements separate (1) expenses from (2) expenses. (Enter only one word per blank.)

1. variable 2. fixed

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 equal:

11,834.25

Which of the following approaches may be used internally by manufacturing companies for costing products for the purposes of valuing inventory and cost of goods sold?

Absorption costing Variable costing

For external reporting, income statements are generally prepared using ___ costing, and ___ costing is used for internal decision making purposes.

Absorption; Variable

Use the following line items to construct an income statement using absorption costing.

Sales - Total cost of goods sold = Gross margin - Total selling and administrative costs = Net operating income

Variable costing and Absorption costing:

The two general costing approaches used by manufacturing companies to prepare income statements

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

absorption costing only

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 ________ costing

absorption; variable

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

common

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

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 ______ costs.

contribution margin, fixed

the difference between reported net income on variable costing & absorption costing income statements is based on how:

fixed overhead is accounted for

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

profitability

Assigning common fixed costs to segments impacts ______.

segment margin only

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

variable

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

variable

Variable costing income statements separate _____ expenses from _____ expenses.

variable and fixed

When preparing a contribution margin income statement:

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

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

Fixed manufacturing overhead costs are expensed as units are sold as part of cost of goods sold under (1) costing, and expensed in full with period costs under (2) costing. (Enter only one word per blank.)

1. absorption 2. variable

Advocated of variable costing believe fixed manufacturing costs:

1. are period expenses 2. are not caused by and cannot be meaningfully traced to specific units of production

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

COMMON

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 $________

Total variable cost = $72,940 + ($22 x 314) = $79398

The two general costing approaches used by manufacturing companies to prepare income statements are ______ costing an ________ costing

absorption; variable

Under absorption costing product costs consist of ______.

both variable and fixed manufacturing costs

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

contribution margin and fixed

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

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

the company-wide break-even sales will always be ________ than the sum of the segment break-even sales.

higher

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

higher than

Select all that apply Incorrectly or arbitrarily assigning common costs to segments ______.

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

absorption costing can lead managers to mistakenly believe that fixed MOH costs will ______ (increase/decrease) in total as the number of units produced increases.

increase

variable costing treats fixed manufacturing overhead as a _______ cost.

period

absorption costing treats fixed MOH as a ______ cost.

product

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

profitability

assigning common fixed costs to segments impacts ______.

segment margin ONLY

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

segments

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

segments

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

traceable

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 and common

Select all that apply Using absorption costing for segmented income statements can lead to ______.

under-costing of segments omission of upstream and downstream costs

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

units produced

Segment

A part or activity of an organization about which managers would like cost, revenue, or profit data.

Variable costing treats fixed manufacturing overhead as a(n) (1) cost. (Enter only one word per blank.)

1. period

Costs are categorized by function when using _____ costing and by behavior when using ____ costing.

absorption and variable

Select all that apply When calculating the profit impact of discontinuing a segment, consider _____.

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

variable costing treats ________ ______ manufacturing costs as product costs.

only variable

Incorrectly or arbitrarily assigning common costs to segments:

Could reduce the overall profits of the company Holds managers responsible for costs they cannot control Distorts the profitability of segment.

True or false: Cost, profit, and investment centers are segments, but sales territories, manufacturing plants, and service departments are not segments.

False

The segment margin represents the:

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

When there is no change in inventory, net operating income will be:

The same under both absorption costing and variable costing

Differences in net operating income between absorption costing and variable costing is due to the:

Timing of when fixed manufacturing overhead is expensed.

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

Traceable

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:

Unit product cost = $22 + $18 + $7 = $47

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

Units produced

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

Units produced

Segment contribution margin equals segment revenue minus the _______ expenses for the segment

VARIABLE

fixed MOH costs are included as part of WIP inventory under ______ costing only.

absorption

costs are categorized by FUNCTION when using _______ costing and by BEHAVIOR when using _______ costing.

absorption variable

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

absorption and variable

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.

Product costs under absorption costing are:

-Variable manufacturing overhead -Direct labor -Direct materials -Fixed manufacturing overhead

advocates of variable costing believe fixed manufacturing costs ______.

1. are period expenses 2. are not caused by and cannot be meaningfully traced to specific units of production

A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n) (1) fixed cost. (Enter only one word per blank.)

1. common

Absorption costing and variable costing net operating income will be: (2)

1. equal when there is no beginning and no ending inventory 2. equal when the number of units produced equals the number of units sold

Click and drag on elements in order 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

On an absorption costing income statement, selling and administrative expenses:

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

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

both income statements include product and period costs reported net income on the statement often differ

assigning common fixed costs to segments impacts:

both segment margin and total corporate profit

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

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

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

increase in total

When using variable costing, fixed manufacturing overhead is:

expensed in the period incurred

absorption costing and variable costing always result in the same net operating income each year. (t/f)

false

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

fixed manufacturing overhead

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

fixed manufacturing overhead

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

not change

If a segment is entirely eliminated, common fixed costs will:

not change

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

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

profitability

The segment margin represents the:

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

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

units produced

Select all that apply Absorption costing is ______.

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

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

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

segment

When units produced exceed units sold, net income will generally be:

Higher under absorption costing than under variable costing

Which of the following statements regarding segmented reporting is incorrect?

Segmented reporting is not useful for organizations with more than one product.

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

The use of ______ costing can lead to the omission of segment costs because non-manufacturing costs are NOT included as costs of a product

VARIABLE

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

higher than

A traceable fixed cost ______.

is incurred because of the existence of the segment

From 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

Fixed manufacturing overhead is treated as part of the per unit product cost and expensed as units are sold.

Absorption costing

Variable costing income statements are based upon a ___ format.

Contribution Margin

When allocating fixed manufacturing overhead costs 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

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

only when the allocation base actually drives the cost being allocated

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

variable

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 _______.

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

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

Common

True or false: Cost, profit and investment centers are segments, but sales territories, manufacturing plants, and service departments are not segments

false

absorption costing net income is calculated by subtracting S&A expenses from _______ _______.

gross margin

An absorption costing income statement calculates:

gross margin by deducting cost of goods sold from sales

A segment should be discontinued when the segment:

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

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

higher than

Select all that apply Common mistakes made by companies when assigning costs to segments include ______.

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

When inventory decreases, net operating income under absorption costing will be _________ _________ cost of goods sold under variable costing.

less than

Differences in net operating income between absorption costing and variable costing is due to the:

timing of when fixed manufacturing overhead is expensed

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 $___________

total cost of goods sold = 842 x $112 = $94,304

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

The variable costing income statement separates ______.

variable and fixed expenses

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

Fixed manufacturing overhead

An absorption costing income statement calculates:

Gross margin by deducting cost of goods sold from sales

Decision-making problems that could occur as a result of treating fixed overhead similarly to a variable cost 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

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:

1,203 * $5.38 = $6,472.14

An otherwise profitable segment may appear to be unprofitable if (1) fixed costs are allocated to it. (Enter only one word per blank.)

1. common

If a segment is eliminated, (1) fixed costs that are not traced to the segment will not change. (Enter only one word per blank.)

1. common

One mistake companies make when preparing segmented income statements is arbitrarily assigning (1) fixed costs to segments. (Enter only one word per blank.)

1. common

Only costs that would disappear over time if a segment disappeared should be treated as (1) fixed costs. (Enter only one word per blank.)

1. traceable

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

Sales - Variable Expenses = Contribution Margin - Fixed Expenses = Net Operating Income

When determining a segment margin, which fixed costs are charged to the segment?

Traceable

Traceable; Common

one mistake companies make when preparing segmented income statements is arbitrarily assigning __________ fixed costs to segments

UNTRACEABLE

BASIC EXAMPLE: Determining a Absorption Costing Company's Unit Product Costs

Unit Product Cost = DM+DL+Var. Manu.OH+Fixed Manu.OH Fixed Manu.OH = Total Fixed Manufacturing Overhead / number of units produced

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

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

Variable

Fixed manufacturing overhead is treated as a period cost and expensed in full each period.

Variable costing

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

variable, absorption

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

Common

What are some other terms for variable costing?

Direct costing or marginal costing

segment contribution margin equals segment revenue minus the _____ expenses for the segment.

fixed

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

Period

Advocates of variable costing believe fixed manufacturing costs:

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

an absorption costing income statement, selling and administrative expenses

-Are reported as a single amount -Equal the amounts reported on a variable costing income statement

Incorrectly or arbitrarily assigning common costs to segments:

-Could reduce the overall profits of the company - Holds managers responsible for costs they cannot control -Distorts the profitability of segments

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

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

Computing contribution margin instead of gross margin.

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

Higher than

Select all that apply 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.

In order to comply with GAAP and IFRS, the ______ costing method must be used for external reporting in the United States.

absorption

When using absorption costing and explaining changes in operating income, financial statement users need to be aware of changes in _____ levels.

inventory

The unit product 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 * 24 = 20376)

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

Comfy Cozy Chairs makes and sells rockers. Each rocker requires $45 of direct materials and $37 of direct labor. Variable manufacturing overhead amounts to $8 per unit, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs amount to $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

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

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

$155

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 expenses 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 ___.

$19 + $40 + $9 = $68

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.

$19,700 + $9,290 = $28,990

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:

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

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing 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:

$47 per unit (22 + 18 + 7 = 47)

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 ______.

$5,763.15 ($1.05 x 1,203) + $4,500 = $5,763.15

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:

$70,000 / 40% = $175,000.

$72,490 + ($22 + 314) = $79,398

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:

($100,000 * 10% * $60,000 / $100,000) = $6,000 $6,000 + $5,000 = $11,000

($140 + $19) * 780 = $124,020

GAAP and IFRS rules:

-Create problems in reconciling internal and external reports. -Require segmented financial data be included in annual reports. -Require that the same method be used for both internal and external segment reporting.

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 $(1). (Enter your answer as a whole number.)

1. 68

The following are common mistake made in preparing segmented income statements:

1. Arbitrarily dividing common costs among segments 2.Omitting costs that should be included 3.Using inappropriate allocation bases

Blissful Breeze manufacturers 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

79,398

Blissful Breeze manufactures and sells ceiling fans. Each fan has a unit products 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 ___.

842 * $112 = $94,304

Fixed manufacturing overhead costs are expensed as units are sold as part of costs of good sold under __________ costing, and expensed in full with period costs under __________ costing

ABSOPRTION, VARIABLE

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

Absorption costing only

Match the costing method with the way costs are separated for the method.

Absorption costing: Manufacturing and selling and administrative Variable costing: Variable and fixed

Costs are categorized by function when using ______ costing and by behavior when using ______ costing.

Absorption; Variable

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 ___ costing.

Absorption; Variable

Under absorption costing product costs consist of:

Both variable and fixed manufacturing costs

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

Common

When a segment is eliminated, a:

Common fixed cost will remain unchanged Traceable fixed cost will disappear

Which of the following costs make up the manufacturing cost per unit of a product under variable costing?

Direct labor, Direct materials, Variable MOH

When using variable costing, fixed manufacturing overhead is:

Expensed in the period incurred.

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

Fixed manufacturing overhead

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

Fixed overhead is accounted for

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 income 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 ___ the sum of the segment break-even sales.

Higher than

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

Increase in total

When using absorption costing and explaining changes in operating income, financial statement users need to be aware of changes in ___ levels.

Inventory

When using absorption costing and explaining changes in operating income, financial statement users need to be aware of changes in ____ levels

Inventory

A traceable fixed cost:

Is incurred because of the existence of the segment

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

Segment break-even calculations include:

Only traceable fixed expenses

Variable costing treats ___________ manufacturing costs as product costs

Only variable

Absorption costing treats fixed manufacturing overhead as a ___ cost.

Product

Absorption costing is:

Required by GAAP and IFRS Used by most companies for both internal and external reports

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

Sales Variable expenses Contribution margin Fixed expenses Net operating income

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

Sales Variable expenses Contribution margin Fixed expenses Net operating income

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 story and a(n) __________ fixed cost for each product line sold in the store.

Traceable; Common

The segment margin is obtained by deducting the ___ fixed costs of a segment from the segment's ___.

Traceable; Contribution margin

True or false: 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

Contribution margin

Variable costing income statements are based upon a __________ format

Period

Variable costing treats fixed manufacturing overhead as a(n) _____ cost

Product costs under absorption costing are:

Variable manufacturing overhead Direct labor Fixed manufacturing overhead Direct materials

Variable costing income statements separate ___ expenses from ___ expenses.

Variable; Fixed

When should a segment be discontinued?

When the segment CM doesn't cover the traceable fixed costs When the segment margin is negative

when a segment is eliminated ______. a.) traceable fixed cost will disappear b.) common fixed cost will disappear c.) common fixed cost will remain unchanged d.) traceable fixed cost will remain unchanged

a & c a.) traceable fixed cost will disappear c.) common fixed cost will remain unchanged

common mistakes made by companies when assigning costs to segments include ______. a.) arbitrarily allocating common fixed costs b.) inappropriately allocating variable costs c.) inappropriately assigning traceable fixed costs d.) omitting costs that should be included

a, c, & d a.) arbitrarily allocating common fixed costs c.) inappropriately assigning traceable fixed costs d.) omitting costs that should be included

Select all that apply 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

Select all that apply GAAP and IFRS rules ______.

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

When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead ______.

deferred in the inventory account on the balance sheet

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

fixed manufacturing overhead

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

fixed overhead is accounted for

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

fixed overhead is accounted for

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:

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

When using absorption costing and explaining changes in operating income, financial statement users need to be aware of changes in ________ levels

inventory

Segment break-even calculations include ______.

only traceable fixed expenses

Segment break-even calculations include:

only traceable fixed expenses

Variable costing treats ______ manufacturing costs as product costs.

only variable

Variable costing treats fixed manufacturing overhead as a(n) __________ cost

period

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

Costs that can be traced directly to a segment ______.

should not be allocated to other segments

Costs that can be traced directly to a segment:

should not be allocated to other segments

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

traceable

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

$101,000

When units produced exceed units sold, net income will generally be:

higher under absorption costing than under variable costing

when units produced exceed units sold, net income will generally be _____.

higher under absorption costing than under variable costing

The segment margin is obtained by deducting the _____ fixed costs of a segment from the segment's _______

traceable; contribution margin

In order to comply with GAAP and IFRS the _______ costing method must be used for external reporting in the US.

Absorption

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

Absorption

Net income computed under ________ costing may NOT agree with the results of CVP analysis

Absorption

$124,020

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

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

Incorrectly or arbitrarily assigning common costs to segments:

-Holds managers responsible for costs they cannot control -Could reduce the overall profits of the company -Distorts the profitability of segments

$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 x 849 blenders SOLD

$47

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

$50 + $75 + $27 + ($30,000/10,000) = $155

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

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

Dollar break-even for a company is calculated as:

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

Product costs under absorption costing are:

-Fixed manufacturing overhead -Direct labor -Variable manufacturing overhead -Direct materials

1. 79,398

1. 94,304

When preparing a contribution margin income statement:

1. COGS consists of only variable manufacturing costs 2. Variable and fixed costs are listed in separate sections of the statement

When should a segment be discontinued?

1. Has a contribution margin that cannot cover any common fixed costs 2. Cannot cover its own costs

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

Absorption costing is:

1. Required by GAAP and IFRS 2. Used by most companies for both internal and external reports

The use of (1) costing can lead to the omission of segment costs because nonmanufacturing costs are not included as costs of a product. (Enter only one word per blank.)

1. absorption

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) (1) fixed cost for the store, and a(n) (2) fixed cost for each product line sold in the store. (Enter only one word per blank.)

1. traceable 2. common

when a segment is eliminated, a:

1. traceable fixed cost will disappear 2. common fixed cost will remain unchanged

Direct costing or marginal costing are other terms for (1) costing. (Enter only one word per blank.)

1. variable

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

FALSE

True or false: Absorption costing and variable costing always result in the same net operating income each year.

False

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

Higher than

The company-wide break-even sales will aways be _____ the sum of the segment break-even sales.

Higher than

When inventory decreases, net operating income under absorption costing will be ______ cost of goods sold under variable costing

Less than

Absorption costing

Manufacturing and selling and administrative

Variable costing

Separates variable and fixed expenses

When preparing a segment margin income statement ______. a.) fixed manufacturing costs are included in cost of goods sold b.) common fixed expenses are excluded from the statement c.) cost of goods sold consists of only variable manufacturing costs d.) traceable fixed expenses are deducted from the contribution margin

c & d c.) cost of goods sold consists of only variable manufacturing costs d.) traceable fixed expenses are deducted from the contribution margin

A segment should discontinued when the segment:

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

The segment margin is obtained by deducting the ______ fixed costs of a segment from the segment's ______.

traceable; contribution margin

When the number of units produced equals 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

Allocating __________ fixed costs to a segment may cause an otherwise profitable segment to appear unprofitable.

untracealbe

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

absorption

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

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 (42000 + 59000 = 101000)

$155 (50 + 75 + 27 + (30000/10000) - 155/unit)

$47 $22+$18+$7 = $47 S&A costs are never considered part of product cost

when using variable costing, fixed manufacturing overhead is:

expensed in the period incurred

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 cos of goods sold was:

$6,472.14 (5.38 * 1203 = 6472.14)

When a segment is eliminated, a:

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

Incorrectly or arbitrarily assigning common costs to segments:

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

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

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

Common mistakes made by companies when assigning costs to segments include:

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

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

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.

A segment should be discontinued when the segment:

-Has a contribution margin that cannot cover traceable fixed costs. -Cannot cover its own costs.

Using absorption costing for segmented income statements can lead to:

-Omission of upstream and downstream costs. -Under-costing of segments

Common mistakes made by companies when assigning costs to segments include:

-Omitting costs that should be included -Inappropriately assigning traceable fixed costs -Arbitrarily allocating common fixed costs

Absorption Costing is:

-Regulated by GAAP and IFRS -Used by most companies for both internal and external reports

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.

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

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

Discontinuing a profitable segment results in:

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

Costs are categorized by function when using (1) costing and by behavior when using (2) costing. (Enter only one word per blank)

1. absorption 2. variable

When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units (1). (Enter only one word per blank.)

1. produced

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

Granny's Touch manufacturers 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 $_______.

28,990

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

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 moth and total fixed manufacturing overhead cost per month is $15,000. The unit product cost of each frame using variable costing is ____.

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 $____________

842 x $11.50 + $7,800 = $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 ___.

849 * $24 = $20,376

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 $________

849 x $24 = $20,376

94,304

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

Absorption

Match the costing method with the way costs are separated for the method: Absorption Costing Variable Costing

Absorption Costing: Manufacturing and selling and administrative Variable Costing: Variable and fixed

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

Absorption costing

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

Absorption costing

Match the costing method with the way costs are separated for the method

Absorption costing - manufacturing and selling and administrative Variable costing - variable and fixed

When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead:

Deferred in the inventory account on the balance sheet.

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

Segment

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

Segments

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

Segments

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

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

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 _____ costing.

absorption and variable

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

absorption costing

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

absorption costing only

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

common

When a segment is eliminated, a:

common fixed cost will remain unchanged traceable fixed cost will disappear

Select all that apply When a segment is eliminated, a ______.

common fixed cost will remain unchanged traceable fixed cost will disappear

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

computing contribution margin instead of gross margin

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

computing contribution margin instead of gross margin

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

When preparing a contribution margin income statement:

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

net operating income is less under absorption costing than under variable costing when inventory for the period _______.

decreases

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

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

U.S. GAAP and IFRS ______ (require/do not require) publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

require

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

Select all that apply Discontinuing a profitable segment results in ______.

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

Absorption costing and variable costing net operating income will be equal when:

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

CH. 6 - Variable Costing and Segment Reporting: Tools for Management, Chapter 6 Learnsmart COST ACCT

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