chapter 7 accounting

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

absorption cost only.

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

common

When units produced exceed units sold, net income will generally be ____ costing.

higher under absorption costing than under variable

absorption costing treats fixed manufacturing overhead as a ____ cost.

product

Variable Costing Income Statement

relies on the contribution format for internal decision making process

Assigning common fixed costs to segments impacts ____.

segment margin only

Assigning common fixed costs to segments impacts ______.

segment margin only

Segment contribution margin

segment revenue - segment variable expenses

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

variable, absorption

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

variable, absorption

Variable costing income statements are based upon ____ format.

contribution margin

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

pricing; drop

Costs that can be traced directly to a segment ____.

should not be allocated to other segments

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

variable

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

period

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

absorption, variable

Absorption Costing Income Statement

used for for external reports

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

variable, absorption

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

fixed overhead is accounted for

When a segment is eliminated, a ____.

Traceable fixed cost common fixed cost will remain unchanged

Traceable Fixed Cost

a fixed cost that is incurred because of the existence of the segment.

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

Under absorption costing product costs consist of ____ costs.

both variable and fixed manufacturing

Under absorption costing product costs consists of ____ costs.

both variable and fixed manufacturing

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.

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

depreciation cost on the equipment used to manufacture the Corvettes

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 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

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

higher than

Incorrectly or arbitrarily assigning common costs to segments:

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

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

increase

Using absorption costing for segmented income statements can lead to:

omission of upstream and downstream costs under-costing of segments

Segment break-even calculations include ____ fixed expenses.

only traceable

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

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

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

the two methods account for fixed manufacturing overhead costs differently - all other costs have the same affect on net operating income under the two methods.

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

traceable

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.

Unit product cost using variable costing

Direct Materials + Direct Labor + Variable Manufacturing Overhead

Product Costs under absorption costing include ____

All MANUFACTURING costs are product costs, regardless of whether they are variable or fixed.

Variable Costing Income Statement includes

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

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

Both Income statement formats include product and period costs, although they define these cost classification differently. Variable Costing income statements are grounded in the contribution format. They categorize expenses based on cost behavior -- Variable expenses are reported separately from fixed expenses. Absorption costing income statements ignore variable and fixed distinctions. Variable and absorption costing net operating incomes often differ from one another. The reason for the difference always relates to the fact that variable costing and absorption costing income statements account for fixed manufacturing overhead differently.

Dollars for company to break even

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

Traceable fixed cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated

True or false: Under absorption costing, fixed overhead is treated like a variable cost because a portion of the total cost allocated to each unit produced, rather than being expensed as one large sum.

True

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

Variable Costing