Chapter 7

Costs are categorized by function when using_________ costing and by behavior when using ________ costing

absorption; variable

Advocated of variable costing believe fixed manufacturing costs

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

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

fixed manufacturing overhead

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

increase in total

Decision-making problems that could occue 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 droppped

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

incorrectly or arbitrarily assigning common costs to segments

- holds managers responsible for costs they can't control - distorts profitability of segments - reduces overall profits of company

Blissful Breeze manufactured and sells ceiling fans. Variable selling and admin expense is $11.50 per fan and fixed selling and admin expense is $7,800 per month. If Blissful Breezw produces 900 fans and sells 842 fans this month, total selling and admin expense will be

842 x $11.50 + $7,800= $17,483

A segment should be discontinued when the segment

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

An absorption costing income statement calculates

Gross margin by deducting cost of goods sold from sales

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

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 $_____.

Variable Costing Unit Product Cost=Direct materials + Direct Labor + Variable Manufacturing overhead = $19+$40+$9 = $68

Using variable costing and the contribution approach for internal decision making

a) It is easy to explain changes in net income. b) It enables CVP analysis. c) It supports decision making.

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

absorption