Chapter 7. Variable Costing and Segment Reporting: Tools for Management

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

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

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

Using absorption costing for segmented income statements can lead to _____.

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

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

Variable costing

Variable and fixed - Variable costing deducts all variable expenses from sales to determine contribution margin and all fixed expenses from contribution margin to determine income or loss.

only variable

Variable costing treats _____ manufacturing costs as product costs.

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

When a segment is eliminated, a _____.

Absorption costing

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

- 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.

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

Advocates of variable costing believe fixed manufacturing costs _____.

common

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) _____ fixed cost.

segment

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

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

Absorption costing _____.

product

Absorption costing treats fixed manufacturing overhead as _____ cost.

absorption

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

- pricing - drop

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

timing of when fixed manufacturing overhead is expensed

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

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

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 _____ per unit.

variable

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

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

The segment margin represents the _____.

period

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

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

GAAP and IFRS rules _____.

- 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.

When the number of units produced equals the number of units sold, _____.

higher than

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

Computing contribution margin instead of gross margin.

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

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

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

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

Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit Direct labor: $75/unit Variable manufacturing overhead: $30,000 Units produced: 10,000 Units sold: 6,000

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

Incorrectly or arbitrarily assigning common costs to segments ________.

- variable - absorption

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

$79398 $72,490 + ($22 x $314). Variable selling costs are incurred on units sold, not units produced.

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 _____

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

Product costs under absorption costing include _____.

$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 _____.

$20376 849 x $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 $_____

Absorption costing

Manufacturing and selling and administrative - Absorption costing separates product (manufacturing) costs from period (selling and administrative costs).