LearnSmart: Chapter 6

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

-Absorption

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

-Common

Variable costing net income may be computed by multiplying the number of units sold by the ____________ _____________ per unit and subtracted total ___________ expenses.

-Contribution -Margin -Fixed

Net operating income is lower under absorption costing (than under variable costing) when inventory decreases because __________ manufacturing overhead deferred in previous periods is released from inventory to the _________ statement in the cost of goods sold account.

-Fixed -Income

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

-Period

Absorption costing treats fixed manufacturing overhead as a __________ cost.

-Product

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

-Segments

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

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

-Variable

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 use of __________ costing can lead to the omission of segment costs because non-manufacturing costs are not included as costs of a product.

-Variable

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

-Variable -Absorption

Match the costing methods with the appropriate income statement format used by each. (Match 1 & 2 with A & B) 1. Absorption costing 2. Variable costing A. Traditional format B. Contribution margin format

1. Absorption costing & A. Traditional format 2. Variable costing & B. Contribution margin format

********** Net operating income is less under absorption costing than under variable costing when inventory for the period: a. Remains the same b. Increases c. Decreases

c. Decreases

Match the costing method with the way costs are separated for the method. (Match 1 & 2 wit A & B) 1. Absorption costing 2. Variable Costing A. Manufacturing and selling and administrative B. Variable and fixed

1. Absorption costing & A. Manufacturing and selling and administrative 2. Variable Costing & B. Variable and fixed

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 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 $____________.

- $28,990

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 produced cost of each frame using variable costing is $_____________.

- 68

Contrast the way fixed manufacturing overhead costs are treated in absorption costing versus variable costing. Match 1 & 2 with A & B. 1. Absorption costing 2. Variable costing A. Fixed manufacturing overhead is treated as a period cost and expensed in full each period B. Fixed manufacturing overhead is treated as part of the per unit product cost and expensed as units are sold

1. Absorption costing & B. Fixed manufacturing overhead is treated as part of the per unit product cost and expensed as units are sold 2. Variable costing & A. Fixed manufacturing overhead is treated as a period cost and expensed in full each period

The Quaint Quilt produces and sells handmade quilts. Last quarter the company produced 91 quilts and sold 78. The total variable cost of goods sold was $40,300. Fixed manufacturing overhead totaled $12,000 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $10,000 per quarter. What was the total variable cost incurred for the quarter? A. $45,782 B. $41,782 C. $43,782

B. $41,782

Sleep Tight manufactures pillows. This 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: a. $101,000 b. $671,096 c. $708,768 d. $59,000

a. $101,000

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: a. $6,472.14 b. $8,016.20 c. $1,544.06

a. $6,472.14

Selling and administrative expenses: a. Are always treated as period costs b. Are treated as period costs under variable costing only c. Are treated as period costs under absorption costing only d. May be treated as either product costs or period costs

a. Are always treated as period costs

Using variable costing and the contribution approach for internal decision making: (Select all that apply) a. Enable CVP analysis b. Is required as part of GAAP financial statements c. Facilitates explaining changes in net income d. Supports decision making

a. Enable CVP analysis c. Facilitates explaining changes in net income d. Supports decision making

How is the contribution format used in segment reporting different from a contribution income statement for the company as a whole? a. Fixed costs are divided into traceable and common costs, so that managers are only held accountable for the traceable costs of their segments. b. The contribution format used for segmented reporting divides costs into their fixed and variable components. c. The contribution format income statement used by the entire company includes fixed manufacturing overhead is cost of goods sold.

a. Fixed costs are divided into traceable and common costs, so that managers are only held accountable for the traceable costs of their segments.

When units produced exceed units sold, net income will generally be: a. Higher under absorption costing than under variable costing b. Higher under variable costing than under absorption costing c. The same under both absorption costing and variable costing

a. Higher under absorption costing than under variable costing

********* Using absorption costing for segmented income statements can lead to: (select all that apply) a. Omission of upstream and downstream costs b. Under-costing of segments c. The need to maintain two costing systems d. Inconsistencies between internal and external reports

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

Costs should be allocated to segments for internal decision-making purposes: a. Only when the allocation base actually drives the cost being allocated b. Even when the cost is non-traceable, so that all costs will be considered in the decisions c. Equally over all segments d. Even if the allocation base does not actually drive the cost

a. Only when the allocation base actually drives the cost being allocated

GAAP and IFRS rules: (Select all that apply) a. Require segmented financial data be included in annual reports b. Create problems in reconciling internal and external reports c. Create incentives for companies to use the contribution margin format in segment reporting d. Require that the same method be used for both internal and external segment reporting

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

Discontinuing a profitable segment results in: (select all that apply) a. The loss of the segment's revenues b. A reduction in the overall profits of the company c. Reduced common fixed costs for the company

a. The loss of the segment's revenues b. A reduction in the overall profits of the company

When the number of units produced equals the number of units sold: (Check all that apply) a. Under both absorption costing and variable costing, all fixed overhead incurred flows to the income statement b. Absorption costing total expense is greater than variable costing total expense c. Absorption costing net income is greater than variable costing net income d. Absorption costing net income is less than variable costing net income e. Absorption costing net income is equal to variable costing net income f. Absorption costing total expense is less than variable costing total expense

a. Under both absorption costing and variable costing, all fixed overhead incurred flows to the income statement. e. Absorption costing net income is equal to variable costing net income.

Under absorption costing, fixed manufacturing overhead costs flow to the income statement when: a. Units are sold b. The fixed manufacturing overhead costs is incurred c. Units are produced d. The period has ended

a. Units are sold

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? (select all that apply) a. Statement costing b. Absorption costing c. Fixed costing d. Variable costing

b. Absorption costing d. Variable costing

Common mistakes made by companies when assigning costs to segments include: (Select all that apply) a. Inappropriately allocating variable costs b. Arbitrarily allocating common fixed costs c. Omitting costs that should be included d. Inappropriately assigning traceable fixed costs

b. Arbitrarily allocating common fixed costs c. Omitting costs that should be included d. Inappropriately assigning traceable fixed costs

Advocates of variable costing believe fixed manufacturing costs: (Select all that apply) a. Must be assigned to products b. Are period expenses c. Should be ignored when preparing income statements d. Are not caused by and cannot be meaningfully traced to specific units of production

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

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. a. Variable manufacturing overhead b. Fixed manufacturing overhead c. Direct labor cost d. Fixed selling and administrative expense

b. Fixed manufacturing overhead

The segment margin represents the: a. Margin available to cover fixed costs b. Margin available after a segment has covered all of its own costs c. Margin remaining after traceable and common fixed costs have been deducted d. Excess of the segment revenue over the segment cost of goods sold

b. Margin available after a segment has covered all of its own costs

Absorption costing is: (check all that apply) a. The preferred method for internal decision making b. Required by GAAP and IFRS c. Rarely used d. Used by most companies for both internal and external reports

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

Place the following items in order to construct a contribution format income statement. (Place the following in order) a. Variable expenses b. Sales c. Net operating income d. Fixed expenses e. Contribution margin

b. Sales a. Variable expenses e. Contribution margin d. Fixed expenses c. Net operating income

Which of the following statements is correct regarding segmented reporting? a. Common fixed costs are charged to segments, but traceable fixed costs are not. b. Traceable fixed costs are charged to segments, but common fixed costs are not. c. Fixed costs are not charged to segments because only variable costs are used to calculate the segment margin d. Both traceable and common fixed costs are charged to segments in order to calculate the segment margin.

b. Traceable fixed costs are charged to segments, but common fixed costs are not.

When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead divided by: a. Units produced - Units Sold b. Units produced c. Units in ending inventory d. Units sold

b. Units produced

Which of the following costs make up the manufacturing cost per unit of a product under variable costing? (select all that apply) a. Fixed manufacturing overhead b. Variable manufacturing overhead c. Direct labor d. Variable selling and administrative e. Fixed selling and administrative f. Direct materials

b. Variable manufacturing overhead c. Direct labor f. Direct materials

Absorption costing and variable costing net operating income will be: (select all that apply) a. Different when there is no beginning or ending inventory b. Equal when there is a change in beginning or ending inventory c. Equal when the number of units produced equals the number of units sold d. Equal when there is no beginning and no ending inventory

c. Equal when the number of units produced equals the number of units sold d. Equal when there is no beginning and no ending inventory

When a segment is eliminated, a: (Select all that apply) a. Traceable fixed cost will remain unchanged b. Common fixed cost will disappear c. Traceable fixed cost will disappear d. Common fixed cost will remain unchanged

c. Traceable fixed cost will disappear d. Common fixed cost will remain unchanged

When should a segment be discontinued? (Select all that apply) a. When the segment margin is positive, but doesn't cover the common fixed costs b. When the segment contribution margin covers the traceable fixed costs, but doesn't cover the common fixed costs c. When the segment margin is negative d. When the segment contribution margin doesn't cover the traceable fixed costs

c. When the segment margin is negative d. When the segment contribution margin doesn't cover the traceable fixed costs

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 a. $90 b. $125 c. $105 d. $119

d. $119

Lily's Lanterns incurs variable selling and administrative costs of $13 per unit sold and fixed selling and administrative costs of $62,000. If Lily produces 500 lanterns, but only sells 325 of them, the total selling and administrative expense under absorption costing is: a. $68,000 b. $4,225 c. $44,525 d. $66,225

d. $66,225

Use the following line items to construct an income statement using absorption costing. (Place these in the proper order) a. = Gross Margin b. - Total selling and administrative costs c. - Total cost of goods sold d. Sales e. = Net operating income

d. Sales c. - Total cost of goods sold a. = Gross Margin b. - Total selling and administrative costs e. = Net operating income

What occurs when a cost that is directly traceable to Segment A is incorrectly allocated over several segments? a. Segment A's revenues will be overstated b. Segment A's costs will be overstated c. There is no direct effort on Segment A because the cost is being absorbed by other segments d. Segment A's costs will be understated

d. Segment A's costs will be understated