LS CH5 - Variable Costing & Segment Reporting: Tools for Management

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 Total cost of goods sold = 849 x $24 = $20,376.

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

absorption

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

absorption

When using ____ costing changes in net operating income can be due to changes in ____ rather than changes in sales.

absorption inventories

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

greater than

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

period

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

A company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories. The term used to describe these divisions is _______.

segment

When constructing segmented reports:

some costs are not traceable to particular segments

When using variable costing:

total fixed manufacturing overhead is expensed in the period incurred

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

traceable

Bart's Inc. operates retail stores in various cities. Each store sells various products. Segmented income statements are prepared for each store. Within each store, segmented income statements are further broken down by product line. The property tax for the store will be a(n) ____ fixed cost for the store, but a(n) ____ fixed cost for each product line sold in the store.

traceable common

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

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 on line sales will increase by 10%. Calculate the expected profit impact of discontinuing catalog Sales.

$11,000 increase 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.

Comfy Cozy Chairs makes and sells rockers. The production of 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. What is the unit product cost using absorption costing?

$119 per unit Unit product cost = $45 + $37 + $8 + ($58,000/2,000) = $119

Granny's Touch manufacturers and sells cookbooks. The company's variable cost of goods sold is $39,200; its fixed manufacturing overhead is $19,700; and its fixed selling and administrative cost is $9,290. An income statement using variable costing would show $____ as the total fixed costs.

$28,990 Total fixed costs = $19,700 + $9,290 = $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 product cost of each frame using variable costing is $_____.

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

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 $______.

$79,398 Total variable cost = $72,490 + ($22 x 314) = $79,398. Variable selling costs are incurred on units sold, not units produced.

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

+Sales -variable costs =contribution Margin -Fixed expenses =net operating income

Which of the following statements regarding segmented reporting is incorrect? - Segments may be comprised of product lines, sales territories, an or responsibility centers - Segmented reporting allows top management to evaluate the performance of lower level managers - Segmented reporting provides top management with cost, profit and investment performance data on the parts or activities of the organization. - Segmented reporting is not useful for organizations with more than one product.

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

Discontinuing a profitable segment results in: (check all that apply) - a reduction in the overall profits of the company - reduced common fixed costs for the company - the loss of the segment's revenues

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

Advocates of variable costing: (Check all that apply.) - believe that fixed manufacturing overhead is best ignored. - believe that fixed manufacturing overhead is a period cost - believe that all manufacturing costs must be assigned to products - argue the fixed costs are not caused by and cannot be meaningfully traced to any specific unit that is produced.

- believe that fixed manufacturing overhead is a period cost - argue the fixed costs are not caused by and cannot be meaningfully traced to any specific unit that is produced.

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

only when the allocation base actually drives the cost being allocated

Absorption costing and variable costing net operating income will be (check all that apply): - equal when the number of units produced equals the number of units sold - equal when there is no beginning and no ending inventory. - different when there is no beginning or ending inventory - equal when there is a change in beginning or ending inventory.

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

Companies need to be careful when assigning fixed costs to segments because (check all that apply): - the contribution margin of the segment is impacted when inappropriate cost assignments are made - allocating traceable fixed costs to segments may make a profitable segment look unprofitable - it is sometimes difficult to determine if a cost should be classified as traceable or common - allocation of common fixed costs to segments reduces the value of the segment margin as a measure of profitability

- it is sometimes difficult to determine if a cost should be classified as traceable or common - allocation of common fixed costs to segments reduces the value of the segment margin as a measure of profitability

Common mistakes made by companies when assigning costs to segments include (check all that apply): - arbitrarily allocating common fixed costs - inappropriately allocating variable costs - inappropriately assigning traceable fixed costs - omitting costs that should be included

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

GAAP and IFRS rules: (check all that apply) - require segmented financial data be included in annual reports. - create incentives for companies to use the contribution margin format in segment reporting. - require that the same method be used for both internal and external segment reporting.

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

Which of the following costs make up the manufacturing cost per unit of a product under variable costing? - Variable manufacturing overhead - Direct materials - Fixed selling and administrative - Direct labor - Variable selling and administrative - Fixed manufacturing overhead

-Direct Materials -Direct Labor -Variable Manufacturing Overhead

Select all costs that are included in product costs under absorption costing.

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

When should a segment be discontinued?

-when the segment contribution margin doesn't cover the traceable fixed costs -when the segment margin is negative

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

1. Sales 2. Total Cost of Goods Sold 3. Gross Margin 4. Total selling and administrative costs 5. Net operating income

T/F: When calculating the segment margin, both traceable and common fixed costs are charged to the segment.

False

When using absorption costing, which of the following equations is use to compute the amount of fixed manufacturing overhead in unit product costs?

Fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead / units produced

To support the TOC approach, which of the following must be done to the variable costing income statement?

Report direct labor costs as part of fixed manufacturing overhead.

What occurs when a cost that is directly traceable to Segment A is incorrectly allocated over several segments?

Segment A's costs will be understated.

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? (check all that apply) - Absorption costing - Variable costing - Statement costing - Fixed costing

absorption costing variable costing

Selling and administrative expenses:

are always treated as period costs

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

exactly the same under both absorption costing and variable costing

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

inventory

Segmented income statements:

may be prepared for activities at many levels in a company

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

variable

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

variable note: This is also true for absorption costing which is widely used for external reporting.

What is a traceable fixed cost?

A fixed cost that is incurred because of the existence of the segment

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

Match the costing methods with the appropriate income statement format used by each.

Absorption costing ~ Traditional format Variable costing ~ Contribution margin format

Contrast the way fixed manufacturing overhead costs are treated in absorption costing versus variable costing.

Absorption costing: Fixed manufacturing overhead is treated as part of the per UNIT product cost and expensed as units are sold. Variable costing: Fixed manufacturing overhead is treated as a PERIOD cost and expensed in full each period.

Which of the following are advantages of using variable costing and the contribution approach for internal decision making? (Check all that apply.) a) It is easy to explain changes in net income. b) It enables CVP analysis. c) It supports decision making. d) It is required to be presented as part of GAAP financial statements.

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

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

absorption

Differences between variable and absorption costing net income exist because under absorption costing some ____ manufacturing overhead cost is capitalized in inventory rather than expensed.

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

When a segment cannot cover its own costs on a properly constructed segmented income statement, then that segment:

should probably be dropped.