Managerial Accounting Chapter 6

Fixed manufacturing overhead costs are included as part of Work in Process inventory under ______. -absorption costing only -variable costing only -both variable and absorption costing -neither variable and absorption costing

absorption costing only

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

absorption, variable

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

absorption, variable

An otherwise profitable segment may appear to be unprofitable if ___ fixed costs are allocated to it.

common

Variable costing income statements are based upon a ______ format. -traditional -contribution -product vs. period costs

contribution

The difference between reported net income on variable costing and absorption costing income statements is based on how ______. -the statements are formated -cost classifications are defined -fixed overhead is accounted for -expenses are organized

fixed overhead is accounted for

Absorption costing treats fixed manufacturing overhead as a ______ cost. -period -product

product

Select all that apply GAAP and IFRS rules ______. -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 -create problems in reconciling internal and external reports

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

Select all that apply Absorption costing is ______. -required by GAAP and IFRS -rarely used -used by most companies for both internal and external reports -the preferred method for internal decision making

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

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

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

variable

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

variable, absorption

U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports. -require -recommend -do not recommend

require

Financial statement users need to be aware of changes in inventory levels when using ____ costing

absorption

Select all that apply Incorrectly or arbitrarily assigning common costs to segments ______. -distorts the profitability of segments -causes company net income to be reported incorrectly -could reduce the overall profits of the company -ensures all common costs will be covered -holds managers responsible for costs they cannot control

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

When using variable costing, fixed manufacturing overhead is ______. -expensed in the period incurred -never expensed -assigned to units of the product and expensed as the units are sold

expensed in the period incurred

Assigning common fixed costs to segments impacts ______. -neither segment margin nor total corporate profit -segment margin only -total corporate profit only -both segment margin and total corporate profit

segment margin only

Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ______ in total as the number of units produced increases. -increase -remain the same -decrease

increase

Decision-making problems that could occur when using absorption costing include inappropriate ______ decisions, and decisions made to ______ products that are, in fact, profitable. -reporting; add -production; focus upon -strategy; produce -pricing; drop

pricing; drop

Costs that can be traced directly to a segment ______. -should be allocated to all segments -may be treated as common costs -should not be allocated to other segments

should not be allocated to other segments

The difference in net operating income between absorption costing and variable costing is due to the ______. -format of the income statements -time when fixed overhead is expensed -amount of selling and administrative cost expensed -amount of sales revenue reported

time when fixed overhead is expensed

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

traceable

Select all that apply Using variable costing and the contribution approach for internal decision making ______. -enables CVP analysis -supports decision making -is required as part of GAAP financial statements -facilitates explaining changes in net income

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

Absorption and variable costing net income are usually different due to the accounting for ______. -fixed manufacturing overhead -all product costs -all manufacturing overhead -variable manufacturing overhead -selling and administrative costs

fixed manufacturing overhead

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

Why is CVP analysis more difficult when using absorption costing than when using variable costing? -Selling and administrative costs are ignored when performing CVP analysis. -CVP analysis requires costs to be broken down between variable and fixed which is not done in absorption costing. -Fixed manufacturing overhead is ignored when performing CVP analysis. -CVP analysis requires costs to be broken down into product and period costs, which is not done in absorption costing.

CVP analysis requires costs to be broken down between variable and fixed which is not done in absorption costing.

True or false: Absorption costing and variable costing always result in the same net operating income each year.

False

Select all that apply Discontinuing a profitable segment results in ______. -a reduction in the overall profits of the company -the loss of the segment's revenues -reduced common fixed costs for the company

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

Because nonmanufacturing costs are not included as costs of a product, the use of ____ costing can lead to the omission of segment costs.

absorption

Under absorption costing product costs consist of ______. -both variable and fixed manufacturing costs -all manufacturing and selling and administrative costs -only variable manufacturing costs -only fixed manufacturing costs

both variable and fixed manufacturing costs

Select all that apply When preparing a segment margin income statement ______. -cost of goods sold consists of only variable manufacturing costs -common fixed expenses are excluded from the statement -traceable fixed expenses are deducted from contribution margin -fixed manufacturing costs are included in cost of goods sold

cost of goods sold consists of only variable manufacturing costs traceable fixed expenses are deducted from contribution margin

A traceable fixed cost ______. -varies with the activity level in a particular segment -is incurred because of the existence of the segment -supports the operations of more than one segment -will continue if the segment is discontinued

is incurred because of the existence of the segment

Segment break-even calculations include ______ fixed expenses. -only traceable -both traceable and common -only common

only traceable

Select all that apply When calculating the profit impact of discontinuing a segment, consider _____. -the segment's contribution margin -the segment's traceable fixed costs -common costs allocated to the segment

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

Select all that apply When a segment is eliminated, a ______. -common fixed cost will disappear -traceable fixed cost will disappear -common fixed cost will remain unchanged -traceable fixed cost will remain unchanged

traceable fixed cost will disappear common fixed cost will remain unchanged

Select all that apply Using absorption costing for segmented income statements can lead to ______. -the need to maintain two costing systems -under-costing of segments -omission of upstream and downstream costs -inconsistencies between internal and external reports

under-costing of segments omission of upstream and downstream costs

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 online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by ______. -$9,000 -$6,000 -$11,000 -$5,000

$11,000 ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 = $11,000

JPL Company has two segments - Retail and Commercial. The Retail segment has a contribution margin ratio of 40% and traceable fixed expenses of $70,000. Commercial has traceable fixed expenses of $50,000 and a contribution margin ratio of 55%. The company also has $30,000 of common fixed expenses. The break-even point in dollar sales for the Retail segment equals ______. -$175,000 -$116,667 -$250,000 -$212,500

$175,000 ($70,000 ÷ 40% = $175,000)

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. -$47 -$70.75 -$58 -$81.75

$47 ($22 + $18 + $7 = $47.)

Which of the following is NOT a common mistake made in preparing segmented income statements? -Using inappropriate allocations bases. -Omitting costs that should be included. -Computing contribution margin instead of gross margin. -Arbitrarily dividing common costs among segments.

Computing contribution margin instead of gross margin.

True or false: A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

True

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

True

In order to comply with GAAP and IFRS, the ______ costing method must be used for external reporting in the United States. -absorption -segmented -variable

absorption

Net income computed under ______ costing may not agree with the results of CVP analysis. -absorption -direct -variable -marginal

absorption

For external reporting, income statements are generally prepared using ____ costing, while ____ costing is used for internal decision making purposes.

absorption, variable

Select all that apply Common mistakes made by companies when assigning costs to segments include ______. -arbitrarily allocating common fixed costs -inappropriately allocating variable costs -inappropriately assigning traceable fixed costs -omitting costs that should be included

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

One mistake companies make when preparing segmented income statements is arbitrarily assigning ____ fixed costs to segments.

common

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 -direct labor cost -variable manufacturing overhead -fixed selling and administrative expense

fixed manufacturing overhead

Under variable costing the cost of a unit of inventory does not contain ______. -direct labor -fixed manufacturing overhead -variable manufacturing overhead -direct materials

fixed manufacturing overhead

Select all that apply Product costs under absorption costing include ______. -fixed selling and administrative -fixed manufacturing overhead -direct labor -direct materials -variable selling and administrative -variable manufacturing overhead

fixed manufacturing overhead direct labor direct materials variable manufacturing overhead

Segmented income statements ______. -may be prepared for activities at many levels in a company -may be prepared for the various departments in the company, but not for specific product lines -are best used to determine which locations are profitable, rather than which product lines are profitable -should only be used for profit centers

may be prepared for activities at many levels in a company

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

period

Arbot Co. manufactures appliances at three manufacturing facilities in the United States. Each location has a plant manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for each product manufactured in the plant. The salary of each plant manager is a ______ for the individual product lines made in the plant. -traceable fixed cost to the plant and a common fixed cost -common fixed cost for the plant and a traceable fixed cost -common fixed cost for both the plant and -traceable fixed cost for both the plant and

traceable fixed cost to the plant and a common fixed cost