A202 Chapter 4 SB

A variable costing income statement:

- calculates contribution margin while the absorption costing income statement calculates gross margin - focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs

When the number of units produced equals the number of units sold:

- 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 using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead divided by: Multiple choice question.

- units produced

Product costs under absorption costing are: Multiple select question.

-Direct materials -Direct labor -Fixed manufacturing overhead -Variable manufacturing overhead

A traceable fixed cost:

is incurred because of the existence of the segment

Variable costing treats ______ manufacturing costs as product costs.

only variable

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:

- traceable fixed cost to the plant and a common fixed cost for the individual product lines made in the plant

When a segment is eliminated, a:

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

Direct costing or marginal costing are other terms for ______ costing

-variable

Variable costing income statements are based upon a ________ format.

- contribution margin

Net operating income is less under absorption costing than under variable costing when inventory for the period:

- decreases

When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead:

- deferred in the inventory account on the balance sheet

The difference between reported net income on variable costing and absorption costing income statements is based on how:

- fixed overhead is accounted for

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

-absorption -variable

For external reporting, income statements are generally prepared using absorption _______ costing, and ______ costing is used for internal decision making purposes

-absorption -variable

Absorption and variable costing net income are usually different due to the accounting for:

-fixed manufacturing overhead

Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit; Direct labor: $75/unit; Variable manufacturing overhead: $27/unit; Fixed manufacturing overhead: $30,000; Units produced: 10,000; Units sold: 6,000.

Reason: $50 + $75 + $27 + ($30,000 ÷ 10,000) = $155 per unit

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

the same under both absorption costing and variable costing

Cost, profit and investment centers are segments, but sales territories, manufacturing plants, and service departments are not segments. True false question.

False

If a segment is entirely eliminated, common fixed costs will:

-no change

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 Multiple choice question.

$119 Reason: $45 + $37 + $8 + ($58,000/2,000) = $119

Segment contribution margin equals segment revenue minus the ______ expenses for the segment

variable

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:

- $6,472.14 - Reason: $5.38 x 1,203 = $6,472.14

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:

- $11,000 - Reason: 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.

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

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 (72,490 + (22 X 314))

Blissful Breeze manufactures and sells ceiling fans. Each fan has a unit product cost of $112 and a unit selling price of $190. If Blissful Breeze produces 900 fans and sells 842 fans this month, the total cost of goods sold will be

- 94,302 (Unit product cost X sold goods)

Absorption costing and variable costing always result in the same net operating income each year.

- False - Reason: Absorption costing and variable costing will only produce the same amount of net operating income when the number of units produced is equal to the number of units sold.

An absorption costing income statement calculates:

- gross margin by deducting cost of goods sold from sales

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

- higher than

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:

- $47

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

- Variable cost Fixed MOH + Fixed S&A expense

Under absorption costing product costs consist of:

- both variable and fixed manufacturing costs

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

- period

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

- segment

Absorption costing and variable costing net operating income will be equal when:

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

The Quaint Quilt produces and sells handmade quilts. Variable manufacturing costs total $140 per quilt. Fixed manufacturing overhead totals $68,250 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. The total variable cost reported on Quaint Quilt's variable costing income statement is:

-$124,020 (140 + 19) X 780

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

-absorption - Reason: When inventory increases, some fixed manufacturing costs that are expensed under variable costing go to inventory under absorption costing, giving absorption costing a higher net income.

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 - Reason: $70,000/40% = $175,000

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

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