ACCT 201B Chapter 7

When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

is greater than

What does the sum of the segment break-even points equal?

Total sales

When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

Is equal to

Max, Incorporated, has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000, respectively. What is the segment margin for the South Division?

200,000

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

is less than

Assigning common fixed costs to segments impacts Blank______

segment margin only

Segment break-even calculations include Blank______ fixed expenses.

only traceable

Costs that can be traced directly to a segment Blank______

should not be allocated to other segments

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 Blank______ for the individual product lines made in the plant.

traceable fixed cost to the plant and a common fixed cost

When preparing a segment margin income statement

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

The segment margin is obtained by deducting the Blank______ fixed costs of a segment from the segment's Blank______.

traceable; contribution margin

Using absorption costing for segmented income statements can lead to: Multiple select question. the need to maintain two costing systems. under-costing of segments. inconsistencies between internal and external reports. omission of upstream and downstream costs.

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

The company-wide break-even sales will always be Blank______ the sum of the segment break-even sales.

Higher than

A traceable fixed cost is tied to what?

A segment. Without a segment there is no traceable fixed costs

Dollar sales for Segment break-even

Segment traceable fixed expenses/ Segment CM ratio

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

Absorption

Unit product cost under variable costing

DM + DL + VMOH

Dollar sales of Company-wide break-even

Company fixed costs/ Company contribution margin

Variable costing income statements are based upon a ______ format.

Contribution margin

Beginning inventory 0 Units produced 500 Units sold 400 Ending inventory 100 Excerpt from Wallis Corporation Per Unit Per Month Selling price $ 100 Direct materials 30 Direct labor 20 Variable manufacturing overhead 10 Variable selling and administrative expenses 7 Fixed manufacturing overhead $ 10,000 Fixed selling and administrative expenses 3,000 What is the company's contribution margin for January?

13,200

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________.

Variable and fixed cost distinctions

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 Blank______.

175k

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

Computing contribution margin instead of gross margin.

How does absorption costing differ from variable costing?

Fixed manufacturing overhead cost is treated as a period cost and is an expense on the income statement. Cost of unit in inventory or in cost of goods sold does not include fix manufacturing overhead.

Why do the Net Operating Income differ in Absorption and variable costing?

In adsorption costing, the fixed manufacturing overhead is include in product cost rather than expensed on income statement. So, if units are not sold, the FMOH costs are carried into the inventory account and deferred to future period.

What is the effect on Net Income considering Variable costing and Absorption costing? Units produced = Units sold

No change in inventory Absorption costing net operating income = Variable costing net operating income Current period FMOH flows to income statement under both methods

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

Reason: Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 saved from stopping catalog sales = $11,000.

U.S. GAAP and IFRS Blank______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

Require

Absorption Costing Income Statement

Sales Revenue -cost of goods sold (DM+DL+VMOH+FMOH) =Gross Margin -Selling and admin expenses (variable and fixed selling and admin expenses) =Net Operating Income

Variable Costing Contribution Format Income Statement

Sales revenue - Variable production expenses (DM,DL,VMOH) - Variable selling and administration expenses = Contribution margin - Fixed manufacturing overhead - Fixed selling and administrative expenses = Net Operating Income

Select all that apply A variable costing income statement Blank______. Multiple select question. does not include fixed manufacturing overhead, which is included on an absorption costing income statement focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs is constructed exactly like an absorption 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 cost calculates contribution margin while the absorption costing income statement calculates gross margin

Common mistakes made by companies when assigning costs to segments include Blank______. Multiple select question. omitting costs that should be included inappropriately allocating variable costs arbitrarily allocating common fixed costs inappropriately assigning traceable fixed costs

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

Discontinuing a profitable segment results in Blank______. Multiple select question. the loss of the segment's revenues 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/

calculates contribution margin while the absorption costing income statement calculates gross margin

Increase. When fixed costs are put on a per unit basis, it appears that the total cost will increase as the number of units increase.

Excerpt from Areojet Corporation records for month of February: Per Unit Per Month Selling price $ 200,000 Direct materials used in production 40,000 Direct labor 10,000 Variable manufacturing overhead 2,000 Fixed manufacturing overhead $ 140,000 Variable selling and administrative expenses 20,000 Fixed selling and administrative expenses 40,000 Assuming the variable costing method is used, what is the total manufacturing costs added to work in process during the month of February?

52,000

Excerpt from Areojet Corporation records for month of February: Per Unit Per Month Selling price $ 200,000 Direct materials used in production 40,000 Direct labor 10,000 Variable manufacturing overhead 2,000 Fixed manufacturing overhead $ 120,000 Variable selling and administrative expenses 20,000 Fixed selling and administrative expenses 40,000 February Beginning Inventory 0 Units Produced 3 Units Sold 3 Ending inventory 0 Assuming the absorption costing method is used, what is the total manufacturing costs per unit added to work in process during the month of February?

92,000

What is the effect on Net Income considering Variable costing and Absorption costing? Units produced < Units sold

Inventory decreases Absorption costing net operating income < variable costing net operating income Deferred FMOH from prior period is released to current period's income statement

What is the effect on Net Income considering Variable costing and Absorption costing? Units produced > Units sold

Inventory increases Absorption costing net operating income > Variable costing net operating income Under Absorption, some of the FMOH goes to ending inventory in balance sheet

When calculating the profit impact of discontinuing a segment, consider Blank______.

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

Incorrectly or arbitrarily assigning common costs to segments: Multiple select question. 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.

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________.

fixed overhead costs

A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company Blank______

has an overall net operating loss of $10,000

Common mistakes in segmented income statements

1. Omission of costs 2. Inappropriate methods in assigning traceable costs among segments 3. Assigning common costs to segments

Beginning inventory 0 Units produced 500 Units sold 400 Ending inventory 100 Excerpt from Wallis Corporation Per Unit Per Month Selling price $ 100 Direct materials 30 Direct labor 20 Variable manufacturing overhead 10 Variable selling and administrative expenses 7 Fixed manufacturing overhead $ 10,000 Fixed selling and administrative expenses 3,000 What is the cost of goods sold for the month of January using the absorption costing method?

32,000

Why is the sum of segment break-even less than the company-wide break-even?

The company-wide has to cover the common fixed expenses

What are the advantages of Variable Costing Contribution method?

Uses contribution method- cost are divided into variable and fixed..which is easier to use for CVP analysis Explain the changes in Net operating income Sales increase, Net operating income increases Sales decrease, Net operating income decreases Total of Fixed costs is separated, which highlights how much to cover in order to profit

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________.

less than absorption costing net operating income

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. Assuming the traceable fixed costs of the television division are $300,000, what is the segment margin of the mobile phone division?

400,000