Chapter 19

(absorption, variable) costing is acceptable for external reporting under U.S. GAAP.

Absorption

RST Company produces a product that has a variable cost of $6 per unit. The company's fixed costs are $30,000. The product sells for $10 per unit. RST desires to earn a profit of $20,000. The contribution margin ratio is %.

Contribution Margin = Selling price - Variable cost Contribution margin = $10 - $6 = $4 Contribution margin ratio = (Contribution margin / Selling price) *100 Contribution margin ratio = ($4 / $10) * 100 Contribution margin ratio = 40%

An income statement which shows the excess of sales over variable costs is referred to as a income statement.

Contribution Margin Income statement

Cost information from (neither, both) costing method(s) is helpful to management in setting prices.

both

Differences in income between variable costing and absorption costing is due to

timing

Commonwealth Company has the following unit costs: direct materials $2, direct labor $4, variable overhead $1, fixed overhead $3. Under the absorption costing method, what is the total unit cost?

$10 Reason: $2 + $4 + $1 + $3.

Which costing method can be helpful to management in setting prices because it reflects full costs that sales must exceed for the company to be profitable?

Absorption costing

Makum Company is using variable costing. Which of the items below would you see on Makum's income statement?

net income contribution margin variable expenses

The costing system which is considered acceptable for external reporting under U.S. GAAP is

absorption costing

Makum Company is using a traditional (absorption) costing system. Which of the items below would you see on Makum's income statement?

net income gross margin cost of goods sold

If management incentives are tied to income under absorption costing, which of the following may occur:

possible inventory obsolescence

Contribution margin is the excess of

sales - variable costs.

A contribution margin income statement shows:

sales-variable costs

The variable costing method includes all of the following costs (select all that apply):

variable overhead direct labor direct materials

Hamilton Company has decided to use variable costing and has identified the following costs: direct materials $5, direct labor $10, variable overhead $3, fixed overhead $2. What is Hamilton Company's total unit cost?

Reason: $5 + $10 + $3. $18

When units produced equals units sold, income under absorption costing will be (>,<,=) net income under variable costing.

equal =

When units produced are less than units sold, net income computed under variable costing will be (greater, less) than net income computed under absorption.

greater

Brother Company uses variable costing. Their direct materials are $8, direct labor is $6 and total overhead is $5 of which $3 is variable. What is Brother Company's total unit cost?

$17 Reason: $8 + $6 + $3.

A company has sales of $125,000, variable costs of $45,000 and fixed costs of $30,000. The contribution margin ratio is %

Sales - Variable expense = Contribution margin Contribution margin / sales = contribution margin ratio .64%

When units produced are greater than units sold under variable costing, fixed overhead is an expense and results in (lower, higher) net income than under absorption costing.

: lower

A format income statement reports variable costs separately from fixed costs.

contribution

An income statement which separately reports variable costs from fixed costs is known as a(n)

contribution format

Sales minus variable costs is called .

contribution margin

Under absorption costing, fixed overhead is allocated to products sold, so when production is greater than units sold, net income will be (greater, less) than income calculated under variable costing.

greater

If management incentives are tied to income under absorption costing, which of the following may occur

increased storage costs. increased financing costs possible obsolescence

Managers should accept special orders if the special-order price

is greater than variable cost

When units produced are greater than units sold, variable costing net income will be (less, greater) than net income calculated under absorption costing.

less

Over the _ run, selling prices must cover both fixed and variable costs.

long

Service firms should focus on _____ costs in managerial decisions.

variable Reason: Service firms should focus on variable costs.

The percent by which a product's unit selling price exceeds its total unit variable cost is the:

contribution margin ratio.

Regardless of whether variable costing or absorption costing is used, if quantity produced differs from quantity sold, income will be

different

Makum Company is using variable costing. Which of the items below would you see on Makum's income statement?

contribution margin variable expenses net income

Regardless of whether variable costing or absorption costing is used, if quantity produced differs from quantity sold, income will be (similar, different, indeterminable).

different

The contribution margin ratio is interpreted as the percent of:

each sales dollar that remains after deducting unit variable cost

When using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to:

ending inventory

When units produced equals units sold, income under variable costing as compared to net income under absorption costing will be

equal to

Production planning is important because producing too much can lead to (excess, insufficient) inventory.

excess

A system of rewarding managers by linking bonuses to income computed under absorption costing may result in:

excess inventory buildup

Loudon Company has the following unit costs: direct materials $6, direct labor $3, variable overhead $2, fixed overhead $1. Under absorption costing, total unit cost is:

$12 All costs are included in absorption costing

True or false: When units produced are less than units sold, net income under absorption costing will be less than net income computed under variable costing.

True Reason: Net income under absorption costing will be less than net income under variable costing when units produced are less than units sold.

Under the (absorption,variable) costing method only variable costs are assigned to products.

variable

Since service firms do not produce inventory, they should focus primarily on

variable costs.