Chapter 4 Accounting Smartbook

Discontinuing a profitable segment results in:

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

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

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

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 preparing a contribution margin income statement:

-Cost of goods sold consists of only variable manufacturing costs -Variable and fixed costs are listed in separate sections of the statement

Incorrectly or arbitrarily common costs to segments:

-Distorts the profitability of segments -Could reduce the overall profits of the company -Holds managers responsible for costs they cannot control

Using variable costing and the contribution approach for internal decision making:

-Enables CVP analysis -Facilitates explaining changes in net income -Supports decision making

Common mistakes made by companies when assigning costs to segments include:

-Inappropriately assigning traceable fixed costs -Arbitrarily allocating common fixed costs -Omitting costs that should be included

Using absorption costing for segmented income statements can lead to:

-Omission of upstream and downstream costs -Under-costing of segments

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

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

GAAP and IFRS rules:

-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

Using variable costing and the contribution approach for internal decision making:

-Supports decision making -Enables CVP analysis -Facilitates explaining changes in net income

When a segment is eliminated, a:

-Traceable fixed cost will disappear -Common fixed cost will remain unchanged

Absorption costing is:

-Used by most companies for both internal and external reports -Required by GAAP and IFRS

Why is CVP analysis more difficult when using absorption costing than when using variable costing?

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

Which of the following is NOT a common mistake made in preparing segmented income statements?

Computing contribution margin instead of gross margin

Which of the following costs are considered variable under super-variable costing?

Direct materials

Under variable costing income statements, product cost would include:

Direct materials and direct labor

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

False

True or False: Super-variable costing treats all manufacturing overhead as a fixed cost.

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

Which of the following are inventoriable costs under super-variable costing?

Variable overhead Direct materials

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

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

absorption

Costs are categorized by function when using _______________________ costing and by behavior when using ________________________ costing.

absorption variable

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

Fixed manufacturing overhead costs are included as part of Work in Progress inventory under:

absorption costing only

Allocating ______________ fixed costs to a segment may cause an otherwise profitable segment to appear unprofitable.

common

one mistake companies make when preparing segmented income statements is arbitrarily assigning _________________ fixed costs to segments

common

Variable costing income statements are based upon a ________________ format.

contribution margin

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

deferred in the inventory account on the balance sheet

An example of a traceable fixed cost for General Motors' Corvette Division is the:

deprecation cost on the equipment used to manufacture the Corvettes

Differences in net operating income between super-variable and variable costing occur because of the treatment of _______________ costs under the two methods.

direct labor

The general guideline is to treat as traceable only those costs that would ____________________ over time if the segment was discontinued.

disappear

When using variable costing, fixed manufacturing overhead is:

expensed in the period incurred

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

fixed manufacturing overhead

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

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

fixed overhead is accounted for

Total fixed costs on a super-variable costing income statement will be _________________ than total fixed costs on a traditional variable costing income statement.

higher than

Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will _________________ as the number of units produced increases.

increase in total

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

inventory

A traceable fixed cost:

is incurred because of the existence of the segment

Segmented income statements:

may be prepared for activities at many levels in a company

Segment break-even calculations include:

only traceable fixed expenses

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

period

Decision-making problems that could occur when using absorption costing include inappropriate _____________________ decisions, and decisions made to _________________ products that are, in fact, profitable.

pricing; drop

Absorption costing treats fixed manufacturing overhead as a _______________ cost.

product

Costs that can be traced directly to a segment:

should not be allocated to other segments

All direct labor and manufacturing overhead is treated as fixed under:

super-variable costing

Differences in net operating income between absorption costing and variable costing is due to the:

timing of when fixed manufacturing overhead is expensed

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

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

The number of units produced does **not** affect net operating income when using _________________ costing.

variable

The two general costing approaches used by manufacturing companies to prepare income statements are ____________________ costing and ______________________ costing.

variable absorption

Costs are separated between variable and fixed expenses when using __________ costing, whereas ___________ costing separates costs between product and period.

variable; absorption