Chapter 6: Variable Costing and Segment Reporting: Tools for Management

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200; its fixed manufacturing overhead is $19,700; and its fixed selling and administrative cost is $9,290. An income statement using variable costing would show ______ as the total fixed costs.

$28,990

Contrast the way fixed manufacturing overhead costs are treated in absorption costing versus variable costing.

Absorption costing - Fixed manufacturing overhead is treated as part of the per unit product cost and expensed as units are sold Variable costing - Fixed manufacturing overhead is treated as a period cost and expensed in full each period.

Match the costing method with the way costs are separated for the method.

Absorption costing - Manufacturing and selling and administrative Variable costing - Variable and fixed

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

True

When should a segment be discontinued? (Check all that apply.) a) When the segment margin is positive, but doesn't cover the common fixed costs b) When the segment contribution margin covers the traceable fixed costs, but doesn't cover the common fixed costs c) When the segment contribution margin doesn't cover the traceable fixed costs d) When the segment margin is negative

c) When the segment contribution margin doesn't cover the traceable fixed costs d) When the segment margin is negative

Decision-making problems that could occur as a result of treating fixed overhead similarly to a variable cost when using absorption costing include inappropriate ______ decisions, and decisions made to _______ products that are, in fact, profitable.

pricing, drop

When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units _______.

produced

Segment contribution margin equals segment revenue minus the _______ expenses for the segment.

variable

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

variable

Which of the following statements are true? (Check all that apply.) a) The variable costing income statement shows the contribution margin, but the absorption costing income statement shows gross margin. b) The variable costing income statement does not include fixed manufacturing overhead, but the absorption costing income statement does. c) A variable costing income statement focuses on fixed and variable costs; an absorption costing income statement focuses on period and product costs. d) The variable costing income statement is constructed in the exact same manner as the absorption costing income statement.

a) The variable costing income statement shows the contribution margin, but the absorption costing income statement shows gross margin. c) A variable costing income statement focuses on fixed and variable costs; an absorption costing income statement focuses on period and product costs.

Using absorption costing for segmented income statements can lead to: a) the need to maintain two costing systems. b) inconsistencies between internal and external reports. c) omission of upstream and downstream costs. d) undercosting of segments.

c) omission of upstream and downstream costs. d) undercosting of segments.

Variable costing net income may be computed by multiplying the number of units sold by the _______ ________ per unit and subtracting total ______ costs.

contribution margin, fixed

Common mistakes made by companies when assigning costs to segments include: a) inappropriately allocating variable costs b) omitting costs that should be included c) inappropriately assigning traceable fixed costs d) arbitrarily allocating common fixed costs

b) omitting costs that should be included c) inappropriately assigning traceable fixed costs d) arbitrarily allocating common fixed costs

A company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories. The term used to describe these divisions is _______.

segment

Which of the following are advantages of using variable costing and the contribution approach for internal decision making? (Check all that apply.) a) It is easy to explain changes in net income. b) It enables CVP analysis. c) It supports decision making. d) It is required to be presented as part of GAAP financial statements.

a) It is easy to explain changes in net income. b) It enables CVP analysis. c) It supports decision making.

Costs should be allocated to segments for internal decision-making purposes: a) even when the cost is non-traceable, so that all costs will be considered in the decisions b) only when the allocation base actually drives the cost being allocated c) equally over all segments d) even if the allocation base does not actually drive the cost

b) only when the allocation base actually drives the cost being allocated

GAAP and IFRS rules (Check all that apply): a) create incentives for companies to use the contribution margin format in segment reporting. b) require segmented financial data be included in annual reports. c) require that the same method be used for both internal and external segment reporting.

b) require segmented financial data be included in annual reports. c) require that the same method be used for both internal and external segment reporting.

Selling and administrative expenses: a) are treated as period costs under variable costing only b) are treated as period costs under absorption costing only c) are always treated as period costs d) may be treated as either product or period costs

c) are always treated as period costs

Net operating income is lower under absorption costing (than under variable costing) when inventory decreases because _______ manufacturing overhead deferred in previous periods is released from inventory to the ________ statement in the cost of goods sold account.

fixed, income

The two general costing approaches used by manufacturing companies to value inventory and cost of goods sold are _________ costing and _________ costing. (Enter only one word per blank.)

variable, absorption

Discontinuing a profitable segment results in: (Check all that apply.) a) a reduction in the overall profits of the company. b) reduced common fixed costs for the company. c) the loss of the segment's revenues.

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

Advocates of variable costing: (Check all that apply.) a) argue that fixed costs are not caused by and cannot be meaningfully traced to any specific unit that is produced. b) believe that fixed manufacturing overhead is a period cost. c) believe that all manufacturing costs must be assigned to products. d) believe that fixed manufacturing overhead is best ignored.

a) argue that fixed costs are not caused by and cannot be meaningfully traced to any specific unit that is produced. b) believe that fixed manufacturing overhead is a period cost.

Absorption costing and variable costing net operating income will be: (Check all that apply.) a) equal when there is no beginning and no ending inventory. b) different when there is no beginning or ending inventory. c) equal when the number of units produced equals the number of units sold. d) equal when there is a change in beginning or ending inventory.

a) equal when there is no beginning and no ending inventory. c) equal when the number of units produced equals the number of units sold.

Contribution margin computed using super-variable costing will be ________ than the contribution margin computed using traditional variable costing. a) higher than b) the same as c) lower than

a) higher than

What does the segment margin represent? a) The margin available to cover fixed costs b) The margin available after a segment has covered all of its own costs c) The margin remaining after traceable and common fixed costs have been deducted d) The excess of the segment revenue over the segment cost of goods sold

b) The margin available after a segment has covered all of its own costs

Which of the following is correct regarding segmented reporting? a) Both traceable and common fixed costs are charged to segments in order to calculate the segment margin. b) Traceable fixed costs are charged to segments, but common fixed costs are not. c) Common fixed costs are charged to segments, but traceable fixed costs are not. d) Fixed costs are not charged to segments because only variable costs are used to calculate the segment margin.

b) Traceable fixed costs are charged to segments, but common fixed costs are not.

When inventory increases, the higher net operating income that results from using absorption costing (rather than variable costing) occurs due to the fixed manufacturing overhead: a) released to the cost of goods sold account on the income statement b) deferred in the inventory account on the balance sheet

b) deferred in the inventory account on the balance sheet

When using variable costing: a) fixed manufacturing overhead is never expensed b) total fixed manufacturing overhead is expensed in the period incurred c) fixed manufacturing overhead is assigned to units of the product and expensed as the units are sold

b) total fixed manufacturing overhead is expensed in the period incurred

Which of the following statements is correct regarding the usefulness of the segmented income statement for segment reporting? a) Segmented income statements allocate common fixed costs among the various segments in order to ensure that these costs are covered. b) Segmented income statements are less detailed, thus more useful to management than absorption costing income statements. c) Segmented income statements can be broken down by department and further broken down by product lines within each department.

c) Segmented income statements can be broken down by department and further broken down by product lines within each department.

A(n) _______ fixed cost supports the operations of more than one segment, but is not traceable in whole or part to any one segment. ( Enter only one word per blank.)

common

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%. Calculate the expected profit impact of discontinuing Catalog Sales. a) $5,000 increase b) $6,000 increase c) $9,000 increase d) $11,000 increase

d) $11,000 increase ($100,000 x 10% x $60,000/$100,000) = $6,000 + $5,000 saved from stopping catalog sales = $11,000.

Under absorption costing, fixed manufacturing overhead accumulates in which accounts until units of product are sold? a) Cost of goods sold (on the income statement) b) Fixed manufacturing overhead (on the balance sheet) c) Selling and administrative expenses (on the income statement) d) Inventory (on the balance sheet)

d) Inventory (on the balance sheet)