Chapter 7: Variable Costing and Segment Reporting: Tools for Management

when calculating the profit impact of discontinuing a segment, consider ___.

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

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 of a store is the ___ fixed cost of the store and the ___ fixed cost of each product line in the store.

- traceable - common

when preparing a segment margin income statement:

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

Using absorption costing for segmented income statements can lead to ___.

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

the two general costing approaches used by manufacturing companies to prepare income statements are ___ costing and ___ costing.

- variable - absorption

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

under variable costing the cost of a unit of inventory does not contain ___.

fixed manufacturing overhead cost

the different between reported net income on variable costing and absorption costing income statements is based on how ___.

fixed overhead is accounted for

net operating income under absorption costing is generally ___ net operating income under variable costing in period in which inventory increases.

higher than

absorption costing can lead manager to mistakenly believe that fixed manufacturing overhead costs will ___ in total as the number of units produces increases.

increase

a traceable fixed cost ___.

incurred because of the existence of the segment

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

require

assigning common fixed costs to segments impacts ___.

segment margin only

costs that can be traced directly to a segment ___.

should not be allocated to other segments

the difference between reported net income on variable costing and absorption costing income statements is based on how ___.

fixed overhead is accounted for

absorption and variable costing net income are usually different due to the accounting for ___.

fixed manufacturing overhead

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

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 break even = traceable FC/ segment CM ratio

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. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. The unit product cost using variable costing is ___ per unit.

$47 unit product cost = sum(direct materials, direct labor, variable manufacturing overhead)

Frames, Inc. manufactures large wooden pictures frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced. The unit product cost of each frame using variable costing is $___.

$68

absorption costing is ___.

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

discontinuing a profitable segment results in ___

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

for external reporting, income statements are generally prepared using ___ costing, while ___ costing is used for internal decision making purposes.

- absorption - variable

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 expenses as one large sum.

True

In order to comply with GAAP and IFRS, the ___ costing method must be used for external reporting in the United States.

absorption

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

common

the otherwise profitable segment may appear to be unprofitable if ___ fixed costs are allocated to it.

common

which of the following is not a common mistake made in preparing segmented income statements?

computing contribution margin instead of gross margin

variable costing income statements are based upon a ___ format.

contribution margin

an example of a traceable fixed cost for General Motors' Corvette Division is the ___.

depreciation on equipment used to manufacture Corvettes

segmented income statements ___.

may be prepared for activities at many levels in a company

segment break-even calculations include ___ fixed expenses.

only traceable

Variable costing treats ___ manufacturing costs as product costs.

only variable

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

Only costs that would disappear over time if a segment disappeared should be treated as ___ fixed costs.

traceable

Arbot co. manufactures appliances at three manufacturing facilities in the United Sates. Each location has a plant manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for product manufactures in the plant. The salary of each plant manager is a ___ for the individual product lines made in the plant.

traceable fixed cost to the plant and a common fixed cost

a cost that can be traced directly to a specific segment should be charged directly to the segment and not allocated to other segments.

true

segment contribution margin equal segment revenue minus the ___ expenses for the segment.

variable

the number of units produced does not affect net operating income when using ___ costing.

variable

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

variable, absorption

costs are categorized by function when using ___ costing and by behavior when ___ costing.

- absorption - variable

incorrectly or arbitrarily assigning common costs to segments:

- could reduce the overall profits of the company - holds managers responsible for costs they cannot control - distorts the profitability of segments

product costs under absorption costing include ___.

- fixed manufacturing overhead - direct materials - direct labor - variable manufacturing overhead

variable costing income statement ___.

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

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 for publicly traded companies ___.

- require segmented financial data be included in annual reports - require that the same method be used for both internal and external segment reporting - create problems in reconciling internal and external reports

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

absorption

financial statement uses need to be aware of changed in inventory levels when using ___ costing.

absorption

net income computed under ___ costing may not agree with the results of CVP analysis.

absorption

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

absorption costing

Fixed manufacturing overhead costs are included as part of Work in Process inventory under ___.

absorption costing only