Chapter 7. Variable Costing and Segment Reporting: Tools for Management
1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income
Place the following line items in order to construct a contribution format income statement.
- under-costing of segments - omission of upstream and downstream costs
Using absorption costing for segmented income statements can lead to _____.
- supports decision making - enables CVP analysis - facilitates explaining changes in net income
Using variable costing and the contribution approach for internal decision making _____.
Variable costing
Variable and fixed - Variable costing deducts all variable expenses from sales to determine contribution margin and all fixed expenses from contribution margin to determine income or loss.
only variable
Variable costing treats _____ manufacturing costs as product costs.
- common fixed cost will remain unchanged - traceable fixed cost will disappear
When a segment is eliminated, a _____.
Absorption costing
When inventory increases, which costing method generally results in higher net income?
- 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.
- are period expenses - are not caused by and cannot be meaningfully traced to specific units of production
Advocates of variable costing believe fixed manufacturing costs _____.
common
A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n) _____ fixed cost.
segment
A part or activity within an organization about which managers would like cost, revenue or profit data is called a(n)
- required by GAAP and IFRS - used by most companies for both internal and external reports
Absorption costing _____.
product
Absorption costing treats fixed manufacturing overhead as _____ cost.
absorption
Advocates of ______ costing believe fixed costs are an essential part of product production.
- pricing - drop
Decision-making problems that could occur when using absorption costing include inappropriate _____ decisions, and decisions made to _____ products that are, in fact, profitable.
timing of when fixed manufacturing overhead is expensed
Differences in net operating income between absorption costing and variable costing is due to the _____.
Unit product cost = $22 + $18 + $7 = $47 Selling and administrative costs are never considered part of product cost.
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 and fixed manufacturing overhead cost is $19,000 in total. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. Last period, 800 gloves were produced, and 585 gloves were sold. The unit product cost using variable costing is _____ per unit.
variable
Segment contribution margin equals segment revenue minus the _____ expenses for the segment.
margin available after a segment has covered all of its own costs
The segment margin represents the _____.
period
Under both variable costing and absorption costing, variable and fixed selling and administrative costs are treated as _____ costs.
- require that the same method be used for both internal and external segment reporting -require segmented financial data be included in annual reports -create problems in reconciling internal and external reports
GAAP and IFRS rules _____.
- under both absorption costing and variable costing, all fixed overhead incurred flows to the income statement. - absorption costing net income is equal to variable costing net income.
When the number of units produced equals the number of units sold, _____.
higher than
When units sold exceed units produced, net income under variable costing will generally be _____ net income under absorption costing.
Computing contribution margin instead of gross margin.
Which of the following is NOT a common mistake made in preparing segmented income statements?
- Both income statements include product and period costs. - Reported net income on the statements often differ.
Which of the following statements are correct regarding income statements prepared under variable and absorption costing?
$155 $50 + $75 + $27 + ($30,000 / 10,000) = $155 per unit
Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit Direct labor: $75/unit Variable manufacturing overhead: $30,000 Units produced: 10,000 Units sold: 6,000
- holds managers responsible for costs they cannot control - distorts the profitability of segments - could reduce the overall profits of the company
Incorrectly or arbitrarily assigning common costs to segments ________.
- variable - absorption
The two general costing approaches used by manufacturing companies to prepare income statements are _____ costing and _____ costing.
$79398 $72,490 + ($22 x $314). Variable selling costs are incurred on units sold, not units produced.
Pearls, Pearls, Pearls! manufactures and sells jewelry. The total variable cost of goods sold this month is $72,490. Variable selling and administrative cost is $22 per unit sold. If 350 units are produced and 314 units are sold this month, the total variable cost reported on the income statement for the month is _____
- fixed manufacturing overhead - direct materials - direct labor - variable manufacturing overhead
Product costs under absorption costing include _____.
$101,000 $42,000 + $59,000 = $101,000
Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal _____.
$20376 849 x $24 = $20,376
The unit product cost of a blender is $24. If 900 blenders are produced and 849 blenders are sold, the total cost of goods sold is $_____
Absorption costing
Manufacturing and selling and administrative - Absorption costing separates product (manufacturing) costs from period (selling and administrative costs).