Managerial Accounting 226 Chapter 6

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 [$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 ($70,000 ÷ 40% = $175,000)

Put'er There manufactures baseball gloves that require $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per glove 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

$47.00 ($22+$18+$7)

Frames, Inc. picture frames each require $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame and variable selling and administrative expense is $13 per frame sold. Total fixed manufacturing overhead cost per month is $15,000 and the company produces 5,000 frames each month. The unit product cost of each frame using variable costing is $___________.

$68

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

?

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.

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.

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

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

absorption

Costs are categorized by function when using ________ costing and by behavior when using _____________ costing.

absorption variable

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

absorption costing only

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

absorption or full

Financial statement users need to be aware of changes in inventory levels when using _________ costing.

absorption or full

The two general costing approaches used by manufacturing companies to prepare income statements are ________ costing and ___________ costing

absorption or full variable , marginal, or direct

Fixed manufacturing overhead costs are expensed as units sold as part of cost of goods sold under ____________ costing, and expensed in full with period costs under ___________ costing.

absorption or full variable, direct, or marginal

When a segment is eliminated, a

common fixed cost will remain unchanged traceable fixed cost will disappear

One mistake companies make when preparing segmented income statements is arbitrarily assigning _________ fixed costs to segments

common, nontraceable, or untraceable

Variable costing income statements are based upon a ______ format.

contribution

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

deferred in the inventory account on the balance sheet

Using variable costing and the contribution approach for internal decision making

facilitates explaining changes in net income supports decision making enables CVP analysis

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

false

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

fixed manufacturing overhead

Incorrectly or arbitrarily assigning common costs to segments:

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

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

increase

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

Using absorption costing for segmented income statements can lead to

omission of upstream and downstream costs under-costing of segments

Segment break-even calculations include _______ fixed expenses.

only traceable

Variable costing treats ________ manufacturing costs as product costs.

only variable

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

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. Multiple choice question.

require

GAAP and IFRS rules for publicly traded companies

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

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

When calculating the profit impact of discontinuing a segment, consider

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

The difference in net operating income between absorption costing and variable costing is due to the

time when fixed overhead is expensed

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 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 ______ for the individual product lines made in the plant.

traceable fixed cost to the plant and a common fixed cost

When preparing a segment margin income statement

traceable fixed expenses are deducted from contribution margin cost of goods sold consists of only variable manufacturing 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 sold in.

traceable, traced, or direct common

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

true

Absorption costing is

used by most companies for both internal and external reports required by GAAP and IFRS

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

variable

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

variable, absorption

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

variable, direct, or marginal

he number of units produced does not affect net operating income when using __________ costing.

variable, direct, or marginal