Managerial Accounting Test 2
a traceable fixed cost
is incurred because of the existence of the segment
If a segment is entirely eliminated, common fixed costs will
not change
A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company:
has an overall net operating loss of $10,000 Reason: If all three segments are at the break-even point, common fixed expenses have not been covered.
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 an explaining changes in operating income, financial statement users need to be aware of changes in
inventory
One mistake companies make when preparing segmented income statements is arbitrarily assigning ______ fixed costs to segments
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)
common fixed cost
Variable costing income statements are based upon a ________ format.
contribution margin
The difference between reported net income on variable costing and absorption costing income statements is based on how:
fixed overhead is accounted for
A segment should be discontinued when the segment:
has a contribution margin that cannot cover traceable fixed costs; cannot cover its own costs
Two general costing approaches used by manufacturing companies to prepare income statements are _____ costing and _____ costing
variable; absorption
Discontinuing a profitable segment results in:
a reduction in the overall profits of the company The loss of the segment's revenues
Advocates of _____ costing believe fixed costs are an essential part of product production.
absorption
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 non manufacturing costs are not included as costs of a product
absorption
SPS Products has two divisions-Catalog Sales and Online Sales. For the last quarter the Catalog Sales segement margin was ($5000). Online sales were 100,00. Online Sales contribution margin was 60,000 and its segment margin was $40,000. If Cataog Sales are discontinued, it is estimated that online sales will increase by 10%. Calculate the expected profit impact of Discontinuing Catalog Sales.
$11,000 (New online sales contribution margin is 100,000 x 10% x 60,000/100,000) = $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:
$70,000 / 40% = $175,000.
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:
11000
Product Cost Formula =
Direct Labor + Direct Material + Factory Overheads
An absorption costing income statement calculates:
Gross margin by deducting cost of goods sold from sales
Incorrectly or arbitrarily assigning common costs to segments:
Holds managers responsible for costs they cannot control; could reduce the overall profits of the company, distorts the profitability of segments
Using absorption costing for segmented income statements can lead to: Multiple select question. omission of upstream and downstream costs inconsistencies between internal and external reports under-costing of segments the need to maintain two costing systems
Omission of upsteam and downstream costs; under-costing of segments
Cost of goods sold
Product cost * Sold product
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 _____ fixed cost for the store, and a _____ fixed cost for each product line sold in the store
Traceable; common
Fixed manufacturing overhead costs are included as part of Work in Process inventory under:
absorption costing only
Costs are categorized by function when using costing _______ and by behavior when using ______ costing
absorption; variable
For external reporting, income statements are generally prepared using _____ costing, and _____ costing is used for internal decision making purposes
absorption; variable
Costs are categorized by function when using ______ costing and by behavior when using ___ costing
absorption; variable/contribution
Under absorption costing product costs consist of:
both variable and fixed manufacturing costs
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
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.
common
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
An example of a traceable fixed cost for General Motors' Corvette Division is the:
depreciation cost on the equipment used to manufacture the Corvettes
Product costs under absorption costings are
direct materials, variable manufacturing overhead, direct labor
Segment break-even calculations include:
only traceable fixed expenses
segment break-even calculations include
only traceable fixed expenses
Variable costing treats ______ manufacturing costs as product costs.
only variable
Variable costing treats fixed manufacturing overhead as a _____ cost
period
When a segment cannot cover its own costs, that segment should:
probably be dropped
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
Absorption costing treats fixed manufacturing overhead as a ____ cost
product
The variable costing income statement separates
product and period costs
The segment margin is a valuable tool for assessing the long-run ______ of a segment.
profitability
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
contribution margin income statement
sales -variable expenses contribution margin -fixed expenses net operating income
Costs that can be traced directly to a segment:
should not be allocated to other segments
costs that can be traced directly to a segment should be charge directly to that segment
should not be allocated to other segments
The segment margin equals the segment's contribution margin less the segment's _______ 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:
traceable fixed cost to the plant and a common fixed cost for the individual product lines made in the plant
The segment margin is obtained by deducting the ______ fixed costs of a segment from the segment's ______.
traceable; contribution margin
When using absorption costing, fixed manufacturing overhead cost per unit = total fixed manufacturing overhead divided by
units produced
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
The number of units produced does not affect net operating income when using _____ costing
variable
direct costing or marginal costing are other terms for _____ costing
variable
Costs are separated between variable and fixed expenses when using ____ costing, whereas ___ costing separates costs between product and period
variable; absorption
Allocating ________ fixed costs to a segment may cause an otherwise profitable segment to appear unprofitable.
common
The general guideline is to treat as traceable only those costs that would _______ over time if the segment was discontinued.
disappear
Variable costing income statements separate ____ expenses from ____ expenses
variable; fixed
Using variable costing and the contribution approach for internal decision making
facilitates explaining changes in net income, supports decision making, enables CVP analysis
Absorption and variable costing net income are usually different due to the accounting for:
fixed manufacturing overhead
Product costs under absorption costing are
fixed manufacturing overhead, direct materials, variable manufacturing overhead
An absorption costing income statement calculates
gross margin by deducting cost of goods sold from sales
The company-wide break-even sales will always be ______ the sum of the segment break-even sales
higher