ACC Ch. 7 SB

Match the costing method with the way costs are categorized. Absorption costing Variable costing Categorized by function Choice, Categorized by behavior Categorized by behavior

Absorption costing - categorized by function Variable costing - categorized by behavior

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

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

absorption

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. (Enter only one word per blank.)

absorption; variable

The difference between reported net income on variable costing and absorption costing income statements is based on how ______.

fixed overhead is accounted for

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

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

Using variable costing and the contribution approach for internal decision making ______.

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

Discontinuing a profitable segment results in ______.

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

When calculating the profit impact of discontinuing a segment, consider _____.

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

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

Absorption costing

Net operating income under absorption costing is generally ______ net operating income under variable costing in periods in which inventory increases.

higher than

Under variable costing the cost of a unit of inventory does not contain ______.

fixed manufacturing overhead

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. 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.

$47 22+18+7=47

Frames, Inc. manufactures large wooden picture frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced, and variable selling and administrative expense is $13 per frame sold. The company produces 5,000 units each month and total fixed manufacturing overhead cost per month is $15,000. The unit product cost of each frame using variable costing is $___. (Enter your answer as a whole number.)

$68 19+40+9=68

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.

Which of the following is NOT a common mistake made in preparing segmented income statements?

Computing contribution margin instead of gross margin.

An otherwise profitable segment may appear to be unprofitable if ___ fixed costs are allocated to it. (Enter only one word per blank.)

common

One mistake companies make when preparing segmented income statements is arbitrarily assigning ___ fixed costs to segments. (Enter only one word per blank.)

common

Variable costing income statements are based upon a ______ format.

contribution margin

Incorrectly or arbitrarily assigning common costs to segments ______.

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

When using variable costing, fixed manufacturing overhead is ______.

expensed in the period incurred

When a segment is eliminated, a ______.

traceable fixed cost will disappear common fixed cost will remain unchanged

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 for the store is a(n) ___ fixed cost for the store, and a(n) ___ fixed cost for each product line sold in the store. (Enter only one word per blank.)

traceable; common

Absorption costing is ______.

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

The number of units produced does not affect net operating income when using ___ costing. (Enter only one word per blank.)

variable

Because nonmanufacturing costs are not included as costs of a product, the use of costing can lead to the omission of segment costs. (Enter only one word per blank.)

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

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

absorption costing only

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.

Costs are categorized by function when using ___ costing and by behavior when using ___ costing. (Enter only one word per blank)

absorption; variable

For external reporting, income statements are generally prepared using ___ costing, while ___ costing is used for internal decision making purposes. (Enter only one word per blank.)

absorption; variable

Common mistakes made by companies when assigning costs to segments include ______.

arbitrarily allocating common fixed costs omitting costs that should be included inappropriately assigning traceable fixed costs

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

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

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

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

Only costs that would disappear over time if a segment disappeared should be treated as ___ fixed costs. (Enter only one word per blank.)

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

Product costs under absorption costing include ______.

variable manufacturing overhead direct labor direct materials fixed manufacturing overhead

The two general costing approaches used by manufacturing companies to prepare income statements are ___ costing and ___ costing. (Enter only one word per blank.)

variable; absorption

GAAP and IFRS rules ______.

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