Accounting Test #2

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

Increase

Absorbing costing treats fixed manufacturing overhead as a ___ cost

Product

incorrectly or arbitrarily assigning common costs to segments: (check all that apply) a. holds managers responsible for costs they cannot control b. ensures all common costs will be covered c. reduces overall profits of the company d. distorts the profitability of segments e. causes company net income to be reported incorrectly

A, c, d

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

Absorption costing only ** Variable costing only Both variable and absorption Neither variable or absorption

Match the costing method with the way cost categorized

Absorption costing —> function Variable costing —> behavior

A part or activity within an organization about which managers would like cost, revenue, or profit data is called a(n) ___.

segment

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*** Cost classifications are defined Expenses are organized The statements are formatted

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 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.

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 expense 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)

Discontinuing a profitable segment results in ____

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

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 $_____.

$68 Variable Costing Unit Product Cost=Direct materials + Direct Labor + Variable Manufacturing overhead = $19+$40+$9 = $68

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 ****Require that the same method be used for both internal and external segment reporting Create incentives for companies to use the contribution margin format in segment reporting

Decision-making problems that could occur when using absorption costing include inappropriate ______ decisions

***inappropriate PRICING decisions **dropping profitable products

When calculating the profit impact of discontinuing a segment, consider ___

**the segments traceable fixed costs ** the segments contribution margin

Which of the following statements are correct regarding income statements prepared under variable and absorption costing?

-both include product costs and period costs -variable costing income statements are grounded in the contribution format; they categorize expenses based on cost behavior — variable expenses are reported separately from fixed expenses - Absorption costing income statements, ignore variable, and fixed cost distinctions -they report different net, operating incomes -Absorption costing treats, all manufacturing costs as product costs, whether they are variable or fixed a. both income statements include product and period costs c. reported net income on the statements often differ Which of the following statements are correct regarding income statements prepared under variable and absorption costing? (Select all that apply) a. both income statements include product and period costs b. absorption costing categorizes costs based on cost behavior c. reported net income on the statements often differ d. the differences between the statements is how total manufacturing overhead is accounted for.

When preparing a segment margin income statement ______.

-fixed manufacturing costs are included in cost of goods sold -cost of goods sold consists of only variable manufacturing costs -common fixed expenses are excluded from the statement -traceable fixed expenses are deducted from contribution margin ***-cost of goods sold consists of only variable manufacturing costs ***-traceable fixed expenses are deducted from contribution margin

Click and drag on elements in order: place the following line items in order to construct a contribution format, income statement

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

Only costs that would disappear over time if a segment disappeared should be treated as (1) fixed costs. (Enter only one word per blank.)

1. traceable

Under absorption costing product cost consist of ___ costs

Both variable and fixed manufacturing*** Only variable manufacturing Only fixed manufacturing All manufacturing and selling and administrative

Why is CVP analysis more difficult when using absorption costing then 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.

Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit Direct labor: $75/unit Variable manufacturing overhead: $27/unit Fixed manufacturing overhead: $30,000 Units produced: 10,000 Units sold: 6,000

Direct materials + direct labor + variable manufacturing overhead + (fixed manufacturing overhead/units produced ) = 155

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing 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:

Direct materials + direct labor + variable manufacturing overhead = 22+18+7 =47

A company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories, which are known as ___

Segments

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 this store is a __ each product line sold in the store

The property tax for the store is a Traceable fixed cost for the store, and a Common fixed cost for each product line sold in the store.

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: 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:

Traceable fixed cost to the plant and a common fixed cost for the individual product lines made in the plant.

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

True

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 and absorption costing

fixed manufacturing overhead

Product costs under absorption costing include

Under Absorption Costing Product cost include ALL manufacturing costs. - DIRECT MATERIALS - DIRECT LABOR - VARIABLE MANUFACTURING OVERHEAD - FIXED MANUFACTURING OVERHEAD The following costs are Period Costs and are excluded from product costs. - VARIABLE SELLING AND ADMINISTRATIVE EXPENSES - FIXED SELLING AND ADMINISTRATIVE EXPENSES

Comfy Cozy Chairs makes and sells rockers. The production of each rocker requires $45 of direct materials and $37 of direct labor. Variable manufacturing overhead amounts to $8 per unit, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs amount to $15 per unit, and fixed selling and administrative costs total $102,000. During the period, 2,000 rockers were produced and 1,640 were sold. What is the unit product cost using absorption costing? $119 per unit

Unit product cost = $45 + $37 + $8 + ($58,000/2,000) = $119

Common mistakes made by companies when assigning costs to segments include:

a) inappropriately allocating variable costs b) omitting costs that should be included c) inappropriately assigning traceable fixed costs d) arbitrarily allocating common fixed costs ****b) omitting costs that should be included ****c) inappropriately assigning traceable fixed costs ****d) arbitrarily allocating common fixed costs

when a segment is eliminated, a

a) traceable fixed cost will remain unchanged **** traceable fixed cost will disappear c) common fixed cost will disappear ****common fixed cost will remain unchanged b and d

Absportion costing is ___

a. the preferred method for internal decision making b. rarely used *c. used by most companies for both internal and external reports *d. required by GAAP and IFRS c and d

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

absorption

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

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

Segmented income statements

c. may be prepared for activities at many levels in the company segmented income statements: a. should only be used for profit centers b. may be prepared for the various departments in the company, but not for specific product lines c. may be prepared for activities at many levels in the company d. are best used to determine which locations are profitable, rather than which product lines are profitable

Using absorption costing for segmented income statements can lead to:(Select all that apply) a. the need to maintain two costing systems b. inconsistencies between internal and external reports c. omission of upstream and downstream costs d. under-costing of segments

c. omission of upstream and downstream costs d. under-costing of segments

An example of a traceable fixed cost for general motors Corvette Division is the ___

d. *****depreciation cost on the equipment used to manufacture the Corvettes -c. is a traceable variable cost a. utilities cost of the GM corporate HQ b. salary of the chief executive officer c. direct materials used in the production of the corvettes d. depreciation cost on the equipment used to manufacture the Corvettes

When inventory increases, a 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

When, using variable costing, fixed manufacturing, overhead is ____

expensed in the period incurred*** Assigned to units of the product and expense as units are sold Never expensed

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

fixed manufacturing overhead

Segment break-even calculations include ___ fixed expenses

only traceable

Variable costing treats ___ manufacturing costs as product costs

only variable Only fixed No All Only variable

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

time when fixed overhead is expensed**

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.

to require

The variable costing income statement separates ___

variable and fixed expenses*** Selling and administrative expenses Product and period costs Direct and indirect expenses

The number of units produced does not affect net, operating income when using ___

variable costs