ACCT 212 Chapter 7: Variable Costing and Segment Reporting: Tools for Management

Smith Company produces and sells one product for $40 per unit. The company has no beginning inventories. Its variable manufacturing cost per unit is $18 and the variable selling and administrative expense per unit is $4. The fixed manufacturing overhead and fixed selling and administrative expense total $80,000 and $20,000, respectively. If Smith Company produces 8,000 units and sells 7,500 units during the year, then its net operating income under absorption costing would be a) $65,000 b) $41,250 c) $40,000 d) $35,000

C

Which of the following statements is true? (You may select more than one answer.) a) A segment's contribution margin minus its traceable fixed expenses equals the segment margin b) A company's common fixed costs should be evenly allocated to business segments when computing the dollar sales for a segment to break even c) A segment's traceable fixed costs should include only those costs that would disappear over time if the segment disappeared d) Fixed costs that are traceable to one segment may be a common cost of another segment

A, C, and D

Which of the following statements is false? (You many select more than one answer.) a) Under variable costing, only those manufacturing costs that vary with output are treated as product costs b) Under variable costing, variable selling and administrative expenses are treated as product costs c) Under absorption costing, fixed manufacturing overhead is treated as a product cost d) Under absorption costing, fixed selling and administrative expenses are treated as period costs

B

*When comparing Kelley's absorption costing net operating income to its variable costing net operating income, which of the following will be true? a) Its absorption costing net operating income will be $35,000 lower than its variable costing net operating income. b) Its absorption costing net operating income will be $35,000 higher than its variable costing net operating income. c) Its absorption costing net operating income will be $15,000 lower than its variable costing net operating income. d) Its absorption costing net operating income will be $15,000 higher than its variable costing net operating income.

D

Smith Company produces and sells one product for $40 per unit. The company has no beginning inventories. Its variable manufacturing cost per unit is $18 and the variable selling and administrative expense per unit is $4. The fixed manufacturing overhead and fixed selling and administrative expense total $80,000 and $20,000, respectively. If Smith Company produces 8,000 units and sells 7,500 units during the year, then its net operating income under variable costing would be a) $65,000 b) $41,250 c) $40,000 d) $35,000

D

Max, Incorporated, has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000, respectively. What is the segment margin for the South Division? a) $100,000 b) $200,000 c) $300,000 d) $400,000

b) $200,000

i) Beginning Inventory ii) Units Produced iii) Units Sold iv) Ending Inventory February i) 0 ii) 3 iii) 3 iv) 0 **Assuming the absorption costing method is used, what is the total manufacturing costs per unit added to work in process during the month of February? a) $52,000 b) $92,000 c) $87,000 d) $122,000

b) $92,000 Fixed manufacturing overhead = 120,000/3 = 40,000 40,000 + 40,000 + 10,000 + 2,000 = 92,000

Which of the following statements about the segment margin is not true? a) In preparing a segmented income statement, the variable expenses are deducted from sales to yield the contribution margin for each segment b) The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin c) The segment margin represents the margin available after a segment has covered all of its own costs d) The segment margin is the best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment

b) The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for _______. a) all overhead costs b) fixed overhead costs c) selling and administrative expenses d) variable overhead costs

b) fixed overhead costs

When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. a) is greater than b) is less than c) is equal to

b) is less than

***What is the cost of goods sold for the month of January using the absorption costing method? a) $24,000 b) $30,000 c) $32,000 d) $40,000

c) $32,000 $30 + $20 + $10 + $20 = $80 400 x $80 = $32,000

*What is the break-even point for the American Division? a) $360,000 b) $440,000 c) $600,000 d) $1,210,549

c) $600,000

Absorption costing income statements ignore ________. a) direct materials and direct labor costs b) direct and indirect cost distinctions c) product and period cost distinctions d) variable and fixed cost distinctions

d) variable and fixed cost distinctions

Decide how each cost is treated on an income statement prepared using the variable costing approach. Using the dropdown boxes, indicate whether each cost item is treated as a period cost or product cost. 1. Direct labor 2. Fixed manufacturing overhead 3. Variable manufacturing overhead 4. Fixed selling and administrative expenses 5. Variable selling and administrative expenses

1. Product Cost 2. Period Cost 3. Product Cost 4. Period Cost 5. Period Cost

Segement

Any part or activity of an organization about which managers seek cost, revenue, or profit data.

*What is the amount of cost of goods sold under absorption costing? a) $189,000 b) $196,000 c) $179,000 d) $186,000

A

Absorption Costing

A costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in unit product costs.

Variable Costing

A costing method that includes only variable manufacturing costs - direct materials, direct labor, and variable manufacturing overhead - in unit product costs.

Traceable Fixed Cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.

Common Fixed Cost

A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments.

Segment Margin

A segment's contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs.

*What is the amount of cost of goods sold under variable costing? a) $220,000 b) $161,000 c) $154,000 d) $230,000

C

Parcel Corporation Segment Income Statement Category; Total Company; American Division; International Division i) Sales; $1,520,000; $720,000; $800,000 ii) Variable expenses; $448,000; $288,000; $160,000 iii) Contribution margin; $1,072,000; $432,000; $640,000 iv) Traceable fixed expenses; $712,000; $360,000; $352,000 v) Division segment margin; $360,000; $72,000; $288,000 vi) Common fixed expenses; $141,800 vii) Net operating income; $218,200

Problems marked with a * will be using this information

*Excerpt from Areojet Corporation records for month of February: category; price per unit; per month i) Selling price; $200,000 ii) Direct materials used in production; $40,000 iii) Direct labor; $10,000 iv) Variable manufacturing overhead; $2,000 v) Fixed manufacturing overhead; ; $140,000 vi) Variable selling and administrative expenses; $20,000 vii) Fixed selling and administrative expenses; ; $40,000

Questions marked with a * will be using this information

**Excerpt from Areojet Corporation records for month of February: category; price per unit; per month i) Selling price; $200,000 ii) Direct materials used in production; $40,000 iii) Direct labor; $10,000 iv) Variable manufacturing overhead; $2,000 v) Fixed manufacturing overhead; ; $120,000 vi) Variable selling and administrative expenses; $20,000 vii) Fixed selling and administrative expenses; ; $40,000

Questions marked with a ** will be using this information

***Category; January i) Beginning inventory; 0 ii) Units produced; 500 iii) Units sold; 400 iv) Ending inventory; 100 Category; Per Unit; Per Month i) Selling price; $100 ii) Direct materials; $30 iii) Direct labor; $20 iv) Variable manufacturing overhead; $10 v) Variable selling and administrative expenses; $7 vi) Fixed manufacturing overhead; ; $10,000 vii) Fixed selling manufacturing and administrative expenses; ; $3,000

Questions marked with a *** will be using this information

*In its first year of operations, Kelley Company produced 10,000 units and sold 7,000 units. Its direct materials, direct labor, variable manufacturing overhead, and variable selling and administrative unit costs were $12, $8, $2, and $1, respectively. Its total fixed manufacturing overhead for the year was $50,000.

Questions that are marked with a * will be using this information.

*Assuming the variable costing method is used, what is the total manufacturing costs added to work in process during the month of February? a) $52,000 b) $80,000 c) $87,000 d) $122,000

a) $52,000 Direct materials + Direct labor + Variable manufacturing overhead

Chao, Incorporated, a service provider, has two divisions. The firm's most recent annual contribution format segmented income statement appears below. category; total company; eastern division; western division i) Sales; $450,000; $90,000; $360,000 ii) Variable expenses; $243,000; $27,000; $216,000 iii) Contribution margin; $207,000; $63,000; $144,000 iv) Traceable fixed expenses; $100,000; $46,800; $54,000 v) Division segment margin; $106,200; $16,200; $90,000 vi) Common fixed expenses; $72,000 vii) Net operating income; $34,200 If the company eliminates the Western Division and the Eastern Division sales increase by 10% as a result, how much will the company's net operating income decrease? a) $83,700 b) $88,380 c) $90,000 d) $137,700 e) $144,000

a) $83,700

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. a) is greater than b) is less than c) is equal to

a) is greater than

***What is the company's contribution margin for January? a) $200 b) $13,200 c) $26,800 d) $40,000

b) $13,200 Variable cost per unit = $30 + $20 + $10 + 7 = $67 Contribution margin = $100 - $67 = $33 $33 x 400 = $13,200

*What is the break-even point for the International Division? a) $352,000 b) $440,000 c) $600,000 d) $1,210,549

b) $440,000

Which of the following is a common mistake made by companies when assigning costs to segments? a) They use allocation bases that drive the costs when assigning costs to segments b) They trace fixed expenses to segments when it is feasible to do so c) They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs d) They include "upstream" and "downstream" costs when preparing profitability analyses that relate to individual product costs

c) They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs

When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. a) is less than b) is greater than c) is equal to

c) is equal to

When the number of units produced is greater than the number of units sold, variable costing net operating income will be _______. a) the same as absorption costing net operating income b) greater than absorption costing net operating income c) less than absorption costing net operating income

c) less than absorption costing net operating income

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. Assuming the traceable fixed costs of the television division are $300,000, what is the segment margin of the mobile phone division? a) $100,000 b) $200,000 c) $300,000 d) $400,000

d) $400,000

Which of the following costing approaches is best suited for cost-volume-profit analysis? a) Absorption b) Normal c) Standard d) Variable

d) Variable