ACCT 3306 Exam 2: Chapter 6

An absorption costing income statement calculates:

Gross margin by deducting cost of goods sold from sales

Absorption costing is:

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

T or F: Treating direct labor costs as variable can lead to bad decisions

True, this may cause managers to try to cut labor which can reduce morale and lead to future problems

Segment

a part or activity of an organization about which managers would like cost, revenue, or profit data

Citrus Scents produces body sprays. Each bottle has a unit product cost of $5.38. The company produced 1,490 bottles this month and sold 1,203 of these bottles. Total cost of goods sold was

$6,472.14 $5.38 x 1203

GAAP and IFRS rules:

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

T or F: Treating direct labor costs as variable costs can lead to bad decisions

True The cost system may encourage managers to trat labor costs as an expense to be minimized when sales decline and this may result in reduced morale and eventual problems when business picks up. Also, management may have little ability to adjust the direct labor force even if they wanted to, resulting in a situation in which direct labor costs are in fact fixed.

For external reporting, income statements are generally prepared using which costing method?

absorption

The use of _________ costing can lead to the mission of segment costs because nonmanufacturing costs are not included as costs of a product

absorption

Costs are categorized by function when using ________ costing and by behavior when using _________ costing

absorption, variable

When using absorption costing and explaining changes in operating income, financial statement users need to be aware fo changes in _________ levels

activity

Variable costing income statements, are based upon a ______________ format.

contribution margin

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

fixed manufacturing overhead

When inventory decreases, cost of goods sold under absorption costing will be __________ cost of goods under variable costing

more than

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 income statements separate __________ costs from _________ costs.

product (manufacturing); period (selling and administrative)

Super-variable costing and variable costing will:

report the same net operating income when units produced equal units sold

When there is no change in inventory, net operating income will be:

the same under both absorption costing and variable costing

Differences in net operating income between absorption costing and variable costing is due to the:

timing of when fixed manufacturing overhead is expensed

For internal reporting, which costing system is used for internal decision making purposes?

variable

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

variable

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

segment

From a decision making point of view, _________ margin is most useful for major capacity decisions and ___________ margin is most useful for short-term sales volume decisions.

segment; contribution

Absorption costing treats fixed manufacturing overhead as a _________ cost

product

Variable costing income statements separate _________ expenses from __________ expenses.

variable; fixed

Sleep tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead ost this year. Variable unit product costs was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal:

$101,000 $42,000 + $59,000

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%. Discounting catalog sales should increase company profits by:

$11,000 Increased online sales contribution margin ($100,000 X 10% X $60,000/$100,000) is $6,000 + $5,000 saved from catalog sales = $11,000

Blink sells and manufactures frames for eyeglasses. The unit product cost for fram #47320 is $76.35. Last period, Blink produced 200 frames and sold 155 of them. Total cost of goods sold equals:

$11,834.25 $76.35 x 155

Comfy Chairs makes and sells rockers. 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, 2000 rockers were produced and 1,640 were sold. The unit product cost using absorption costing is

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

Given the following information, calculate the unit product cost under absorption costing DM: $50/unit DL: $75/unit VMOH: $27/unit FMOH: $30,000 Units produced: 10,000 Units sold: 6,000

$155 +$50 + $75+ $27

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%

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expense is $6,2000. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9,290. An income statement prepared using variable costing shows _________ as the total fixed expenses.

$28,990 $19,700 + $9,290

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 production cost using variable costing is:

$47 per unit Unit product cost = $22 + $18 + $7 Selling and administrative costs are never considered part of product cost.

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 Unit product cost = $19 + $40 + $9 = $68. Selling and administrative costs are not product costs. Under variable costing, fixed overhead is also not a product cost.

Pearls manufactures and sells jewelry. The total variable cost of goods sold this month is $72,490. Variable selling and administrative cost is $22 per unit sold. If 350 units are produced and 314 units are sold this month, the total variable cost reported on the income statement for the month is?

$79,398 Total variable cost = $72,490 + ($22 x 314). Variable selling costs are incurred on units sold, not produces

variable costing

- AKA direct costing or marginal costing A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs. - Only the costs that vary with output are treated as product costs - Fixed expenses are treated as a period cost and reported as an expense on the income statement

Product costs under absorption costing are:

- Fixed Manufacturing Overhead - Direct Materials - Direct Labor - Variable Manufacturing Overhead

Advocates of variable costing believe fixed manufacturing costs:

- are not caused by and cannot be meaningfully traced to specific units of production - are period expenses

When preparing a contribution margin income statement:

- cost of goods sold consists of only variable manufacturing costs - variable and fixed costs are listed in separate sections of the statement

Using variable costing and the contribution approach for internal decision making:

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

Using variable costing and the contribution approach for internal decision making:

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

A variable costing income statement:

- focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs - calculates contribution margin while the absorption costing income statement calculates gross margin

When the units sold exceed the units produced and hence inventories decrease, is net operating income lower under absorption costing or variable costing?

Absorption costing because some of the fixed manufacturing overhead of previous periods is released from inventories under absorption costing

In general, when the units produced exceed the units sold and hence inventories increase, is net operating income higher under absorption costing or variable costing?

Absorption costing because some of the fixed manufacturing overhead of the period is deferred in inventories under absorption costing.

Which of the following costs are considered variable under super variable costing?

Direct Materials

Differences between Variable costing and Absorption costing

In absorption costing, fixed manufacturing overhead costs are included in WIP inventory. When units are completed, these costs are transferred to finished goods and only when the units are sold do these costs flow through to the income statement as past of cost of goods sold. In variable costing, fixed manufacturing overhead cost are considered to be period costs - just like selling and administrative costs - and are taken immediately to the income statement as period expenses.

Which of the following statements are correct?

In practice, direct labor costs are really fixed Employee morale may be reduced when direct labor is treated as a variable cost

T or F: Super-variable costing treats all manufacturing overhead as a fixed cost

True

Why do variable and absorption costing net operating incomes often differ from one another?

Variable costing and absorption costing income statements account for fixed manufacturing overhead differently. Under absorption costing, some fixed manufacturing overhead is capitalized in inventories (i.e. included in product costs) rather than being immediately expensed on the income statement.

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 - allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing costs

Advocates of ____ costing believe fixed costs are an essential part of product production.

absorption

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

Allocating __________ fixed costs to a segment may cause an otherwise profitable segment to appear unprofitable

common

If a segment is eliminated, ___ fixed costs that are not traced to the segment will not change.

common

Differences in net operating income between super-variable and variable costing occur because of the treatment of _________ costs under the two methods.

direct labor

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

fixed manufacturing overhead

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 If all three segments are at the break-even point, common fixed expenses have not been covered

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

higher than

Total fixed costs on a super-variable costing income statement will be _________ than total fixed costs on a traditional variable costing income statement

higher than Direct labor and all manufacturing overhead are treated as fixed under super-variable costing

The company wide breakeven sales will always be ________ the sum of the segment break-even sales.

higher than b/c the segment break even calculations do not include the company's common fixed expenses

When units sold exceed units produced, net income under variable costing will be generally __________ net income under absorption costing

higher than, occurs because some of the fixed manufacturing overhead of previous periods is released from inventories under absorption costing.

a traceable fixed costs:

is incurred because of the existence of the segment

Contribution Margin computed using super-variable costing will be ________ than the contribution margin computed using traditional variable costing

lower than b/c super-variable costing only includes direct materials as variable product costs. A lower variable costs results in a higher contribution margin.

Segment Margin

obtained by deducting the traceable fixed costs of a segment from the segment's contribution margin - represents the margin available after a segment has covered all of its own costs - best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment - common fixed costs are not allocated to segments

Costs should be allocated to segments for internal decision-making purposes:

only when the allocation base actually drives the cost being allocated

When a segment cannot cover its own costs, that segment should:

probably be dropped

Under both variable costing and absorption costing, variable and fixed selling and administrative costs are treated as ___ costs.

period

Decision-making problems that could occur when using absorption costing include __________ decisions, and decisions made to ___________ products that are, in fact, profitable

pricing; drop

Costs than can be traced directly to a 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 plan 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

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.

traceable; common

Dollar break-even for a company is calculated as:

(Traceable fixed expenses + Common fixed expenses)/Overall CM ratio

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

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

Variable costing net income may be computed by multiplying the number of units sold by the ___________ _____________ per unit and subtracting total ________ expenses.

Contribution margin; fixed