BUS 215 Ch6 - Variable Costing and Segment Reporting: Tools for Management

absorption costing treats fixed manufacturing overhead as a __ cost

product

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 US

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

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

absorption costing

discontinuing a profitable segment results in:

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

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

on an absorption costing income statement, selling and administrative expenses:

-are reported as a single amount -equal the amounts reported on a variable costing income statement

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

a segment should be discontinued when the segment:

-cannot cover its own costs -has a contribution margin that cannot cover traceable fixed costs

when preparing a contribution margin income statement:

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

fixed manufacturing overhead costs are included as part of work in process inventory under:

absorption costing only

variable costing deducts

all variable expenses from sales to determine contribution margin and all fixed expenses from contribution margin to determine income or loss

selling and administrative expenses:

are always treated as period costs

super-variable costing will have higher net operating income than variable costing when units produced:

are less than units sold

super-variable costing will have lower net operating income than variable costing when units produced:

are less than units sold

under absorption costing product costs consists of:

both variable and fixed manufacturing costs

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

which of the following costs are considered variable under super-variable costing?

direct materials

Unit product cost under absorption costing (per unit) =

direct materials (per unit) + direct labor (per unit) + variable manufacturing overhead (per unit) + (fixed manufacturing overhead/units products)

unit product costs =

direct materials + direct labor + variable manufacturing overhead cost (per unit) -selling and admin costs are not product costs. under variable costing, fixed overhead is also not a product cost

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 allocating fixed manufacturing overhead costs to units under absorption costing, the total fixed overhead costs must be divided by the number of units___

produced

absorption costing separates

product (manufacturing) costs from period (selling and administrative) costs

the segment margin is a valuable tool for assessing the long-run ___ of a segment

profitability

super-variable costing and variable costing will:

report the same net operating income when units produces = 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

when using absorption costing, fixed manufacturing overhead cost per unit = total fixed manufacturing overhead divided by:

units produced

one mistake companies make when preparing segmented income statements is arbitrarily assigning __________ fixed costs to segments

untraceable

direct costing or marginal costing are other terms for __ costing

variable

the number of units produced does not affect net operating income when using ___ costing

variable

segment contribution margin = segment revenue minus the ___ expenses for the segment

variable -fixed expenses are deducted from the segment contribution margin to compute the divisional segment margin

for external reporting, income statement are generally prepared using ___ costing, and ___ costing is used for internal decision

variable, absorption

the general costing approaches used by manufacturing companies to prepare income statement are __ costing and __ costing

variable, absorption

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

segment

from a decision making point of view, ___ margin is most useful for major capacity devisions and __ margin is most useful for short-term sales

segment, contribution

when a segment is eliminated, a:

-common fixed cost will remain unchanged -traceable fixed cost will disappear

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

only when the allocation base actually drives the cost being allocated

total selling and admin expenses =

# sold x $variable selling and admin expenses + $fixed selling and admin expenses

total cogs =

# sold x unit product cost

dollar break-even for a company is calculated as:

(traceable fixed expenses + common fixed expenses) /overall contribution margin ratio

Contribution Format Income Statement

-Sales -Variable Expenses -Contribution Margin -Fixed Expenses -Net Operating Income

incorrectly or arbitrarily assigning common costs to segments:

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

Product costs under absorption costing are:

-direct materials -direct labor variable manufacturing overhead -fixed manufacturing overhead

which of the following statements are correct

-employee morale may be reduces when direct labor is treated as a variable cost -in practice, direct labor costs are really fixed

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

segmented income statements:

-may be prepared for activities at many levels in a company -may be used for locations or product lines

using absorption costing for segmented income statements can lead to:

-omission of upstream and downstream costs -under-costing of segments

GAAP and IFRS rules:

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

absorption costing is:

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

absorption costing and variable costing net operating income will be equal when:

-there is no beginning and no ending inventory -the number of units produced equals the number of units sold

when preparing a contribution margin income statement:

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

which of the following are inventoriable costs under super-variable costing?

-variable overhead -direct materials

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 ___ fixed cost

common

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

common

Why is CVP analysis more difficult when using absorption costing than when using variable costing?

cvp analysis requires costs to be broken down between variable and fixed which is not done in absorption costing

net operating income is less under absorption costing than under variable costing when inventory for the period:

decreases

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

differences in net operating income between super-variable and variable costing occur because of the treatment of ___ costs under the two methods

direct labor

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

fixed manufacturing overhead

total fixed expenses in an income statement prepared using variable costing =

fixed manufacturing overhead + fixed selling and admin expense

an absorption costing income statement calculates:

gross margin by deducting fixed cogs from sales

a company with 3 segments has $10k in common fixed expenses. all 3 segments are at the break-even point. as the result, the company:

has an overall net operating loss of $10k. if all 3 segments are at the break-even point, common fixed expenses have not been covered.

contribution margin computed using super-variable costing will be ___ than the contribution margin computed using traditional variable costing

higher than

when units produced > units sold, net income will generally be:

higher under absorption costing than under variable costing

when units produced exceeds units sold, net income will generally be:

higher under absorption costing than under variable costing

when using absorption costing and explaining changes in operating income, financial statement users need to be aware of changes in ___ levels

inventory

Segment break-even calculations include:

only traceable fixed expenses

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

period

variable costing treats fixed manufacturing overhead as a ___ cost

period

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

costs that can be traced directly to a segment:

should not be allocated to other segments

all direct labor and manufacturing overhead is treated as fixed under:

super-variable costing

total variable cost on variable costing income statement =

total variable cogs + (variable selling and admin cost per unit x units sold) -variable selling costs are incurred on units sold, not units produced

the segment margin equals the segment's contribution margin less the segment's ___ fixed costs

traceable