CH 7 Concept Overviews, Exercises and Problems

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.

is less than

Which of the following is a common mistake made by companies when assigning costs to segments?

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

Which of the following costing approaches is best suited for cost-volume-profit analysis?

Variable

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 ________.

fixed overhead 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.

is equal to

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.

is greater than

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________.

less than absorption costing net operating income

Absorption costing income statements ignore ________.

variable and fixed cost distinctions

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?

$200,000 Explanation: Contribution margin = Sales of $500,000 × 60% contribution margin = $300,000 Segment margin = Contribution margin of $300,000 − Traceable fixed expenses of $100,000 = $200,000

Parcel Corporation Segment Income Statement: Sales: $1,520,000 total company; $720,000 American division; $800,000 international division Variable expenses: $448,000 total company; $288,000 American division; $160,000 international division Contribution margin: $1,072,000 total company; $432,000 American division; $640,000 international division Traceable fixed expenses: $712,000 total company; $360,000 American division; $352,000 international division Division segment margin: $360,000 total company; $72,000 American division; $288,000 international division Common fixed expenses: $141,800 total company Net operating income: $218,200 total company What is the break-even point for the International Division?

$440,000 Explanation: Segment contribution margin ratio = $640,000 ÷ $800,000 = 80%Segment break-even point = Traceable fixed expenses of $352,000 ÷ Segment contribution margin ratio of 80% = $440,000

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.

Direct labor: Product cost Fixed manufacturing overhead: Period cost Variable manufacturing overhead: Product cost Fixed selling and administrative expenses: Period cost Variable selling and administrative expenses: Period cost

Which of the following statements about the segment margin is not true?

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

Excerpt from Walls Corporation: In January: Beginning Inventory: 0 Units Produced: 500 Units Sold: 400 Ending Inventory: 100 Selling price: $100 per unit Direct materials used in production: $30 per unit Direct labor: $20 per unit Variable manufacturing overhead: $10 per unit Variable selling and administrative expenses: $7 per unit Fixed manufacturing overhead: $10,000 per month Fixed selling and administrative expenses: $3,000 per month What is the company's contribution margin for January?

$13,200 Explanation: Variable cost per unit = (Direct materials cost of $30 per unit + Direct labor cost of $20 per unit + Variable manufacturing cost per unit of $10) + Variable selling and administrative expenses per unit of $7 = $67 Contribution margin = (Sales price of $100 − Variable cost per unit of $67) × Units sold of 400 = $33 × 400 = $13,200 Alternatively: Sales = $100 per unit × 400 units = $40,000Variable cost of goods sold = $60 x 400 units = $24,000Variable selling and administrative expenses = $7 per unit × 400 units = $2,800Contribution margin = Sales of $40,000 − Variable cost of goods sold of $24,000 − Variable selling and administrative expenses of $2,800 = $13,200

Excerpt from Areojet Corporation records for month of February: Selling price: $200,000 per unit Direct materials used in production: $40,000 per unit Direct labor: $10,000 per unit Variable manufacturing overhead: $2,000 per unit Fixed manufacturing overhead: $120,000 per month Variable selling and administrative expenses: $20,000 per unit Fixed selling and administrative expenses: $40,000 per month Assuming the variable costing method is used, what is the total manufacturing costs added to work in process during the month of February?

$52,000 Explanation: Total manufacturing costs added to work in process during the month of February = Direct materials used in production of $40,000 + Direct labor cost of $10,000 + Variable manufacturing overhead cost of $2,000 = $52,000

Parcel Corporation Segment Income Statement: Sales: $1,520,000 total company; $720,000 American division; $800,000 international division Variable expenses: $448,000 total company; $288,000 American division; $160,000 international division Contribution margin: $1,072,000 total company; $432,000 American division; $640,000 international division Traceable fixed expenses: $712,000 total company; $360,000 American division; $352,000 international division Division segment margin: $360,000 total company; $72,000 American division; $288,000 international division Common fixed expenses: $141,800 total company Net operating income: $218,200 total company What is the break-even point for the American Division?

$600,000 Explanation: Segment contribution margin ratio = $432,000 ÷ $720,000 = 60%Segment break-even point = Traceable fixed expenses of $360,000 ÷ Segment contribution margin ratio of 60% = $600,000

Chao, Incorporated, a service provider, has two divisions. The firm's most recent annual contribution format segmented income statement appears below. Sales: $450,000 total company; $90,000 eastern division; $360,000 western division Variable expenses: $243,000 total company; $27,000 eastern division; $216,000 western division Contribution margin: $207,000 total company; $63,000 eastern division; $144,000 western division Traceable fixed expenses: $100,800 total company; $46,800 eastern division; $54,000 western division Division segment margin: $106,200 total company; $16,200 eastern division; $90,000 western division Common fixed expenses: $72,000 total company Net operating income: $34,200 total company 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?

$83,700 Explanation: Eastern Division contribution margin ratio = $63,000 ÷ $900,000 = 70% Increase in Eastern Division contribution margin = Increase in sales of ($90,000 × Increase of 10%) × CM ratio of 70% Increase in Eastern Division contribution margin = $9,000 × 0.70 = $6,300 Because the fixed costs will not change, the entire $6,300 would result in increased net operating income for the company. Change in company's net operating income = Increase in Western Division CM of $6,300 − Decrease of Eastern Division segment margin of $90,000 = $(83,700)

Excerpt from Walls Corporation: In January: Beginning Inventory: 0 Units Produced: 500 Units Sold: 400 Ending Inventory: 100 Selling price: $100 per unit Direct materials used in production: $30 per unit Direct labor: $20 per unit Variable manufacturing overhead: $10 per unit Variable selling and administrative expenses: $7 per unit Fixed manufacturing overhead: $10,000 per month Fixed selling and administrative expenses: $3,000 per month

$32,000 Explanation: Fixed manufacturing overhead cost per unit = $10,000 fixed manufacturing overhead ÷ 500 units produced = $20Per unit product cost = $30 direct materials cost per unit + $20 direct labor cost per unit + $10 variable manufacturing cost per unit + $20 fixed manufacturing overhead cost per unit = $80 Cost of goods sold = 400 units sold × $80 per unit = $32,000

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?

$400,000 Explanation: Traceable fixed costs of the mobile phone division = Total traceable fixed costs of $500,000 − Traceable fixed costs of the television division of $300,000 = $200,000.Mobile phone segment margin = Contribution margin of $600,000 − Traceable fixed costs of $200,000 = $400,000.

Excerpt from Areojet Corporation records for month of February: Selling price: $200,000 per unit Direct materials used in production: $40,000 per unit Direct labor: $10,000 per unit Variable manufacturing overhead: $2,000 per unit Fixed manufacturing overhead: $120,000 per month Variable selling and administrative expenses: $20,000 per unit Fixed selling and administrative expenses: $40,000 per month In February: Beginning Inventory: 0 Units Produced: 3 Units Sold: 3 Ending Inventory: 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?

$92,000 Explanation: Total manufacturing costs added to work in process during the month of February = Direct materials used in production of $40,000 + Direct labor cost of $10,000 + Variable manufacturing overhead cost of $2,000 + Fixed manufacturing overhead cost of $40,000 = $92,000