CH 7 Pre-Work Terms

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

Absorption costing

Fixed manufacturing overhead costs are included as part of Work in Process inventory under ______.

absorption costing only

Managers who believe that all manufacturing costs must be assigned to products in order to properly match the cost of production with sales are advocates of ______ costing.

absorption/full

The two general costing approaches used by manufacturing companies to prepare income statements are ______ costing and ______ costing.

absorption/full variable/marginal/direct

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

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

common

Variable costing income statements are based upon a ______ format.

contribution margin

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

When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead cost divided by units:

produced

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, manufactured, made, or completed

Assigning common fixed costs to segments impacts _____.

segment margin only Explanation: Total profit for the company includes common fixed costs.

Costs that can be traced directly to a segment ______.

should not be allocated to other segments

Selling and administrative expenses are ______ on both the absorption and variable costing income statements.

the same amount

When there is no change in inventory, net operating income will be ______ costing.

the same under both absorption and variable

When preparing a segment margin income statement:

traceable fixed expenses are deducted from contribution margin. cost of goods sold consists of only variable manufacturing costs.

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 of a store is the ______ fixed cost of the store and the ______ fixed cost of each product line sold in the store.

traceable/traced/direct, common

Advocates of ______ costing believe the matching principle dictates that fixed costs should be recognized as an expense in the current period.

variable

The variable costing income statement separates ______.

variable and fixed expenses

When the number of units produced equals the number of units sold, ______.

absorption costing net income is equal to variable costing net income all fixed overhead incurred flows to the income statement under both costing methods

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

absorption/full

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

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 those bottles. Total cost of goods sold was ______.

$6,472.14 Explanation: $5.38 × 1,203 = $6,472.14

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.

require

Which of the following is NOT a common mistake made in preparing segmented income statements?

Computing contribution margin instead of gross margin.

Because nonmanufacturing costs are not included as costs of a product, the use of ______ costing can lead to the omission of segment costs.

absorption

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

absorption

For external reporting, income statements are generally prepared using ____ costing, while ____ costing is used for internal decision-making purposes.

absorption, variable

Costs are categorized by function when using ______ costing and by behavior when using ______ costing.

absorption, variable/contribution

Financial statement users need to be aware of changes in inventory levels when using ______ costing.

absorption/ full

Using variable costing and the contribution approach for internal decision making ______.

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

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 in absorption costing.

fixed manufacturing overhead

Segmented income statements ______.

may be prepared for activities at many levels in a company Explanation: Segmented income statements may be used for locations or product lines.

When inventory decreases, cost of goods sold under absorption costing will generally be ______ cost of goods sold under variable costing.

more than

When a segment cannot cover its own costs, that segment should ______.

probably be dropped Explanation: Common fixed costs are not included in segment margin.

The segment margin is a valuable tool for assessing the long-run ______ of a segment.

profitability

Absorption costing is ______.

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

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

Common mistakes made by companies when assigning costs to segments include ______.

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

Selling and administrative expenses ______.

are always treated as period costs

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

An example of a traceable fixed cost for General Motors' Corvette Division is the ______.

depreciation cost on the equipment used to manufacture the Corvettes

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

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

segment

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

segment

Discontinuing a profitable segment results in ______.

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

Costs should be allocated to segments for internal decision-making purposes ______ the allocation base actually drives the cost being allocated.

only when

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

only when the allocation base actually drives the cost being allocated

Comfy Cozy Chairs makes and sells rockers. Each rocker requires $45 of direct materials and $37 of direct labor. Variable manufacturing overhead is $8 per unit, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs are $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. The unit product cost using absorption costing is ______.

$119 Explanation: $45 + $37 + $8 + ($58,000 ÷ 2,000) = $119

The Quaint Quilt produces and sells handmade quilts. Variable manufacturing costs total $140 per quilt. Fixed manufacturing overhead totals $68,250 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. The total variable cost reported on Quaint Quilt's variable costing income statement is ______.

$124,020 Explanation: ($140 + $19) x 780 = $124,020

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.

$155 Explanation: $50 + $75 + $27 + ($30,000 ÷ 10,000) = $155 per unit

The unit product cost of a blender is $24. If 900 blenders are produced and 849 blenders are sold, the total cost of goods sold is $ ______.

$20,376 Explanation: 849 x $24 = $20,376

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 $6,200. 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 Explanation: $19,700 + $9,290 = $28,990

Citrus Scents produces body sprays. Variable selling and administrative expense is $1.05 per bottle and fixed selling and administrative expense is $4,500 per month. The company produced 1,490 bottles this month, and sold 1,203 of those bottles. Total selling and administrative expense for the month was ______.

$5,763.15 Explanation: ($1.05 × 1,203) + $4,500 = $5,763.15

Pearls, Pearls, 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 Explanation: $72,490 + ($22 x 314) = $79,398

Dollar break-even for a company is calculated as ______.

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

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

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

Absorption costing net income may be computed by multiplying the number of units sold by the contribution margin per unit and subtracting total fixed expenses.

False

Segment margin is most useful in decisions involving short-run changes in sales volume such as pricing special orders.

False

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

True

Under absorption costing product costs consist of ______ costs.

both variable and fixed manufacturing

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

Product costs under absorption costing include ______.

direct materials fixed manufacturing overhead direct labor variable manufacturing overhead

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

fixed manufacturing overhead

Absorption costing net income is calculated by subtracting selling and administrative expenses from ______ ______.

gross margin

An absorption costing income statement calculates ______.

gross margin by deducting cost of goods sold from sales

Incorrectly or arbitrarily assigning common costs to segments:

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

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 traceable fixed cost ______.

is incurred because of the existence of the segment

Segment break-even calculations include ______ fixed expenses.

only traceable

When calculating the profit impact of discontinuing a segment, consider ______.

the segment's traceable fixed costs the segment's contribution margin

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 a ______ for the individual product lines made in the plant.

traceable fixed cost to the plant and a common fixed cost

Using absorption costing for segmented income statements can lead to:

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

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

$11,824.25 Explanation: $76.35 × 155 = $11,834.25

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%. Discontinuing Catalog Sales should increase company profits by ______.

$11,000 Explanation: Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $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 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 Explanation: $70,000 ÷ 40% = $175,000

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per unit. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. The unit product cost using variable costing is ______ per unit.

$47 Explanation: $22 + $18 + $7 = $47

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. The unit product cost of each frame using variable costing is $ ______.

$68 Explanation: $19 + $40 + $9 = $68

Match the costing method with the way costs are categorized.

Absorption costing: categorized by function Variable costing: categorized by behavior

A segment should probably be dropped when the segment ______.

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

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

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

higher than

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

higher than

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

higher than Explanation: Company-wide will always be higher because segment break-even does not include common 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(n) ______ cost.

period

Only costs that would disappear over time if a segment disappeared should be treated as ______ fixed costs.

traceable

The segment margin equals the segment's contribution margin less the segment's ______ fixed costs.

traceable

Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost 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 Explanation: $42,000 + $59,000 = $101,000

If a segment is entirely eliminated, common fixed costs will ______.

not change

Direct costing or marginal costing are other terms for ______ costing.

variable

Blissful Breeze manufactures and sells ceiling fans. Each fan has a unit product cost of $112 and a unit selling price of $190. If Blissful Breeze produces 900 fans and sells 842 fans this month, the total cost of goods sold will be $ ______.

$94,304 Explanation: $112 x 842 = $94,304

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

variable

The number of units produced does not affect net operating income when using ______costing.

variable

Blissful Breeze manufactures and sells ceiling fans. Variable selling and administrative expense is $11.50 per fan and fixed selling and administrative expense is $7,800 per month. If Blissful Breeze produces 900 fans and sells 842 fans this month, total selling and administrative expenses will be $ ______.

$17,483 Explanation: (842 x $11.50) + 7,800 = $17,483

A company has two segments with total sales of $500,000 and total variable costs of $343,750. Traceable fixed expenses are $50,000 and common fixed expenses are $80,000. The break even in dollars for the company as a whole equals $ ______.

$416,000 Explanation: contribution margin = (sales-total variable costs) $500,000 - $343,750 = $156,250 CM ratio = contribution margin ÷ sales $156,250 ÷ $500,000 = 0.3125 break even in dollars =(traceable fixed expenses + common fixed expenses) ÷ CM ratio ($50,000 + $80,0000) ÷ 0.3125 = $416,000