chapter 06 bus215
Using variable costing and the contribution approach for internal decision making
(1) supports decision making (2) facilitates explaining changes in net income (3) enables CVP analysis
Common Expenses
(total product sales/Total Sales) X (total common expenses)
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
(traceable fixed costs)/(contribution margin ratio)
companywide perspective formula for computing the break-even point for a multi product company with traceable fixed expenses is
(traceable fixed expenses + common fixed expenses)/ (overall CM ratio)
Which of the following statements are correct regarding income statements prepared under variable and absorption costing?
1. Reported net income on the statements often differ 2. both income statements include product and period costs
Segment margin=
Contribution Margin - Traceable fixed costs
a traceable fixed cost of a segment is
a fixed cost incurred because fo the existence of the segment
Under absorption costing all manufacturing costs flow through the
absorption costing cost of goods sold
Fixed manufacturing overhead costs are expensed as units are sold as part of cost of goods sold under (........), and expensed in full with period costs under (.......)
absorption costing, variable costing
Selling and administrative expenses are
always treated as period costs and expensed in their entirety in the same period they are incurred
Variable costing income statements separate
fixed expenses from variable expenses
Absorption and variable costing net income are usually different due to the accounting for
fixed manufacturing overhead
Under variable costing the cost of a unit of inventory does not contain
fixed manufacturing overhead
The difference between reported net income on variable costing and absorption costing income statements is based on how
fixed overhead is accounted for
Absorption costing net income is calculated by subtracting selling and administrative expenses from
gross margin
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
When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead divided by units
produced
The absorption costing income statement separates
product and period
What is the best gauge of the long-run profitability of a segment
segment margin
Assigning common fixed costs to segments impacts
segment margin only
Dollar sales for a segment to break even=
segment traceable fixed expenses/segment CM ratio
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 $
step #1: CM ratio: contribution margin = (sales-total variable costs) 500,000-343750=156250 cm ratio = contribution margin/sales 156250/500,000=0.3125 step#2: break even in dollars=(traceable fixed expenses + common fixed expenses)/cm ratio (50,000+80,0000)/0.3125=416000
segment margin represents
the margin available after a segment has covered all of its own costs
formula for break-even point for a business segment is
(segment traceable fixed expenses)/(segment CM ratio)
On an absorption costing income statement, selling and administrative expenses
(1)reported as a single amount (2)equal the amounts reported on a variable costing income statement
The company-wide break-even sales will always be ______ the sum of the segment break-even sales.
higher than
In the contribution approach (variable), costs are categorized according to
behvior: fixed expenses or variable expenses
How does absorption costing income statement categorize costs
by function: manufacturing or selling and admin.
One mistake companies make when preparing segmented income statements is arbitrarily assigning
common fixed costs to segments
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
Variable Costing is also known as
direct costing or marginal costing
The cost of a unit of product under the absorption costing method consists of
direct materials, direct labor, and both variable and fixed manufacturing overhead
When using variable costing, fixed manufacturing overhead is
expensed in the period incurred
True or false: Absorption costing and variable costing always result in the same net operating income each year.
false
True or false: Segment margin is most useful in decisions involving short-run changes in sales volume such as pricing special orders.
false
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
The variable costing income statement separates
variable and fixed expenses
The number of units produced does not affect net operating income when using
variable costing
Discontinuing a profitable segment results in
(1) a reduction in the overall profits of the company (2)the loss of the segment's revenues
Absorption costing is
(1) required by GAAP and IFRS (2) used by most companies for both internal and external reports
When calculating the profit impact of discontinuing a segment, consider _
(1) the segment's traceable fixed costs (2)the segment's contribution margin
Any allocation of common costs to segments
reduces the value of the segment margin as a measure of long-run segment profitability and segment performance
Absorption Costing (Full Cost Method) treats all manufacturing costs as
products costs (regardless of whether they are variable or fixed)
When preparing a segment margin income statement
(1)cost of goods sold consists of only variable manufacturing costs (2)traceable fixed expenses are deducted from contribution margin
A variable costing income statement
(1)focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs (2)calculates contribution margin while the absorption costing income statement calculates gross margin
A segment should be discontinued/dropped when the segment
(1)has a contribution margin that cannot cover traceable fixed costs (2) cannot cover its own costs
By how much would the company's net operating income increase if Minneapolis increased its sales by $81,000 per year? Assume no change in cost behavior patterns.
81,000*(Minneapolis contribution margin) =81,000*.40=32400
A company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories, which are known as
Segments
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. (Enter only one word per blank.)
traceable, common
examples of traceable fixed costs include
(1)salary of the Fritos product manager at PepsiCo (2) maintenance cost for the building in which Boeing 747s are assembled (3) the liability insurance at Disney World
When preparing a segment margin income statement
(1)traceable fixed expenses are deducted from contribution margin (2)cost of goods sold consists of only variable manufacturing costs
Segmented income statements
may be prepared for activities at many levels in a company
Variable costing treats fixed manufacturing overhead as a(n)
period costs
Under absorption and variable costing, variable and fixed selling and administrative expenses are always treated as
period costs and reported as expenses on the income statement as incurred
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
GAAP and IFRS rules
(1)require segmented financial data be included in annual reports (2)require that the same method be used for both internal and external segment reporting (3) create problems in reconciling internal and external reports
dollar sales to attain target profit=
(target profit + fixed expenses)/(cm ratio)
Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ______ in total as the number of units produced increases.
increase
Under absorption costing all selling and admin expenses are
listed separately as period expenses
Which manufacturing costs are treated as product costs
manufacturing costs that vary with output such as direct materials, direct labor, and variable portion of manufacturing overhead
The two general costing approaches used by manufacturing companies to prepare income statements are
variable costing and absorption costing
