Chapter 6: Variable Costing and Segment Reporting: Tools for Management

Fixed manufacturing overhead costs are expensed as units are sold as part of cost of goods sold under _____ costing, and expensed in full with period costs under _____ costing.

absorption; variable

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 Variable Costing Unit Product Cost=Direct materials + Direct Labor + Variable Manufacturing overhead= $19+$40+$9= $68

Select all that apply: 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

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

depreciation cost on the equipment used to manufacture the Corvettes

The difference between reported net income on variable costing and absorption costing income statements is based on how ______.

fixed overhead is accounted for

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

Assigning common fixed costs to segments impacts ______.

segment margin only

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

variable

Select all that apply: When calculating the profit impact of discontinuing a segment, consider _____.

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

Select all that apply: When a segment is eliminated, a ______.

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

Select all that apply: Product costs under absorption costing include ______.

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

True or false: Absorption costing and variable costing always result in the same net operating income each year.

False

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

absorption; variable

Variable costing income statements are based upon a ______ format.

contribution margin

Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ______ in total as the number of units produced increases.

increase

Segment break-even calculations include ______ fixed expenses.

only traceable

Variable costing treats ______ manufacturing costs as product costs.

only variable

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

variable

A traceable fixed cost ______.

is incurred because of the existence of the segment

Segmented income statements ______.

may be prepared for activities at many levels in a company

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

traceable

Costs are separated between variable and fixed expenses when using ______ costing, whereas ______ costing separates costs between product and period.

variable, absorption

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

fixed manufacturing overhead

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product

Variable costing treats fixed manufacturing overhead as a(n) ____ cost.

period

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

timing of when fixed manufacturing overhead is expensed

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 Reason: Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 saved from stopping catalog sales = $11,000.

Select all that apply: Using variable costing and the contribution approach for internal decision making ______.

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

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

Absorption; Variable

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

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

absorption

Net income computed under ______ costing may not agree with the results of CVP analysis.

absorption

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

fixed manufacturing overhead

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

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 Reason: $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 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 product cost using variable costing is ______ per unit.

-$47 Reason: $22 + $18 + $7 = $47. Selling and administrative costs are never considered part of product cost.