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

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 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

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

False

True or false: Under absorption costing, fixed overhead is treated like a variable cost because a portion of the total cost is allocated to each unit produced, rather than being expensed as one large sum.

True

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

absorption

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

absorption Variable

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

absorption variable

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product

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

Variable Absoprtion

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

Variable Absorption

When using variable costing, fixed manufacturing overhead is ______.

expensed in the period incurred

Select all that apply 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

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

Variable

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

increase

Segmented income statements Blank______.

may be prepared for activities at many levels in a company

Segment break-even calculations include Blank______ fixed expenses.

only traceable

Variable costing treats ______ manufacturing costs as product costs.

only variable

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

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

variable

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

fixed overhead is accounted for

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

produced

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

Select all that apply 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.

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

absorption

Under absorption costing product costs consist of ______ costs.

both variable and fixed manufacturing

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 Blank______.

$11,000

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

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

Absorption costing

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

Absorption Variable

Select all that apply: 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.

The variable costing income statement separates ______.

variable and fixed expenses

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

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

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

fixed manufacturing overhead

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

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 Blank______.

$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

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

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

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

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

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

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

higher than