chapter 7 accounting
Fixed manufacturing overhead costs are included as part of Work in Process inventory under ____.
absorption cost only.
one mistake companies make when preparing segmented income statements is arbitrarily assigning __________ fixed costs to segments
common
When units produced exceed units sold, net income will generally be ____ costing.
higher under absorption costing than under variable
absorption costing treats fixed manufacturing overhead as a ____ cost.
product
Variable Costing Income Statement
relies on the contribution format for internal decision making process
Assigning common fixed costs to segments impacts ____.
segment margin only
Assigning common fixed costs to segments impacts ______.
segment margin only
Segment contribution margin
segment revenue - segment variable expenses
Costs are separated between variable and fixed expenses when using ____ costing, whereas ____ costing separates costs between product and period.
variable, absorption
The two general costing approaches used by manufacturing companies to prepare income statements are ___ costing and ____ costing.
variable, absorption
Variable costing income statements are based upon ____ format.
contribution margin
Decision-making problems that could occur when using absorption costing include inappropriate ____ decisions, and decisions made to a ____ products that are, in fact, profitable.
pricing; drop
Costs that can be traced directly to a segment ____.
should not be allocated to other segments
The number of units produced does not affect net operating income when using ____ costing.
variable
Variable costing treats fixed manufacturing overhead as a(n) ____ cost.
period
Costs are categorized by function when using ______ costing and by behavior when using ______ costing.
absorption, variable
Absorption Costing Income Statement
used for for external reports
Costs are separated between variable and fixed expenses when using ______ costing, whereas ______ costing separates costs between product and period.
variable, absorption
The difference between reported net income on variable costing and absorption costing income statements is based on how ____.
fixed overhead is accounted for
When a segment is eliminated, a ____.
Traceable fixed cost common fixed cost will remain unchanged
Traceable Fixed Cost
a fixed cost that is incurred because of the existence of the segment.
Financial Statement users need to be aware of changes in inventory levels when using ____ costing.
absorption
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
Under absorption costing product costs consists of ____ costs.
both variable and fixed manufacturing
When preparing a segment margin income statement:
cost of goods sold consists of only variable manufacturing costs. traceable fixed expenses are deducted from contribution 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
Using variable costing and the contribution approach for internal decision making:
enables CVP analysis supports decision making facilitates explaining changes in net income
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
Net Operating income under absorption costing is generally ____ net operating income under variable costing in periods in which inventory increases
higher than
Incorrectly or arbitrarily assigning common costs to segments:
hold managers responsible for costs they cannot control could reduce the overall profits of the company distorts the profitability if 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
Using absorption costing for segmented income statements can lead to:
omission of upstream and downstream costs under-costing of segments
Segment break-even calculations include ____ fixed expenses.
only traceable
When calculating the profit impact of discontinuing a segment, consider ____.
the segment's contribution margin the segment's traceable fixed costs
Absorption and variable costing net income are usually different due to the accounting for ____
the two methods account for fixed manufacturing overhead costs differently - all other costs have the same affect on net operating income under the two methods.
Only costs that would disappear over time if a segment disappeared should be treated as ____ fixed costs.
traceable
Why is CVP analysis more difficult when using absorption costing than when using variable costing?
CVP analysis requires costs to be broken down between variable and fixed which is not done in absorption costing.
Unit product cost using variable costing
Direct Materials + Direct Labor + Variable Manufacturing Overhead
Product Costs under absorption costing include ____
All MANUFACTURING costs are product costs, regardless of whether they are variable or fixed.
Variable Costing Income Statement includes
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
Which of the following statements are correct regarding income statements prepared under variable and absorption costing?
Both Income statement formats include product and period costs, although they define these cost classification differently. Variable Costing income statements are grounded in the contribution format. They categorize expenses based on cost behavior -- Variable expenses are reported separately from fixed expenses. Absorption costing income statements ignore variable and fixed distinctions. Variable and absorption costing net operating incomes often differ from one another. The reason for the difference always relates to the fact that variable costing and absorption costing income statements account for fixed manufacturing overhead differently.
Dollars for company to break even
(traceable fixed expenses + common fixed expenses) / overall CM ratio
Traceable fixed cost
A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated
True or false: Under absorption costing, fixed overhead is treated like a variable cost because a portion of the total cost allocated to each unit produced, rather than being expensed as one large sum.
True
Direct Costing or marginal costing are other terms for ____ costing.
Variable Costing