Chapter 7 managerial accounting

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

absorption > variable

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

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

fixed manufacturing overhead

When units produced exceeds units sold, net income will generally be

higher under absorption costing than under variable costing

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

Segment break-even calculations include:

only traceable fixed expenses

Direct costing or marginal costing are other terms for

variable costing

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

variable; absorption

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

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 ($22 + $18 + 7)

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

Incorrectly or arbitrarily assigning common costs to segments:

-Could reduce the overall profits of the company - Holds managers responsible for costs they cannot control -Distorts the profitability of segments

GAAP and IFRS rules:

-Create problems in reconciling internal and external reports. -Require segmented financial data be included in annual reports. -Require that the same method be used for both internal and external segment reporting.

Common mistakes made by companies when assigning costs to segments include

-Omitting costs that should be included -Arbitrarily allocating common fixed costs -Inappropriately assigning traceable fixed costs

Absorption costing is

-Required by GAAP and IFRS -Used by most companies for both internal and external reports

Using variable costing and the contribution approach for internal decision making:

-Supports decision making -Enables CVP analysis -Facilitates explaining changes in net income

Using absorption costing for segmented income statements can lead to:

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

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

Because manufacturing costs are not included as costs of a product, the use of_____costing can lead to the omission of segment costs.

Absorption

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

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

Absorption

Net income computed under_____costing may not agree with the results of CVP analysis.

Absorption

Net income computer under___costing may not agree with the results of CVP analysis.

Absorption

For external reporting, income statements are generally prepared using____costing, while_____costing is used for internal decision making purposes.

Absorption; variable

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

Depreciation cost on the equipment used to manufacture the Corvettes

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.

Direct; common

A variable costing income statement_____

Focuses on fixed and variable expenses, while and absorption costing income statement focuses on period and product costs Calculates contribution margin while the absorption costing income statement calculates gross 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

Variable costing treats________manufacturing costs as product costs.

Only variable

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

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

U.S. GAAP and IFRS

The standards that measure business activity or the standards we follow in the U.S./International

(T/F)Under absorption costing, fixed overhead is treated like a variable cost because a portion of the total cost is all packaged to each unit produced, rather than being expensed as one large sum.

True

True or 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

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

Variable

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

fixed manufacturing overhead

Under absorption costing product costs consist of

both variable and fixed manufacturing costs

An otherwise profitable segment may appear to be unprofitable if _____ fixed costs are allocated to it.

common

one mistake companies make when preparing segmented income statements is arbitrarily assigning __________ fixed costs to segments

common

When a segment is eliminated, a:

common fixed cost will remain unchanged traceable fixed cost will disappear

Assigning common fixed costs to segments impacts ______.

segment margin only

Costs that can be traced directly to a segment

should not be allocated to other segments

When calculating the profit impact of discontinuing a segment, consider

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

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

traceable

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 number of units produced does not affect net operating income when using _______ costing

variable

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 ______.

$70,000 / 40% = $175,000.