Chapter 7: Variable Costing and Segment Reporting: Tools for Management

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.

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

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

absorption

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

common

Product costs under absorption costing include ______.

direct labor fixed manufacturing overhead variable manufacturing overhead direct materials

Segmented income statements ______.

may be prepared for activities at many levels in a company

Assigning common fixed costs to segments impacts ______.

segment margin only Reason: Total profit for the company includes common fixed costs.

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 contribution margin the segment's traceable fixed costs

Direct costing or marginal costing are other terms for ____ costing.

variable

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

Absorption costing Reason: When inventory increases, some fixed manufacturing costs that are expensed under variable costing go to inventory under absorption costing, giving absorption costing a higher net income.

Match the costing method with the way costs are separated for the method.

Absorption costing -Manufacturing and selling and administrative Variable costing -Variable and fixed

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.

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

When units produced exceed units sold, net income will generally be ______ costing.

higher under absorption costing than under variable

Segment break-even calculations include ______ fixed expenses.

only traceable

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 ______.

require that the same method be used for both internal and external segment reporting require segmented financial data be included in annual reports create problems in reconciling internal and external reports

One mistake companies make when preparing segmented income statements is arbitrarily assigning _____ fixed costs to segments.

traceable

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

traceable

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

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

Using absorption costing for segmented income statements can lead to ______.

under-costing of segments omission of upstream and downstream costs

Absorption costing is ______.

used by most companies for both internal and external reports required by GAAP and IFRS

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

variable

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

variable, absorption

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.

Because nonmanufacturing costs are not included as costs of a product, the use of _____ costing can lead to the omission of segment costs.

absorption

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

absorption

Fixed manufacturing overhead costs are included as part of Work in Process inventory under ______.

absorption costing only

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 treats fixed manufacturing overhead as a(n) ______ cost.

period

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

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

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

absorption; variable

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

absorption; variable

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

When a segment is eliminated, a ______.

common fixed cost will remain unchanged traceable fixed cost will disappear

Incorrectly or arbitrarily assigning common costs to segments ______.

could reduce the overall profits of the company distorts the profitability of segments holds managers responsible for costs they cannot control

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

fixed manufacturing overhead

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

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

increase Reason: When fixed costs are put on a per unit basis, it appears that the total cost will increase as the number of units increase.

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

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

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product