Ch 7 SB ACCT 252

Costs are categorized by function when using_____costing and by behavior when using________costing.

1. Absorption 2. Variable

Variable costing income statements separate_______expenses from_______expenses.

1. Variable 2. Fixed

Discontinuing a profitable segment results in ______

A reduction in the overall profits of the company. The loss of the segment's revenues.

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.

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

Under-costing of segments. Omission of upstream and downstream costs.

Segment contribution margin equals segment revenue minus the ____________ expenses for the segment

Variable

Segment contribution margin equals segment revenue minus the _______expenses for the segment.

Variable

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

Variable

The variable costing income statement separates?

Variable and Fixed expenses

Under absorption costing product costs consist of ______ costs.

both variable and fixed manufacturing

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

depreciation on equipment used to manufacture Corvettes

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

fixed overhead is accounted for

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

higher under absorption costing than under variable

Variable costing treats ______ manufacturing costs as product costs.

only variable Reason: Fixed manufacturing costs are treated as period costs under variable costing.

When a segment cannot cover its own costs, that segment should

probably be dropped

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

variable costing

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.

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

Common

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

Common

GAAP and IFRS rules for publicly traded companies

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

Miscavage Corporation has two divisions: the Beta Division and the Alpha Division. The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable fixed expenses of $186,500. The Alpha Division has sales of $510,000, variable expenses of $178,500, and traceable fixed expenses of $222,100. The total amount of common fixed expenses not traceable to the individual divisions is $235,500. What is the company's net operating income?$374,400$201,300$609,900($34,200)

$ (34,200) Sales $ 1,090,000Variable expenses (480,100)Traceable fixed expenses (408,600)---------------------Segment margin 201,300Common fixed expenses (235,500)---------------------Net operating income $ (34,200)

Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal?

$101,000 Reason: Fixed manufacturing overhead =$42,00 Fixed selling and administrative expenses =$59,000 $42,000 + $59,000 = $101,000 total fixed expenses =$101,000

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.

Blink sells and manufactures frames for eyeglasses. The unit product cost for frame #47320 is $76.35. Last period, Blink produced 200 frames and sold 155 of them. Total cost of goods sold equals ?

$11,834.25 Reason: $76.35 × 155 = $11,834.25

Comfy Cozy Chairs makes rockers that require $45 of direct materials and $37 of direct labor. Variable manufacturing overhead is $8 per rocker, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs are $15 per rocker, 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 Reason: $45 + $37 + $8 + ($58,000 ÷ 2,000) = $119

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 Reason: ($140 + $19) × 780 quilts sold = $124,020

Beamish Inc., which produces a single product, has provided the following data for its most recent month of operations:Number of units produced 8,000Variable costs per unit:Direct materials $ 37Direct labor $ 56Variable manufacturing overhead$ 4Variable sell and admin expense $ 2Fixed costs:Fixed manufacturing overhead $312,000Fixed sell and admin. expense $448,000There were no beginning or ending inventories. The absorption costing unit product cost was:

$136 Direct materials $ 37Direct labor 56Variable manuf. overhead 4Fixed manufacturing overhead cost ($312,000 ÷ 8,000 units) 39Absorption costing unit product cost $136

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 total Units: 10,000 produced and 6,000 sold

$155 Reason: $50 + $75 + $27 + ($30,000 ÷ 10,000) = $155 per unit

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

The unit product cost of a blender is $24. If 900 blenders are produced and 849 blenders are sold, the total cost of goods sold is $_________

$20376 Reason: (849 • 24 = 20376)

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expense is $6,200. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9,290. An income statement prepared using variable costing shows $ ____________as the total fixed expenses.

$28990 Reason: $19,700 + $9,290 = $28,990

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. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. The unit product cost using variable costing is ______ per unit.

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

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. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. The unit product cost using variable costing is ______ per unit.

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

Azuki Corporation operates in two sales territories, Urban and Rural. Data concerning last year's operations appear below:...............urban ........ruralSales $320,000 $80,000Variable expenses 208,000 56,000Contribution margin 112,000 24,000Traceable fixed expenses 48,000 30,000Segment margin $64,000 $(6,000)Azuki's common fixed expenses were $25,000 last year.If operations in the Rural Sales Territory would have been discontinued at the beginning of last year, how would this have changed the net operating income of Azuki Corporation as a whole?

$6,000 increase

Citrus Scents produces body sprays. Each bottle has a unit product cost of $5.38. This month 1,490 bottles were produced and 1,203 bottles were sold. Total cost of goods sold is_____

$6,472.14 Reason: $5.38 × 1,203 = $6,472.14

Kray Inc., which produces a single product, has provided the following data for its most recent month of operations:Number of units produced 6,000Variable costs per unit:Direct materials $ 40Direct labor $ 19Variable manufacturing overhead$ 8Variable sell and admin expense $ 2Fixed costs:Fixed manufacturing overhead $144,000Fixed sell and admin expense $198,000There were no beginning or ending inventories. The variable costing unit product cost was:$91 per unit$67 per unit$69 per unit$61 per unit

$67 Direct materials $ 40Direct labor 19Variable manuf. overhead 8Variable costing unit product cost$ 67

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. The unit product cost of each frame using variable costing is $ __________

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

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 Reason: 72,490 + ($22 x 314)

A manufacturing company that produces a single product has provided the following concerning its mot recent month of operations:Units in beginning inventory 0Units produced 8900Units sold 8500Units in ending inventory 400Variable costs per unit:Direct materials $26Direct labor $25Variable manufacturing overhead $4Variable selling and administrative expense $4Fixed costs:Fixed manufacturing overhead $249,200Fixed selling and administrative expense $17,000What is the variable costing unit product cost for the month?

$83 per unit 249,200 / 8900 = 2828 + 26 + 25 +4Answer: $83 per unit

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 $______?

$94,304 (Product cost) • (Amount sold$) 112 X 842 = $94,304

Advocates of ________costing believe fixed costs are an essential part of product production.

Absorption

Because nonmanufacturing 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

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

Absorption

A segment should probably be dropped when the segment _________?

Cannot cover its own costs Has a contribution margin that cannot cover traceable fixed costs

If a segment is eliminated_______fixed costs that are not traced to the segment will not change.

Common

Product costs under absorption costing include what four things?

Direct labor Fixed manufacturing overhead Variable manufacturing overhead Direct materials

When using variable costing, fixed manufacturing overhead is ?

Expensed in the period incurred

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

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

Costs that can be traced directly to a segment ________?

Should not be allocated to other segments

A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company

Has an overall net operating loss of $10,000

A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company

Has an overall net operating loss of $10,000 Reason: if all three segments are at the break-even point, common fixed expenses have not been covered.

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

Higher than

The company-wide break-even sales will always be _______ the sum of the segment break-even sales

Higher than. Reason: Company-wide will always be higher because segment break-even does not include common fixed expenses.

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 allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units?

Produced

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

Produced.

The segment margin is a valuable tool for assessing the long-run ______ of a segment.

Profitability

Discontinuing a profitable segment results in _____?

The loss of the segment's revenues. A reduction in the overall profits of the company

The segment margin represents the?

The margin available after a segment has covered all of its own costs

When calculating the profit impact of discontinuing a segment, consider ______?

The segment's traceable fixed costs. The segment's contribution margin.

The segment margin equals the segment's contribution margin less the segment's __________fixed costs.

Traceable

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 of a store is the __________fixed cost of the store and the ____________fixed cost of each product line sold in the store.

Traceable Common

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

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

Traceable fixed costs.

When a segment is eliminated, a?

traceable fixed cost will disappear common fixed cost will remain unchanged

Homeyer Corporation has provided the following data for its two most recent years of operation:Selling price per unit $71Manufacturing costs:Variable manufacturing cost per unit produced:Direct materials $12Direct labor $6Variable manufacturing overhead $3Fixed manufacturing overhead per year$264,000Selling and administrative expenses:Variable selling and administrative expense per unit sold $4Fixed selling and administrative expense per year $74,000Year 1Year 2Units in beginning inventory 03,000Units produced during the year11,00012,000Units sold during the year8,00014,000Units in ending inventory3,0001,000The net operating income (loss) under absorption costing in Year 1

$102,000 Absorption costing income statement:Year 1 Sales [(8,000 units sold × $71 per unit)]$568,000Cost of goods sold [(8,000 units sold × $45 per unit)] 360,000 Gross margin 208,000 Selling and administrative expenses[((8,000 units sold × $4 per unit) + $74,000)] 106,000Net operating income (loss)$102,000

Managers who believe that all manufacturing costs must be assigned to products in order to properly match the cost of production with sales are advocates of _________ costing

Absorption

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

Absorption Reason: CVP analysis requires that costs be broken down into fixed and variable components.

For external reporting, income statements are generally prepared using _______, costing, while ________, 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

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

Common mistakes made by companies when assigning costs to segments include _____?

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

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.

If a segment is entirely eliminated, common fixed costs will ___

Not change

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

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

Absorption costing is ____?

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

Assigning common fixed costs to segments impacts _______.

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

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 Reason: All traceable costs should be assigned to segments when possible.

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

variable, absorption