Managerial Accounting Chapter 6

Product costs under absorption costing include

-Variable manufacturing overhead -Direct labor -Direct materials -Fixed manufacturing overhead

Incorrectly or arbitrarily assigning common costs to segments:

1. holds managers responsible for costs they can't control 2. could reduce the overall profits of the company 3. distorts the profitability of segments

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.

Variable costing

Categorized by behavior

Absorption costing

Categorized by function

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

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

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

absorption costing only

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

absorption, variable

Costs are categorized by function when using ____________ costing and by behavior when using ________________ costing

absorption, variable

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.

When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead Blank______.

deferred in the inventory account on the balance sheet

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

depreciation cost on the equipment used to manufacture the Corvettes

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 Blank______ is handled in absorption costing.

fixed manufacturing overhead

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

fixed manufacturing overhead.

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

fixed overhead is accounted for

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

increase

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 Blank______ cost.

product

U.S. GAAP and IFRS Blank______ 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

Assigning common fixed costs to segments impacts_______________

segment margin only

Costs that can be traced directly to a segment Blank______.

should not be allocated to other segments

Discontinuing a profitable segment results in ____________

the loss of the segment's revenues a reduction in the overall profits of the company

When calculating the profit impact of discontinuing a segment, consider ___________

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

The difference in net operating income between absorption costing and variable costing is due to the ____________

time when fixed overhead is expensed

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

traceable

Absorption costing is ____________

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

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

The two general costing approaches used by manufacturing companies to prepare income statements are ___________ costing and ______________ costing

variable, absorption

Variable costing income statements separate _____________ expenses from ______________ expenses

variable, fixed

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

Absorption, variable

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.

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 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.

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 $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 $70,000 ÷ 40% = $175,000

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 Blank______.

$45 + $37 + $8 + ($58,000 ÷ 2,000) = $119

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 Blank______ per unit.

$47 per unit(22 + 18 + 7 = 47)

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 =(19+40+9)

Which of the following is NOT a common mistake made in preparing segmented income statements?

Computing contribution margin instead of gross margin.

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 Blank______ costing method must be used for external reporting in the United States.

absorption

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

common

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 Blank______ fixed expenses.

only traceable

Variable costing treats Blank______ manufacturing costs as product costs.

only variable

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 Blank______ for the individual product lines made in the plant.

traceable fixed cost to the plant and a common fixed cost

When a segment is eliminated, a ____________.

traceable fixed cost will disappear common fixed cost will remain unchanged

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 an __________ fixed cost for each product line sold in the store

traceable, common