Quarles-Lecture Questions CH 4

1. Direct labor 2. Fixed manufacturing overhead 3. Variable manufacturing overhead 4. Fixed selling and administrative expenses 5. Variable selling and administrative expenses

1. Product cost 2. Period cost 3. Product cost 4. Period cost 5. Period cost

Max, Inc., has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000 respectively. What is the segment margin for the South Division?

Contribution margin = Sales of $500,000 × 60% contribution margin = $300,000 Segment margin = Contribution margin of $300,000 - Traceable fixed expenses of $100,000 = $200,000

Chao, Inc., a service provider, has two divisions. The firm's most recent annual contribution format segmented income statement appears below. Total Company Eastern Division Western Division Sales $ 450,000 $ 90,000 $ 360,000 Variable expenses 243,000 27,000 216,000 Contribution margin 207,000 63,000 144,000 Traceable fixed expenses 100,800 46,800 54,000 Division segment margin 106,200 $ 16,200 90,000 Common fixed expenses 72,000 Net operating income $34,200 If the company eliminates the Western Division and the Eastern Division sales increase by 10% as a result, how much will the company's net operating income decrease?

Eastern Division contribution margin ratio = $63,000 ÷ $900,000 = 70% Increase in Eastern Division contribution margin = Increase in sales of ($90,000 × Increase of 10%) × CM ratio of 70% Increase in Eastern Division contribution margin = $9,000 × 0.70 = $6,300 Because the fixed costs will not change, the entire $6,300 would result in increased net operating income for the company. Change in company's net operating income = Increase in Western Division CM of $6,300 − Decrease of Eastern Division segment margin of $90,000 = $(83,700)

Excerpt from Areojet Corporation Per Unit Per Month Selling price $200,000 Direct materials $40,000 Direct labor $10,000 Variable manufacturing overhead $2,000 Fixed manufacturing overhead $140,000 Variable selling & administrative expenses 20,000 Fixed selling and administrative expenses 40,000 January February March Beginning inventory 0 0 3 Units produced 4 5 2 Units sold 4 2 5 Ending inventory 0 3 0 What is the unit product cost for the month of February, using the absorption costing method?

Fixed manufacturing overhead cost per unit = Monthly fixed manufacturing overhead cost of $140,000 ÷ 5 units produced during February = $28,000 Unit product cost for the month of February = Direct materials cost of $40,000 + Direct labor cost of $10,000 + Variable manufacturing overhead cost of $2,000 + Fixed manufacturing overhead cost of $28,000 = $80,000

January Beginning inventory 0 Units produced 500 Units sold 400 Ending inventory 100 Excerpt from Wallis Corporation Per Unit Per Month Selling price $100 Direct materials $30 Direct labor $20 Variable manufacturing overhead 10 Variable selling and administrative expenses 7 Fixed manufacturing overhead $ 10,000 Fixed selling and administrative expenses 3,000 What is the cost of goods sold for the month of January using the absorption costing method?

Knowledge Check 1Per unit product cost = $30 direct materials cost per unit + $20 direct labor cost per unit + $10 variable manufacturing cost per unit + $20 fixed manufacturing overhead cost per unit (or $10,000 fixed manufacturing overhead ÷ 500 units produced) = $80Cost of goods sold = 400 units sold × $80 per unit = $32,000

Parcel Corporation Segment Income Statement Total Company American Division International Division Sales $ 1,520,000 $ 720,000 $ 800,000 Variable expenses 448,000 288,000 160,000 Contribution margin 1,072,000 432,000 640,000 Traceable fixed expenses 712,000 360,000 352,000 Division segment margin 360,000 $72,000 $ 288,000 Common fixed expenses 141,800 Net operating income $218,200 What is the break-even point for the International Division?

Segment break-even point = Traceable fixed expenses of $352,000 ÷ Segment contribution margin ratio of 80% (= $640,000 ÷ $800,000) = $440,000

Parcel Corporation Segment Income Statement Total Company American Division International Division Sales $ 1,520,000 $ 720,000 $ 800,000 Variable expenses 448,000 288,000 160,000 Contribution margin 1,072,000 432,000 640,000 Traceable fixed expenses 712,000 360,000 352,000 Division segment margin 360,000 $72,000 $ 288,000 Common fixed expenses 141,800 Net operating income $218,200 What is the break-even point for the American Division?

Segment break-even point = Traceable fixed expenses of $360,000 ÷ Segment contribution margin ratio of 60% (= $432,000 ÷ $720,000) = $600,000

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. What is the segment margin of the mobile phone division, assuming the traceable fixed costs of the television division are $300,000?

The traceable fixed costs of the mobile phone division is $200,000 ($500,000 total traceable fixed costs minus $300,000 traceable fixed costs of television division). segment margin is $400,000 ($600,000 contribution margin minus the $200,000 traceable fixed costs).

Which of the following is a common mistake made by companies when assigning costs to segments?

They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.

Excerpt from Areojet Corporation Per Unit Per Month Selling price $200,000 Direct materials $40,000 Direct labor $10,000 Variable manufacturing overhead $2,000 Fixed manufacturing overhead $140,000 Variable selling & administrative expenses 20,000 Fixed selling and administrative expenses 40,000 January February March Beginning inventory 0 0 3 Units produced 4 5 2 Units sold 4 2 5 Ending inventory 0 3 0 What is the unit product cost for the month of February, using the variable costing method?

Unit product cost for the month of February = Direct materials cost of $40,000 + Direct labor cost of $10,000 + Variable manufacturing overhead cost of $2,000 = $52,000

Which of the following costing approaches is best suited for cost-volume-profit analysis?

Variable

Knowledge Check 01 January Beginning inventory 0 Units produced 500 Units sold 400 Ending inventory 100 Excerpt from Wallis Corporation Per Unit Per Month Selling price $100 Direct materials $30 Direct labor $20 Variable manufacturing overhead 10 Variable selling and administrative expenses 7 Fixed manufacturing overhead $ 10,000 Fixed selling and administrative expenses 3,000 What is the company's contribution margin for January?

Variable cost per unit = (Direct materials cost of $30 per unit + Direct labor cost of $20 per unit + Variable manufacturing cost per unit of $10) + Variable selling & administrative expenses per unit of $7 = $60 + $7 = $67 Contribution margin = (Sales price of $100 − Variable cost per unit of $67) × Units sold of 400 = $33 × 400 = $13,200Alternatively:Sales of $40,000 (= $100 per unit × 400 units) - Variable cost of goods sold of $24,000 (= $60 × 400 units) - Variable selling and administrative expenses of $2,800 (= $7 per unit × 400 units) = $13,200

When the units produced are equal to the units sold, net operating income computed using the absorption costing approach is ________ the net operating income computed using the variable costing approach.

equal to

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________.

fixed overhead costs

When the units produced exceed the units sold, net operating income computed using the absorption costing approach is ______ the net operating income computed using the variable costing approach.

greater than

When units produced are less than units sold, net operating income computed using the absorption costing approach is ________ the net operating income computed using the variable costing approach.

less than

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________.

less than absorption costing net operating income

The use of absorption costing for segmented income statements results in ________.

omission of upstream and downstream costs

Absorption costing income statements ignore ________.

variable and fixed cost distinctions