Managerial Accounting, 16e (Garrison)
Chapter 6 Variable Costing and Segment Reporting: Tools for Management
1) Variable manufacturing overhead costs are treated as product costs under both absorption and
variable costing.
2) Absorption costing treats all manufacturing costs as product costs.
3) Under variable costing, fixed manufacturing overhead is treated as a product cost.
4) Under variable costing, all variable production costs are treated as product costs.
5) Under variable costing, an increase in fixed manufacturing overhead will affect the unit
product cost.
6) Under variable costing, only variable production costs are treated as product costs.
7) Absorption costing treats all fixed costs as product costs.
8) Variable costing is more compatible with cost-volume-profit analysis than is absorption
costing.
9) Under the absorption costing method, a company can increase profits simply by increasing the
number of units produced.
10) Net operating income computed using absorption costing will always be less than net
operating income computed using variable costing.
11) Under absorption costing, a portion of fixed manufacturing overhead cost is released from
inventory when production volume exceeds sales volume.
12) Variable costing net operating income is usually closer to the net cash flow of a period than
is absorption costing net operating income.
13) When reconciling variable costing and absorption costing net operating income, fixed
manufacturing overhead costs deferred in inventory under absorption costing should be deducted
from variable costing net operating income to arrive at the absorption costing net operating
income.
14) Lean production should result in reduced inventories. If lean production is successfully
implemented, the difference in net operating income computed under the absorption and variable
costing methods should be reduced.
15) Assuming the LIFO inventory flow assumption, when production exceeds sales for the
period, absorption costing net operating income will exceed variable costing net operating
income.
16) Under the LIFO inventory flow assumption, if the number of units in inventories increase
between the beginning and end of the period, absorption costing net operating income will
generally be greater than variable costing net operating income.
17) Segment margin is sales less variable expenses less traceable fixed expenses.
18) All other things the same, if a division’s traceable fixed expenses decrease then the division’s
segment margin will decrease.
19) The salary paid to a store manager is not a traceable fixed expense of the store.
20) A company has two divisions, each selling several products. If segment reports are prepared
for each product, the division managers’ salaries should be considered as common fixed costs of
the products.
21) Allocating common fixed costs to segments on segmented income statements increases the
usefulness of such statements.
22) If a cost must be arbitrarily allocated in order to be assigned to a particular segment, then that
cost should be considered a common cost.
23) Segmented statements for internal use should not be prepared using the contribution format.
24) When using segmented income statements, the dollar sales for a company to break even
equals the traceable fixed expenses divided by the overall CM ratio.
25) Common fixed expenses should not be allocated to business segments when performing
break-even calculations and making decisions.
26) When computing the break even for a segment, the calculations include the company’s
common fixed expenses.
27) How would the following costs be classified (product or period) under variable costing at a
retail clothing store?
Cost of purchasing clothing
Sales commissions
A)
Product
Product
B)
Product
Period
C)
Period
Product
D)
Period
Period
A) Choice A
B) Choice B
C) Choice C
D) Choice D
28) Which of the following costs at a manufacturing company would be treated as a product cost
under variable costing?
A) direct material cost
B) property taxes on the factory building
C) sales manager’s salary
D) sales commissions
29) A cost that would be included in product costs under both absorption costing and variable
costing is:
A) supervisory salaries.
B) factory rent.
C) variable manufacturing costs.
D) variable selling expenses.
30) The costing method that treats all fixed costs as period costs is:
A) absorption costing.
B) job-order costing.
C) variable costing.
D) process costing.
31) Assuming that direct labor is a variable cost, the primary difference between the absorption
and variable costing is that:
A) variable costing treats only direct materials and direct labor as product cost while absorption
costing treats direct materials, direct labor, and the variable portion of manufacturing overhead
as product costs.
B) variable costing treats direct materials, direct labor, the variable portion of manufacturing
overhead, and an allocated portion of fixed manufacturing overhead as product costs while
absorption costing treats only direct materials, direct labor, and the variable portion of
manufacturing overhead as product costs.
C) variable costing treats only direct materials, direct labor, the variable portion of
manufacturing overhead, and the variable portion of selling and administrative expenses as
product cost while absorption costing treats direct materials, direct labor, the variable portion of
manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product
costs.
D) variable costing treats only direct materials, direct labor, and the variable portion of
manufacturing overhead as product costs while absorption costing treats direct materials, direct
labor, the variable portion of manufacturing overhead, and an allocated portion of fixed
manufacturing overhead as product costs.
32) Which of the following is true of a company that uses absorption costing?
A) Net operating income fluctuates directly with changes in sales volume.
B) Fixed production and fixed selling costs are considered to be product costs.
C) Unit product costs can change as a result of changes in the number of units manufactured.
D) Variable selling expenses are included in product costs.
33) A reason why absorption costing income statements are sometimes difficult to interpret is
that:
A) they omit variable expenses entirely in computing net operating income.
B) they shift portions of fixed manufacturing overhead from period to period according to
changing levels of inventories.
C) they include all fixed manufacturing overhead on the income statement each year as a period
cost.
D) they ignore inventory levels in determining cost of goods sold.
34) When unit sales are constant, but the number of units produced fluctuates and everything else
remains the same, net operating income under variable costing will:
A) fluctuate in direct proportion to changes in production.
B) remain constant.
C) fluctuate inversely with changes in production.
D) be greater than net operating income under absorption costing.
35) Which of the following will usually be found on an income statement prepared using
absorption costing?
Contribution Margin
Gross Margin
A)
Yes
Yes
B)
Yes
No
C)
No
Yes
D)
No
No
A) Choice A
B) Choice B
C) Choice C
D) Choice D
36) In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000
sets of artificial tan lines. What would have happened to net operating income in this first year
under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that
Bronfren has both variable and fixed production costs.)
Variable costing
Absorption costing
A)
No effect
Increase
B)
Decrease
Increase
C)
Decrease
Decrease
D)
No effect
Decrease
A) Choice A
B) Choice B
C) Choice C
D) Choice D
37) Net operating income computed under variable costing would exceed net operating income
computed using absorption costing if:
A) units sold exceed units produced.
B) units sold are less than units produced.
C) units sold equal units produced.
D) the average fixed cost per unit is zero.
38) Generally speaking, net operating income under variable and absorption costing will:
A) always be equal.
B) never be equal.
C) be equal only when production and sales are equal.
D) be equal only when production exceeds sales.
39) When sales exceed production and the company uses the LIFO inventory flow assumption,
the net operating income reported under variable costing generally will be:
A) less than net operating income reported under absorption costing.
B) greater than net operating income reported under absorption costing.
C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.
40) Hayworth Corporation has just segmented last year’s income statement into its ten product
lines. The chief executive officer (CEO) is curious as to what effect dropping one of the product
lines at the beginning of last year would have had on overall company profit. What is the best
number for the CEO to look at to determine the effect of this elimination on the net operating
income of the company as a whole?
A) the product line’s sales dollars
B) the product line’s contribution margin
C) the product line’s segment margin
D) the product line’s segment margin minus an allocated portion of common fixed expenses
41) Higado Confectionery Corporation has a number of store locations throughout North
America. In income statements segmented by store, which of the following would be considered
a common fixed cost with respect to the stores?
A) store manager salaries
B) store building depreciation expense
C) the cost of corporate advertising aired during the Super Bowl
D) cost of goods sold at each store
42) The impact on net operating income of a small change in sales for a segment is best predicted
by using:
A) the contribution margin ratio.
B) the segment margin.
C) the ratio of the segment margin to sales.
D) net sales less segment fixed costs.
43) When using data from a segmented income statement, the dollar sales for a segment to break
even is equal to:
A) Traceable fixed expenses ÷ Segment CM ratio
B) Common fixed expenses ÷ Segment CM ratio
C) (Traceable fixed expenses + Common fixed expenses) ÷ Segment CM ratio
D) Non-traceable fixed expenses ÷ Segment CM ratio
44) Allocating common fixed expenses to business segments:
A) may cause managers to erroneously discontinue business segments.
B) may cause managers to erroneously keep business segments that should be dropped.
C) ensures that all costs are covered.
D) helps managers make good decisions.
45) Mullee Corporation produces a single product and has the following cost structure:
Number of units produced each year
Variable costs per unit:
Direct materials
$
Direct labor
$
Variable manufacturing overhead
$
Variable selling and administrative expense
$
Fixed costs per year:
Fixed manufacturing overhead
$
Fixed selling and administrative expense
$
The absorption costing unit product cost is:
A) $149 per unit
B) $65 per unit
C) $63 per unit
D) $128 per unit
Direct materials
$
Direct labor
Variable manufacturing overhead
2
Fixed manufacturing overhead cost ($441,000 ÷ 7,000 units)
Absorption costing unit product cost
$
128
46) A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:
Selling price
$
121
Units in beginning inventory
0
Units produced
6,000
Units sold
5,600
Units in ending inventory
400
Variable costs per unit:
Direct materials
$
38
Direct labor
$
53
Variable manufacturing overhead
$
3
Variable selling and administrative expense
$
11
Fixed costs:
Fixed manufacturing overhead
$
60,000
Fixed selling and administrative expense
$
28,000
What is the total period cost for the month under variable costing?
A) $149,600
B) $60,000
C) $88,000
D) $89,600
($11 per unit × 5,600 units sold)
Fixed manufacturing overhead
60,000
Fixed selling and administrative expense
28,000
Variable costing total period cost
$
149,600