Chapter 6: Variable Costing and Segment Reporting

Question 1

What are the 2 types of costing methods?

Answer 1

Variable costing and absorption costing

Question 2

Which costing method includes fixed manufacturing overhead as a part of product costs?

Answer 2

Absorption costing

Question 3

Variable Costing:
1. What is included in Product Costs?
2. What is included in Period Costs?

Answer 3

1. Direct materials, direct labor, variable MOH
2. Fixed MOH, Variable Selling and Admin Expenses, Fixed Selling and Admin Expenses

Question 4

Absorption Costing:
1. What is included in Product Costs?
2. What is included in Period Costs?

Answer 4

1. Direct materials, direct labor, variable MOH, AND fixed MOH
2. Variable selling and admin expenses, Fixed selling and admin expenses

Question 5

T or F: Over time, both the variable costing and absorption costing method will get us to the same cost.

Answer 5

True

Question 6

In (absorption/variable) costing, we will expense fixed MOH, which will initially make our Net Operating Income (more/less) immediately, because we’re not attaching it to the product.

Answer 6

Variable; less

(We’re recognizing fixed MOH on our income statement immediately; not attached to the product when we actually sell it)

Question 7

T or F: In absorption costing, we won’t see all of the product costs until we actually sell the product. We will only see period cost (selling and admin).

Answer 7

True

(this is what we’ve been doing in past chapters)
(look at pic in camera roll if needed)

Question 8

Which method will produce the highest values for work in process and finished goods inventories?
a. Absorption costing
b. Variable costing
c. They produce the same values for these inventories
d. It depends

Answer 8

a. Absorption costing

(bc it ALSO includes our fixed MOH in product costs compared to variable costing)
(product costs go into WIP and Finished Goods Inventories)

Question 9

• Under ______ costing, all product costs, variable and fixed, are included when determining unit product cost.
• Under _____ costing, only the variable production costs are included in product costs.

Answer 9

• absorption
• variable

(look at pic in camera roll to understand how to calculate unit product cost under both the variable and absorption costing method)

Question 10

What is the Variable Costing Contribution Format Income Statement?

Answer 10

Sales
- Variable Expenses (which includes variable cost of goods sold (which is VARIABLE manufacturing costs only) and variable selling and admin expenses)
= Contribution Margin
- Fixed Expenses (which includes fixed MOH (that is, all fixed MOH is expensed) and fixed selling and admin expenses)
= Net Operating Income

(Fixed MOH is considered a period cost in variable costing, so it is expensed. This is the big difference in comparison to absorption costing)

(look at pic of this in camera roll)

Question 11

What is the Absorption Costing Income Statement?

Answer 11

Sales
- COGS (which will be units produced x unit product cost)
= Gross Margin
- Selling and admin expenses (both fixed and variable)
= Net Operating Income

(look at pic of this in camera roll)

Question 12

In (absorption/variable costing), there is a higher Net Operating Income because the product cost is higher (it’s attached to that inventory).

Answer 12

Absorption

Question 13

Cost of Goods Sold is higher under what costing method?

Answer 13

Absorption

(bc it includes fixed MOH)

Question 14

Look at picture in camera roll titled “Comparing the Two Methods” to understand when things are expensed in each method, and how they still end up equaling the same amount of total cost.

Answer 14

Okay

Question 15

How can we reconcile the difference in Net Operating Income between Variable Costing and Absorption Costing?

Answer 15

Variable Costing NOI is less than absorption costing NOI.

So, to reconcile the difference, we will ADD fixed mfg. overhead costs that were DEFERRED IN INVENTORY to the Variable Costing N.O.I. (we would take the amount of units produced that were deferred (aka not sold) and multiply it by the fixed MOH per unit cost (which we get by taking MOH/total units produced) to get the fixed MOH costs deferred in inventory.

Then, the Variable Costing NOI + Fixed MOH Costs deferred in inventory will = Absorption Costing NOI. (aka we have reconciled the difference between absorption and variable income)

(look at pic in camera roll to understand)

Question 16

Direct materials and direct labor are (fixed/variable costs).

Answer 16

Variable

Question 17

Our unit product cost is (higher/lower) in absorption costing because we attached the fixed MOH to our Cost of Goods Sold there.

Answer 17

higher

Question 18

How do we calculate COGS in absorption costing?

Answer 18

Take the units sold x unit product cost

Question 19

If our units produced = our units sold, then the following is true:
1. Effect on Inventory: (no change/ decrease/increase)
2. Relation between variable and absorption incomes: (absorption = variable, absorption > variable, absorption < variable)

Answer 19

1. no change
2. absorption = variable (the income would be the same)

Question 20

If our units produced > units sold, then the following is true:
1. Effect on Inventory: (no change/ decrease/increase)
2. Relation between variable and absorption incomes: (absorption = variable, absorption > variable, absorption < variable)

Answer 20

1. Increase in inventory
2. Absorption > variable

Question 21

If our units produced < units sold, then the following is true:
1. Effect on Inventory: (no change/ decrease/increase)
2. Relation between variable and absorption incomes: (absorption = variable, absorption > variable, absorption < variable)

Answer 21

1. Decrease in inventory
2. Absorption < variable

Question 22

any part or activity of an organization about which a manager seeks cost, revenue, or profit data

Answer 22

Segment

(Ex: looking at the activity ONLY of the Starbucks in the SE region; looking at only that segments cost, revenue, and profit data)

Question 23

A segment can be what 3 things?

Answer 23

1. An Individual Store (ex: AU store at Student Center)
2. A Sales Territory (Starbucks in the SE region)
3. A Service Center (an internal department that provides goods or services to other departments within the same organization; ex: the IT department of a company)

Question 24

There are two keys to building segmented income statements. What are they?

Answer 24

1. A contribution format should be used (bc it separates fixed from variable costs and it enables the calculation of a contribution margin; helps to see the difference between fixed and variable costs)
2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

Question 25

(traceable/common) fixed costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared.

Answer 25

Traceable (could trace these DIRECTLY to the fixed cost of that segment) (ex: the salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo (aka able to trace it to the Fritos segment)) (another ex: the maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing)

Question 26

(traceable/common) fixed costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated.

Answer 26

Common (we don't allocate common costs to segments) (ex: the salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors) (another ex: the cost of heating a Kroger grocery store is a common fixed cost of the various departments)

Question 27

T or F: The traceable fixed costs of one segment may be a common fixed cost of another segment.

Answer 27

True (ex: The landing fee paid to land an airplane at an airport is traceable to the particular flight, but it is not traceable to first-class, business-class, and economy-class passengers)

Question 28

How do you calculate division/segment margin for segmented statements?

Answer 28

Contribution Margin - Traceable Fixed Costs (look at pic in camera roll of segmented statement)

Question 29

T or F: Division/segment margin is the segment's contribution to profits.

Answer 29

True

Question 30

T or F: Common expenses would still remain even if you took out a segment of the company.

Answer 30

True

Question 31

How do you calculate NOI for a company when looking at a segmented statement?

Answer 31

Company (total) division margin - Common Expenses = Net Operation Income

Question 32

T or F: Traceable fixed costs can become common costs.

Answer 32

True (look at pic in camera roll of this; it's the one with a segment statement of Television Division)

Question 33

Break-Even Analysis for Segments: How do we calculate our break-even point COMPANY-wide (not segments)?

Answer 33

BE Point = (Traceable Fixed Costs + Common Expenses) / CM Ratio Remember: CM Ratio = CM / Sales (DEFINITELY KNOW THIS AND KNOW HOW TO DO IT FOR EXAM) (We are using the overall COMPANY'S data for this, aka using the Company CM, the Company Traceable FC, etc.)

Question 34

Look at pic in camera roll for how to calculate the Company-Wide Break Event Point when dealing with Segmented Income Statements

Answer 34

Ok

Question 35

How do you calculate the break-even point for a business segment (not the overall company like we mentioned before)?

Answer 35

BE Point = Traceable Fixed Costs / CM Ratio (We DON'T add common expenses to traceable fixed costs. We also use the segments data (aka the SEGMENTS traceable fixed costs, the SEGMENTS CM Ratio, by using the SEGMENTS CM and Sales to compute that CM Ratio)

Question 36

Company-Wide Financial Statements: Both U.S. GAAP and IFRS require _______ costing for external reports.

Answer 36

absorption (since absorption costing is required for external reporting, most companies also use it for internal reports rather than incurring the additional cost of maintaining a separate variable cost system for internal reporting)

Question 37

Segmented Financial Information: Both U.S. GAAP and IFRS require publicly traded companies to include _______ financial data in their annual reports. 1. Companies must report segmented results to shareholders using the ____ ____ that are used for internal segmented reports. 2. This requirement motivates managers to avoid using the ________ approach for internal reporting purposes because if they did they would be required to: a. Share this sensitive data with the public. b. Reconcile these reports with applicable ru.es for consolidated reporting purposes.

Answer 37

- segmented 1. same methods 2. contribution