Question 1

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.

Accepted Answer

Common fixed costs are costs that cannot be attributed to a specific product or segment, and are incurred for the overall benefit of the company. The salaries of division managers are an example of common fixed costs, as they benefit both divisions and all products sold by the company. Therefore, when preparing segment reports, the division managers' salaries should be considered as common fixed costs of the products.

Question 2

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.

Accepted Answer

Lean production focuses on minimizing waste and increasing efficiency in production processes, which should lead to a reduction in inventories. This reduction in inventories should result in a smaller difference between net operating income computed under absorption and variable costing methods. This is because absorption costing includes fixed manufacturing overhead costs in the cost of goods sold, which can lead to higher inventory values and lower net operating income in periods of low sales. Variable costing, on the other hand, only includes variable manufacturing costs in the cost of goods sold, resulting in a more consistent net operating income regardless of inventory levels.

Question 3

Under variable costing, only variable production costs are treated as product costs.

Accepted Answer

Variable costing only considers variable production costs (such as direct materials, direct labor, and variable overhead) as product costs, while fixed production costs (such as depreciation on equipment and property taxes on the factory) are treated as period costs and expensed in the period incurred.

Question 4

The salary paid to a store manager is not a traceable fixed expense of the store.

Accepted Answer

The salary paid to a store manager is a fixed expense that can be traced directly to the store. It is not a variable expense that fluctuates with sales.

Question 5

Under variable costing, an increase in fixed manufacturing overhead will affect the unit product cost.

Accepted Answer

Under variable costing, only variable costs are included in the unit product cost; fixed manufacturing overhead is treated as a period expense and does not affect the unit product cost.

Question 6

Variable costing is more compatible with cost-volume-profit analysis than is absorption costing.

Accepted Answer

Variable costing separates fixed and variable costs, making it easier to analyze the effects of changes in sales volume on contribution margin and net income, which are key components of cost-volume-profit analysis. Absorption costing, on the other hand, includes fixed manufacturing overhead as a product cost, which can distort contribution margin calculations and make cost-volume-profit analysis more difficult. Therefore, variable costing is considered more compatible with cost-volume-profit analysis.

Question 7

Allocating common fixed costs to segments on segmented income statements increases the usefulness of such statements.

Accepted Answer

Allocating common fixed costs to segments does not increase the usefulness of segmented income statements because these costs are not caused by or directly attributable to any specific segment, making it difficult to accurately assess the performance of individual segments.

Question 8

Under the absorption costing method, a company can increase profits simply by increasing the number of units produced.

Accepted Answer

Under the absorption costing method, fixed production costs are included in the cost of each unit produced. Therefore, as more units are produced, the fixed costs are spread out over a larger number of units, resulting in a lower cost per unit and potentially higher profits. However, it's important to note that increasing production may also result in higher variable costs and selling expenses, which could offset the benefits of spreading fixed costs over more units.

Question 9

Variable costing net operating income is usually closer to the net cash flow of a period than is absorption costing net operating income.

Accepted Answer

This is because variable costing only includes variable manufacturing costs in the cost of goods sold, while absorption costing includes both variable and fixed manufacturing costs. As fixed costs do not immediately affect cash flow, they can distort the comparison between net operating income and net cash flow.

Question 10

Under variable costing, fixed manufacturing overhead is treated as a product cost.

Accepted Answer

Under variable costing, fixed manufacturing overhead is treated as a period cost and not included in product costs.

Question 11

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.

Accepted Answer

Under LIFO and when production exceeds sales, there will be more cost of goods sold charged to the income statement. Absorption costing includes fixed manufacturing overhead in the cost of goods sold, while variable costing only includes variable manufacturing costs. As a result, net operating income under absorption costing will be higher than under variable costing when production exceeds sales.

Question 12

Under absorption costing, a portion of fixed manufacturing overhead cost is released from inventory when production volume exceeds sales volume.

Accepted Answer

The answer of Under absorption costing, a portion of fixed...

Question 13

Absorption costing treats all manufacturing costs as product costs.

Accepted Answer

Absorption costing includes all manufacturing costs in the cost of a product, including direct materials, direct labor, and both variable and fixed manufacturing overhead costs. Therefore, all costs are considered product costs.

Question 14

Under variable costing, all variable production costs are treated as product costs.

Accepted Answer

Under variable costing method, only variable production costs are included in product costs. Fixed overhead costs are treated as period costs and are expensed in the period incurred.

Question 15

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.

Accepted Answer

Fixed manufacturing overhead costs deferred in inventory under absorption costing are added to variable costing net operating income to arrive at the absorption costing net operating income, not deducted. This is because these costs are treated as an expense in the period they are incurred under variable costing but are allocated to the cost of goods sold and inventory under absorption costing.

Question 16

Segment margin is sales less variable expenses less traceable fixed expenses.

Accepted Answer

This formula for segment margin is correct.

Question 17

Absorption costing treats all fixed costs as product costs.

Accepted Answer

Absorption costing treats only manufacturing fixed costs as product costs, not all fixed costs. Non-manufacturing fixed costs are treated as period costs.

Question 18

All other things the same, if a division's traceable fixed expenses decrease then the division's segment margin will decrease.

Accepted Answer

If the traceable fixed expenses decrease, it means the division's total fixed costs have decreased. Therefore, the division's contribution margin will increase as a result, leading to an increase in segment margin.

Question 19

Net operating income computed using absorption costing will always be less than net operating income computed using variable costing.

Accepted Answer

Net operating income computed using absorption costing and variable costing can be different depending on the level of production and inventory levels. In some cases, net operating income computed using absorption costing can be higher than that computed using variable costing.

Question 20

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.

Accepted Answer

Under LIFO, the costs of the last units purchased or produced are matched with revenues to determine COGS, which results in higher COGS and lower ending inventory compared to FIFO. This means that under absorption costing, a larger portion of the fixed manufacturing overhead is allocated to COGS, resulting in higher net operating income compared to variable costing.

Quiz 6: Variable Costing and Segment Reporting: Tools for Management