Variable Costing and Segment Reporting: Tools for Management

The company sells the same number of units as it produces.

Super-variable costing will produce the same net operating income as variable costing in which of the following circumstances?

True

Treating direct labor costs as variable costs can lead to bad decisions.

False

It is absorption costing income statements that ignore cost behaviors.

Variable costing income statements ignore cost behaviors.

Net Operating Income =

Sales - Variable expenses - Fixed expenses

CM Ratio =

Contribution Margin / Sales

Break-even sales =

Total fixed cost (expenses) / CM Ratio

Period Cost

Any cost that is expensed in the period incurred and not tied to production, such as selling and administrative expenses.

Product Cost

Any cost that is directly tied to the production of goods, including direct materials, direct labor, and manufacturing overhead.

Variable costing income statement

is a method of cost accounting that includes only variable costs in the cost of a product, while fixed costs are expensed in the period incurred. This approach helps in determining the contribution margin and managing inventory.

Absorption costing

is an accounting method that allocates all manufacturing costs, both fixed and variable, to the cost of a product. This approach is used for external financial reporting and can affect profit reporting based on inventory levels.

A variable costing income statement categorizes costs by behavior and an absorption costing income statement categorizes costs by function.

True

In variable costing, costs are categorized as variable or fixed, but in absorption costing, they are categorized as product or period.

Under absorption costing, fixed manufacturing overhead costs are included in work in process inventory on the balance sheet.

True

True for absorption costing, but not for variable costing in which fixed manufacturing overhead is a period cost.

Which of the following income statement line headings will be found on the absorption costing income statement and not the variable costing income statement?

Cost of goods sold

Cost of goods sold appears on the absorption costing income statement, but not on the variable costing income statement.

Fixed Cost

A cost that remains constant regardless of the level of production or sales within a certain range of activity. Fixed costs do not change with the volume of goods produced. (traceable)

Variable Cost

A cost that varies with the level of production or sales. Variable costs increase or decrease directly in proportion to the quantity of goods produced. (not easily traceable)

If a company uses absorption costing, the fixed manufacturing overhead cost of a unit of product that was manufactured in January and sold in April, will be recognized in January.

This statement is false; under absorption costing, the fixed manufacturing overhead cost is recognized in the period the product is sold, not when it is manufactured.

Santa Claws manufactures extra sturdy pet toys. They use absorption costing. In October, their fixed manufacturing overhead in ending inventory was $38,000 and their fixed manufacturing overhead in beginning inventory was $43,000. Which of the following statements is true?

They had $5,000 of manufacturing overhead released from inventory.

Manufacturing overhead deferred in (released from) inventory = $38,000 − $43,000 = ($5,000) of manufacturing overhead released from inventory.

Super-variable costing

is a costing method similar to variable costing but also includes fixed costs as a variable cost component, allowing for more flexibility in cost analysis.

Super-variable costing classifies all direct material and manufacturing overhead costs as fixed period costs.

False

Super-variable costing classifies all direct labor and manufacturing overhead costs as fixed period costs.

If a fixed cost supports more than one segment, and is not traceable to any one segment, it is a what?

A common fixed cost, which is a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment.

If variable manufacturing costs are constant, a change in inventories do not affect absorption costing net operating income.

False

True in variable costing, but not in absorption costing.