Responsibility Accounting and Transfer Pricing (C.

Variable Costing & Segmented Reporting)

C. VARIABLE COSTING AND SEGMENTED REPORTING THEORIES: Direct costing 1. A basic tenet of direct costing is that period costs should be currently expensed. What is the rationale behind this procedure? A. Period costs are uncontrollable and should not be charged to a specific product. B. Period costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits. C. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by management. D. Because period costs will occur whether or not production occurs it is improper to allocate these costs to production and defer a current costs of doing business. 1!. "n a #ariable costing system product cost includes A. direct materials direct labor #ariable o#erhead B. direct materials direct labor fixed o#erhead C. direct labor #ariable o#erhead fixed o#erhead D. direct materials #ariable o#erhead fixed o#erhead $. Which of the following must be %nown about production process in order to institute a direct costing system? A. &he #ariable and fixed components of all costs related to production. B. &he controllable and noncontrollable components of all costs related to production. C. 'tandard production rates and times for all elements of production. D. Contribution margin and brea%e#en point for all goods in production. (. )nder the direct costing concept unit product cost would most li%ely be increased by A. A decrease in the remaining useful life of factory machinery depreciated on the units*of* production method. B. A decrease in the number of units produced. C. An increase in the remaining useful life of factory machinery depreciated on the sum*of* the*years+*digits method. D. An increase in the commission paid to salesmen for each unit sold. ,. Which of the following statements is true for a firm that uses #ariable -direct. costing? A. &he cost of a unit of product changes because of changes in the number of units manufactured.
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B. Profits fluctuate with sales C. An idle facility #ariation is calculated D. Product costs include /direct0 -#ariable. administrati#e costs. 1. Which of the following is an argument against the use of direct -#ariable. costing? A. Absorption costing o#erstates the balance sheet #alue of in#entories. B. 2ariable factory o#erhead is a period cost. C. 3ixed factory o#erhead is difficult to allocate properly. D. 3ixed factory o#erhead is necessary for the production of a product. 14. Ad#ocates of #ariable costing for internal reporting purposes do not rely on which of the following points? A. &he matching concept B. Price*#olume relationships C. Absorption costing does not include selling and administrati#e expenses as part of in#entoriable cost D. Production influences income under absorption costing 1(. Which costing method is not acceptable to the '3A' external reporting? A. absorption costing C. full costing B. #ariable costing D. all of these are acceptable 15. 2ariable costing can be used for A. external reporting B. internal reporting C. either external reporting or internal reporting D. neither external reporting nor internal reporting 1$. Which of the following is not true of #ariable costing? A. Profits may increase though sales decrease. B. Profits fluctuate with sales. C. &he cost of the product consists of all #ariable production costs. D. &he income statement under #ariable costing does not include o#erhead #olume #ariance. Contribution margin format income statement 11. When #ariable costing is used the income statement is usually prepared using A. a contribution margin format C. a functional format

Responsibility Accounting and Transfer Pricing (C. Variable Costing & Segmented Reporting)

B. an operational format

D. all of these $$. >et earnings determined using full absorption costing can be reconciled to net earnings determined using direct costing by computing the difference between A. "n#entoried fixed costs in the beginning and ending in#entories and any deferred o#er* or underapplied fixed factory o#erhead. B. "n#entoried discretionary costs in the beginning and ending in#entories. C. 8ross margin -absorption costing method. and contribution margin -direct costing method.. D. 'ales as recorded under the direct costing method and sales as recorded under the absorption costing method. $(. >et profit under absorption costing may differ from net profit determined under direct costing. ?ow is this difference calculated? A. Change in the 7uantity of all units in in#entory times the rele#ant fixed costs per unit. B. Change in the 7uantity of all units produced times the rele#ant fixed costs per unit. C. Change in the 7uantity of all units in in#entory times the rele#ant #ariable cost per unit. D. Change in the 7uantity of all units produced times the rele#ant #ariable cost per unit. Sensiti"it# n !#sis $4. &he le#el of production affects income under which of the following methods? A. absorption costing C. #ariable costing B. both absorption and #ariable costing D. neither absorption nor #ariable costing 16. 2ariable*costing income will usually exceed absorption costing income when A. sales exceed production C. production exceeds sales B. production and sales are e7ual D. none of these 1@. 2ariable costing net income is A. higher than absorption net income when more units are sold than produced B. lower than absorption net income when more units are produced than sold C. the same as absorption net income when all units produced are sold D. all of the abo#e @. A manufacturing company prepares income statements using both absorption and #ariable costing methods. At the end of a period actual sales re#enues total gross profit and total contribution margin approximated budgeted figures whereas net income was substantially greater than the budgeted amount. &here were no beginning or ending in#entories. &here most li%ely explanation of the net income increase is that compared to budget actual
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Absorption costing 6. Absorption costing of in#entories as re7uired by 8AAP has been critici9ed for encouraging managers to increase year*end in#entories in order to boost reported profits. Which of the following techni7ues is the most effecti#e at resol#ing this problem? A. 'enior management control of in#entory le#els B. Adoption of :ust*in*time -;"&. production system C. <eward managers based upon the residual income approach D. )se #ariable costing to determine income for bonus purposes 11. When absorption costing is used all of the following costs are considered product costs except A. direct labor C. #ariable selling and administrati#e costs B. #ariable o#erhead D. fixed o#erhead $1. )nabsorbed fixed o#erhead costs in an absorption costing system are A. 3ixed factory costs not allocated to units produced. B. 2ariable o#erhead costs not allocated to units produced. C. =xcess #ariable o#erhead costs. D. Costs that should be controlled. V ri b!e costing "s. Absorption costing 5. What is the primary difference between #ariable and absorption costing? A. inclusion of fixed selling expenses in product costs B. inclusion of #ariable factory o#erhead in period costs C. inclusion of #ariable selling expenses in product costs D. inclusion of fixed factory o#erhead in product costs !. Which of the following statements is true? A. Absorption costing net income exceeds #ariable produced and sold are e7ual. B. 2ariable costing net income exceeds absorption produced exceed units sold. C. 2ariable costing net income exceeds absorption produced e7ual units sold. D. Absorption costing net income exceeds #ariable produced are greater than units sold. costing net income when units costing net income when units costing net income when units costing net income when units

Responsibility Accounting and Transfer Pricing (C. Variable Costing & Segmented Reporting)

A. B. C. D.

Aanufacturing fixed costs had increased. 'elling and administrati#e fixed expenses had decreased. 'ales prices and #ariable costs had increased proportionately. 'ales prices had declined proportionately less than #ariable costs.

1. 5. A. B.

direct fixed selling costs common fixed selling costs $ ( 1 5 1 $ , 1

C. $ ( , 1 D. 1 , 1 5

1,. When #ariable costing is used fixed manufacturing o#erhead is recogni9ed as an expense when the A. cost is incurred C. product is sold B. product is completed D. product is in#entoried Seg$ent reporting $,. A segment is any part of an organi9ation about which a manager see%s A. cost data C. 7uantitati#e data B. re#enue data D. any of the abo#e $5. Which of the following could be considered a segment? A. di#ision C. product line B. sales territory D. all of these $1. &he guideline-s. used in assigning costs to a segment include-s. whether A. costs are fixed C. costs are directly traceable B. costs are #ariable D. all of the abo#e $!. 'egment margin is e7ual to A. sales less #ariable costs B. sales less #ariable costs and direct fixed costs C. sales less #ariable costs and indirect fixed costs D. sales less cost of goods sold $@. <e#enue less #ariable costs and direct fixed costs e7uals A. contribution margin C. income before taxes B. segment margin D. income after taxes (4. "ndicate which of the following costs would be a#oided if a segment is eliminated. 1. #ariable manufacturing costs $. direct fixed costs (. common fixed costs ,. #ariable selling costs
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$6. Which of the following costs would continue to be incurred e#en if a segment is eliminated? A. direct fixed expenses B. common fixed costs C. #ariable cost of goods sold D. #ariable selling and administrati#e expenses Cost !!oc tion po!ic# (1. Which of the following is a good reason for allocating indirect costs to operating departments? A. &he company could lose money if the operating departments do not pay for the ser#ices they use. B. &o remind managers of the need to co#er indirect costs. C. &o encourage managers to use more ser#ices. D. &o determine the true costs of operating departments. ((. &he cost allocation policy most li%ely to encourage use of a ser#ice is based on A. budgeted total costs of the ser#ice department B. actual total costs of the ser#ice department C. budgeted #ariable costs for the ser#ice department D. actual #ariable costs for the ser#ice department ($. &he term /dual rates0 refers to A. allocating costs to se#eral operating departments B. allocating fixed costs based on capacity re7uirements and #ariable costs based on use C. allocating both actual costs and budgeted costs D. using the budgeted rate to allocate some costs the actual rate to allocate others (,. &he WB<'& method of allocating ser#ice department costs is to allocate A. total actual costs based on actual use of the ser#ice B. total budgeted costs based on long*term expected use of the ser#ice C. total budgeted cost based on actual use of the ser#ice D. none of the abo#e because all the abo#e are e7ually undesirable PROBLEMS:

Responsibility Accounting and Transfer Pricing (C. Variable Costing & Segmented Reporting)

V ri b!e costing =nding in#entory 1 . &he following information pertains to 'harapo#a CorporationC Beginning in#entory =nding in#entory Direct labor per unit Direct materials per unit 2ariable o#erhead per unit 3ixed o#erhead per unit 2ariable selling costs per unit 3ixed selling costs per unit What is the #alue of ending in#entory using the #ariable costing method? A. P111 444 C. P144 444 B. P1$1 444 D. P1@1 444

4 units 1 444 units P14 6 $ 1 5 6

)nit costs ( . During Aay <oy Co. produced 14 444 units of Product F. Costs incurred by <oy during Aay were as follows Direct materials P14 444 Direct labor $4 444 2ariable manufacturing o#erhead 1 444 2ariable selling and general ( 444 3ixed manufacturing o#erhead @ 444 3ixed selling and general , 444 &otal P11 444 What are the unit costs under absorption and #ariable costing methods respecti#ely? A. P1.14G P(.64 C. P,.,4G P(.14 B. P(.64 P1.14 D. P(.14C P,.,4 Difference in income , . Consider the followingC 'ales price per unit P16 per unit 'tandard absorption cost rate P1$ per unit 'tandard #ariable cost rate P6 per unit 2ariable selling expense rate P$ per unit 3ixed selling and administrati#e expenses P,4 444 3ixed manufacturing o#erhead P54 444 Hast period 1( 444 units were produced. "n the current period 11 444 units were produced. "n each period 1( 444 units were sold. What is the difference in reported income under absorption and #ariable costing for the current period? A. &he #ariable*costing income exceeded absorption*costing income by P, 444. B. &he absorption*costing income exceeded #ariable*costing income by P6 444. C. &he #ariable*costing income exceeded absorption*costing income by P5 444. D. >et income will not be different between the two methods.
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Absorption costing 8ross margin $ . A company manufactures a single product for its customers by contracting in ad#ance of production. &herefore the company only produces units that will be sold by the end of each period. During the last period the following sales were made and costs incurredC 'ales P,4 444 Direct materials @ 414 Direct labor 5 444 <ent -@D14 factory 1D14 office. ( 444 Depreciation on factory e7uipment $ 444 'uper#ision -$D( factory 1D( office. 1 144 'alespeople+s salaries 1 (44 "nsurance -$D( factory 1D( office. 1 $44 Bffice supplies !14 Ad#ertising !44 Depreciation on office e7uipment 144 "nterest on loan (44 Based on the abo#e data the gross margin percentage for the last period -rounded to nearest percent. was A. ,1E C. ,5E B. ,,E D. ,@E V ri b!e costing "s. Absorption costing
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&he Blue Company has failed to reach its planned acti#ity le#el during its first two years of operation. &he following table shows the relationship between units produced sales and normal acti#ity for these years and the pro:ected relationship for Iear (. All prices and costs ha#e remained the same for the last two years and are expected to do so in Iear (. "ncome has been positi#e in both Iear 1 and Iear $. )nits Produced 'ales Planned Acti#ity Iear 1 @4 444 @4 444 144 444

Responsibility Accounting and Transfer Pricing (C. Variable Costing & Segmented Reporting)

Iear $ @1 444 @1 444 144 444 Iear ( @4 444 @4 444 144 444 Because Blue Company uses an absorption costing system one would predict gross margin for Iear ( to be A. 8reater than Iear 1. C. =7ual to Iear 1. B. 8reater than Iear $. D. =7ual to Iear $. Reconci!i tion "ncome under absorption costing 5 . A company had income of P14 444 using direct costing for a gi#en period. Beginning and ending in#entories for that period were 1( 444 units and 16 444 units respecti#ely. "gnoring income taxes if the fixed o#erhead application rate were P$.44 per unit what would the income ha#e been using absorption costing? A. P,4 444 B. P14 444 C. P54 444 D. Cannot be determined from the information gi#en. "ncome under #ariable costing ! . Huna Company had income of P51 444 using absorption costing for a gi#en period. Beginning and ending in#entories for that period were 1( 444 units and 16 444 respecti#ely. "gnoring income taxes if the fixed o#erhead application rate were P$.14 per unit what would the income ha#e been using #ariable costing? A. P !! 144 C. P 1$ 144 B. P 54 444 D. P $4 444 )nit contribution margin 6 . &he following information was extracted from the first year of absorption*based accounting records of 'oulmate Co. &otal fixed costs incurred P144 444 &otal #ariable costs incurred 14 444 &otal period costs incurred !4 444 &otal #ariable period costs incurred (4 444 )nits produced $4 444 )nits sold 1$ 444 )nit sales Price P 1$ Based on #ariable costing if 'oulmate Co. had sold 1$ 441 units instead of 1$ 444 its
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income before taxes would ha#e been A. P @.14 higher B. P 6.14 higher
@

C. P11.44 higher D. P 6.(( higher

At its present le#el of operations a small manufacturing firm has total #ariable costs e7ual to !1E of sales and total fixed costs e7ual to 11E of sales. Based on #ariable costing if sales change by P1.44 income will change by A. P 4.$1 C. P 4.!1 B. P 4.1$ D. P 4.14

Seg$ente% Inco$e St te$ent =ffect of dropping a department 14 . Jambales Aining Co. mines three products. 8old Bre sells for P1 444 444 per ton #ariable costs are P544 444 per ton and fixed mining costs are P1 444 444. &he segment margin for $441 was P-1 444 444.. &he management of Jambales Aining was considering dropping the mining of 8old Bre. Bnly one*half of the fixed expenses are direct and would be eliminated if the segment was dropped. "f 8old Bre were dropped net income for Jambales Aining would A. "ncrease by P1 444 444 C. Decrease by P1 444 444 B. "ncrease by P1 144 44 D. Decrease by P1 144 444
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. Aging Company plans to discontinue a segment with a P($ 444 segment margin. Common expenses allocated to the segment amounted to P,1 444 of which P$4 444 cannot be eliminated if the segment were closed. &he effect of closing down the segment on Aging Company+s before tax profit would be A. P1$ 444 decrease C. P ! 444 decrease B. P1$ 444 increase D. P ! 444 increase

&se t'is % t to respon% to ()estions *+ t'ro)g' *,. Bmid Publishing Company has three di#isionsC A B and C. &he re#enues of these di#isions are P$@ 444 ,6 444 and 5( 444 respecti#ely. 2ariable costs of these di#isions amount to 1!E 1@E and 5,E of the gi#en re#enues. &he di#isionsK short*term controllable fixed costs are P, $44 1 $44 and 5 $44 respecti#ely. &he di#isionsK long*term controllable fixed costs amount to P( 644 , @44 and 1 !44 in the order gi#en. &he companyKs uncontrollable costs amount to P! 114 and income tax is at $4E of operating income.
1$

. Hong*term controllable margin for di#ision A amounts to A. P, ,!4 C. P1$ ,!4

Responsibility Accounting and Transfer Pricing (C. Variable Costing & Segmented Reporting)

B. P6 $!4
1(

D. P15 ,!4
1,

144E . &he amount of fixed factory costs applied to product during the first six months under absorption costing would be A. B#erapplied by P$4 444. C. )nderapplied by P,4 444. B. =7ual to the fixed costs incurred. D. )nderapplied by P64 444 . <eported net income -or loss. for the first six months under absorption costing would be A. P154 444 C. P 64 444 B. P ,4 444 D. P -,4 444. . <eported net income -or loss. for the firs six months under direct costing would be A. P1,, 444. C. P !$ 444 B. P4 D. P-(5 444. . Assuming that @4 444 units of Product F were sold during the first six months and that this is to be used as a basis the re#ised budget estimate for the total number of units to be sold during this year would be A. (54 444. C. $,4 444 B. $44 444. D. (44 444

. 'hort*term controllable margin for di#ision B amounts to A. P@ 164 C. P1@ 564 B. P1, ,64 D. P$( 164

Co$pre'ensi"e -)estions *. t'ro)g' */ are based on the following annual flexible budget which has been prepared for use in ma%ing decisions relating to Product F. Budgeted units 144 444 114 444 $44 444 'ales 2olume P644 444 P1 $44 444 P1 544 444 Aanufacturing costsC 2ariable P(44 444 P ,14 444 P 544 444 3ixed $44 444 $44 444 $44 444 P144 444 P 514 444 P 644 444 'elling expensesC 2ariable P$44 444 P (44 444 P ,44 444 3ixed 154 444 154 444 154 444 P(54 444 P ,54 444 P 154 444 "ncome -or loss. -P54 444. P @4 444 P $,4 444 &he $44 444*unit budget has been adopted and will be used for allocating fixed manufacturing costs to units of Product F. At the end of the first six months the following information is a#ailableC )nits Production completed 1$4 444 'ales 54 444 All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred coincide with the budget. B#er* and underapplied fixed manufacturing costs are deferred until year*end. Annual sales ha#e the following seasonal patternC Portion of Annual 'ales 3irst 7uarter 14E 'econd 7uarter $4E &hird 7uarter (4E 3ourth 7uarter ,4E
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15

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AnswerC C Direct materials Direct labor 2ariable o#erhead &otal unit cost* #ariable costing 2alue of ending in#entory -1 444 x P$4. AnswerC C 'ales Cost of goods sold Direct materials Direct labor <ent -4.@ x P( 444. Depreciation 'uper#ision -$D( x P1 144. "nsurance -$D( x P1 $44. 8ross margin 8ross margin percentage -P16 ,44 L P,4 444. AnswerC C Direct materials Direct labor 2ariable o#erhead &otal #ariable product cost 2ariable unit cost -P(1 444 L 14 444. Add 3ixed o#erhead per unit -P@ 444 L 14 444. Absorption unit cost

P 6 14 $ P$4 P144 444 P,4 444 P@ 414 5 414 $ !44 $ 444 1 444 644

-$1 544. P16 ,44 ,5E P14 444 $4 444 1 444 P(1 44 P(.14 4.@4 P,.,4

AnswerC B 3ixed o#erhead rate per unitC P1$ M P6 P, Difference in incomeC $ 444 x P, P6 444 During the current year the company+s production e7ualed the budgeted. &he in#entory increased. absorption costing income is higher than the #ariable costing income. . AnswerC C &he production and unit sales during year ( matched with year 1.

&herefore

. AnswerC C &he income under absorption costing is higher by P14 444 because the amount of fixed o#erhead that related to unsold units was deferred and was included as cost of finished goods in#entory. &he #ariable costing income statement immediately wrote the entire fixed o#erhead that was incurred during the year as period cost. 3ixed o#erhead deferred as product costC 1 444 x P$ P14 444 Absorption income -P14 444 N P14 444. P54 444 . AnswerC C Absorption income Hess 3ixed B#erhead in decrease in in#entory "ncome 2ariable costing AnswerC B CA< per unit O 'elling Price M )nit #ariable cost P6.14 O P1$.44 M P(.14 2ariable Cost Per unit 51 444 1$ 144 1$ 144

-16 444 M 11 444. x $.14

ProductC -14 444 M (4 444. D $4 444 O 'elling P Adm. -#ariable period costs. (4 444D1$ 444 &otal #ariable costDunit Q &otal #ariable costs M #ariable period cost -selling P adm.. O #ariable product cost.
9

P1.44 $.14 P(.14

AnswerC A 1.44 * -1.44 x .!1. O P4.$1

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. AnswerC A &he only rele#ant information to compute the effect of dropping the mining of gold ore is the negati#e segment margin. "f the product line is dropped the company can a#oid the negati#e margin of P1 million. . AnswerC C A#oidable common expenses 'egment margin lost Decrease in profit AnswerC A <e#enues 2ariable cost -P$@ 444 x 4.1!. Contribution margin Hess 'hort*term controllable fixed cost 'hort*term controllable margin Hong*term controllable fixed cost Hong*term controllable margin AnswerC B <e#enues 2ariable cost -P,6 444 x 4.1@. Contribution margin 'hort*term controllable fixed cost 'hort*term controllable margin M Di# B AnswerC A Budgeted actual fixed o#erhead -4.1 x P$44 444. Applied fixed o#erhead -1$4 444 x P1.44. B#erapplied fixed o#erhead -fa#orable #olume #ariance. AnswerC B 'ales -54 444 x P6. Cost of goods sold -54 444 x P,. 8ross profit 'elling and other expenses -54 444 x $. N P64 444 Absorption profit AnswerC B &otal contribution margin -54 444 x P(. HessC 3ixed manufacturing B? 3ixed selling and other expenses 2ariable costing profit CA per unit -P1.5A M P4.5A M P4.,A. L $44 444. P $1 444 ($ 444 P- ! 444. P$@ 444 15 1(4 1$ ,!4 , $44 6 $!4 ( 644 P , ,!4 P,6 444 $6 ($4 1@ 564 1 $44 P1, ,64 P144 444 1$4 444 P $4 444 P,64 444 $,4 444 $,4 444 $44.444 P ,4 444 P164 444 P144 444 64 444 164 444 >"H P(.44

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. AnswerC D &he sales pattern indicated that sales for the first semester was (4E. &he assumption was that the pattern was still #alid. &herefore the assumed @4 444 units would be (4 percent of expected annual sales. -@4 444 L 4.(. O (44 444 units