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

C. VARIABLE COSTING AND SEGMENTED REPORTING

THEORIES:Direct costing1. 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.

17. In a variable costing system, product cost includesA. direct materials, direct labor, variable overheadB. direct materials, direct labor, fixed overheadC. direct labor, variable overhead, fixed overheadD. direct materials, variable overhead, fixed overhead

2. Which of the following must be known about production process in order to institute a direct costing system?A. The variable and fixed components of all costs related to production.B. The controllable and noncontrollable components of all costs related to production.C. Standard production rates and times for all elements of production.D. Contribution margin and breakeven point for all goods in production.

3. Under the direct costing concept, unit product cost would most likely be increased byA. 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.

4. Which of the following statements is true for a firm that uses variable (direct) costing?A. The cost of a unit of product changes because of changes in the number of units

manufactured.B. Profits fluctuate with salesC. An idle facility variation is calculated

D. Product costs include “direct” (variable) administrative costs.

5. Which of the following is an argument against the use of direct (variable) costing?A. Absorption costing overstates the balance sheet value of inventories.B. Variable factory overhead is a period cost.C. Fixed factory overhead is difficult to allocate properly.D. Fixed factory overhead is necessary for the production of a product.

10. Advocates of variable costing for internal reporting purposes do not rely on which of the following points?A. The matching conceptB. Price-volume relationshipsC. Absorption costing does not include selling and administrative expenses as part of

inventoriable costD. Production influences income under absorption costing

13. Which costing method is not acceptable to the SFAS external reporting?A. absorption costing C. full costingB. variable costing D. all of these are acceptable

16. Variable costing can be used for A. external reportingB. internal reportingC. either external reporting or internal reportingD. neither external reporting nor internal reporting

12. Which of the following is not true of variable costing?A. Profits may increase though sales decrease.B. Profits fluctuate with sales.C. The cost of the product consists of all variable production costs.D. The income statement under variable costing does not include overhead volume

variance.

Contribution margin format income statement15. When variable costing is used, the income statement is usually prepared using

A. a contribution margin format C. a functional formatB. an operational format D. all of these

Absorption costing8. Absorption costing of inventories, as required by GAAP, has been criticized for encouraging

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managers to increase year-end inventories in order to boost reported profits. Which of the following techniques is the most effective at resolving this problem?A. Senior management control of inventory levelsB. Adoption of just-in-time (JIT) production systemC. Reward managers based upon the residual income approachD. Use variable costing to determine income for bonus purposes

11. When absorption costing is used, all of the following costs are considered product costs exceptA. direct labor C. variable selling and administrative costsB. variable overhead D. fixed overhead

21. Unabsorbed fixed overhead costs in an absorption costing system areA. Fixed factory costs not allocated to units produced.B. Variable overhead costs not allocated to units produced.C. Excess variable overhead costs.D. Costs that should be controlled.

Variable costing vs. Absorption costing6. What is the primary difference between variable and absorption costing?

A. inclusion of fixed selling expenses in product costsB. inclusion of variable factory overhead in period costsC. inclusion of variable selling expenses in product costsD. inclusion of fixed factory overhead in product costs

7. Which of the following statements is true?A. Absorption costing net income exceeds variable costing net income when units

produced and sold are equal.B. Variable costing net income exceeds absorption costing net income when units

produced exceed units sold.C. Variable costing net income exceeds absorption costing net income when units

produced equal units sold.D. Absorption costing net income exceeds variable costing net income when units

produced are greater than units sold.

22. Net earnings determined using full absorption costing can be reconciled to net earnings determined using direct costing by computing the difference betweenA. Inventoried fixed costs in the beginning and ending inventories and any deferred over- or

underapplied fixed factory overhead.B. Inventoried discretionary costs in the beginning and ending inventories.

C. Gross margin (absorption costing method) and contribution margin (direct costing method).

D. Sales as recorded under the direct costing method and sales as recorded under the absorption costing method.

23. Net profit under absorption costing may differ from net profit determined under direct costing. How is this difference calculated?A. Change in the quantity of all units in inventory times the relevant fixed costs per unit.B. Change in the quantity of all units produced times the relevant fixed costs per unit.C. Change in the quantity of all units in inventory times the relevant variable cost per unit.D. Change in the quantity of all units produced times the relevant variable cost per unit.

Sensitivity analysis20. The level of production affects income under which of the following methods?

A. absorption costing C. variable costingB. both absorption and variable costing D. neither absorption nor variable costing

18. Variable-costing income will usually exceed absorption costing income whenA. sales exceed production C. production exceeds salesB. production and sales are equal D. none of these

19. Variable costing net income isA. higher than absorption net income when more units are sold than producedB. lower than absorption net income when more units are produced than soldC. the same as absorption net income when all units produced are soldD. all of the above

9. A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no beginning or ending inventories. There most likely explanation of the net income increase is that, compared to budget, actualA. Manufacturing fixed costs had increased.B. Selling and administrative fixed expenses had decreased.C. Sales prices and variable costs had increased proportionately.D. Sales prices had declined proportionately less than variable costs.

14. When variable costing is used, fixed manufacturing overhead is recognized as an expense when theA. cost is incurred C. product is sold

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B. product is completed D. product is inventoried

Segment reporting24. A segment is any part of an organization about which a manager seeks

A. cost data C. quantitative dataB. revenue data D. any of the above

26. Which of the following could be considered a segment?A. division C. product lineB. sales territory D. all of these

25. The guideline(s) used in assigning costs to a segment include(s) whetherA. costs are fixed C. costs are directly traceableB. costs are variable D. all of the above

27. Segment margin is equal toA. sales less variable costsB. sales less variable costs and direct fixed costsC. sales less variable costs and indirect fixed costsD. sales less cost of goods sold

29. Revenue less variable costs and direct fixed costs equalsA. contribution margin C. income before taxesB. segment margin D. income after taxes

30. Indicate which of the following costs would be avoided if a segment is eliminated.1. variable manufacturing costs2. direct fixed costs3. common fixed costs4. variable selling costs5. direct fixed selling costs6. common fixed selling costsA. 2, 3, 5, 6 C. 2, 3, 4, 5B. 1, 2, 4, 5 D. 1, 4, 5, 6

28. Which of the following costs would continue to be incurred even if a segment is eliminated?A. direct fixed expensesB. common fixed costsC. variable cost of goods soldD. variable selling and administrative expenses

Cost allocation policy31. Which of the following is a good reason for allocating indirect costs to operating departments?

A. The company could lose money if the operating departments do not pay for the services they use.

B. To remind managers of the need to cover indirect costs.C. To encourage managers to use more services.D. To determine the true costs of operating departments.

33. The cost allocation policy most likely to encourage use of a service is based onA. budgeted total costs of the service departmentB. actual total costs of the service departmentC. budgeted variable costs for the service departmentD. actual variable costs for the service department

32. The term “dual rates” refers toA. allocating costs to several operating departmentsB. allocating fixed costs based on capacity requirements and variable costs based on useC. allocating both actual costs and budgeted costsD. using the budgeted rate to allocate some costs, the actual rate to allocate others

34. The WORST method of allocating service department costs is to allocateA. total actual costs based on actual use of the serviceB. total budgeted costs based on long-term expected use of the serviceC. total budgeted cost based on actual use of the serviceD. none of the above, because all the above are equally undesirable

PROBLEMS:Variable costingEnding inventory1. The following information pertains to Sharapova Corporation:

Beginning inventory 0 unitsEnding inventory 5,000 unitsDirect labor per unit P10Direct materials per unit 8Variable overhead per unit 2Fixed overhead per unit 5Variable selling costs per unit 6Fixed selling costs per unit 8

What is the value of ending inventory using the variable costing method?

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

A. P155,000 C. P100,000B. P125,000 D. P195,000

Absorption costingGross margin2. A company manufactures a single product for its customers by contracting in advance of

production. Therefore, 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 incurred:

Sales P40,000Direct materials 9,050Direct labor 6,000Rent (9/10 factory, 1/10 office) 3,000Depreciation on factory equipment 2,000Supervision (2/3 factory, 1/3 office) 1,500Salespeople’s salaries 1,300Insurance (2/3 factory, 1/3 office) 1,200Office supplies 750Advertising 700Depreciation on office equipment 500Interest on loan 300

Based on the above data, the gross margin percentage for the last period (rounded to nearest percent) wasA. 41% C. 46%B. 44% D. 49%

Variable costing vs. Absorption costingUnit costs3. During May, Roy Co. produced 10,000 units of Product X. Costs incurred by Roy during May

were as followsDirect materials P10,000Direct labor 20,000Variable manufacturing overhead 5,000Variable selling and general 3,000Fixed manufacturing overhead 9,000Fixed selling and general 4,000 Total P51,000

What are the unit costs under absorption and variable costing methods, respectively?A. P5.10; P3.80 C. P4.40; P3.50B. P3.80 P5.10 D. P3.50: P4.40

Difference in income4. Consider the following:

Sales price, per unit P18 per unitStandard absorption cost rate P12 per unitStandard variable cost rate P8 per unitVariable selling expense rate P2 per unitFixed selling and administrative expenses P40,000Fixed manufacturing overhead P60,000

Last period, 13,000 units were produced. In the current period, 15,000 units were produced.

4 . Answer: BFixed overhead rate per unit: P12 – P8 P4Difference in income: 2,000 x P4 P8,000

During the current year, the company’s production equaled the budgeted. The inventory increased. Therefore, absorption costing income is higher than the variable costing income.

1 . Answer: CDirect materials P 8Direct labor 10Variable overhead 2 Total unit cost- variable costing P20 Value of ending inventory (5,000 x P20) P100,000

2 . Answer: CSales P40,000Cost of goods sold

Direct materials P9,050Direct labor 6,050Rent (0.9 x P3,000) 2,700Depreciation 2,000Supervision (2/3 x P1,500) 1,000Insurance (2/3 x P1,200) 800 (21,600 )

Gross margin P18,400Gross margin percentage (P18,400 ÷ P40,000) 46%

3 . Answer: CDirect materials P10,000Direct labor 20,000Variable overhead 5,000 Total variable product cost P35,00

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In each period, 13,000 units were sold. What is the difference in reported income under absorption and variable costing for the current period?A. The variable-costing income exceeded absorption-costing income by P4,000.B. The absorption-costing income exceeded variable-costing income by P8,000.C. The variable-costing income exceeded absorption-costing income by P6,000.D. Net income will not be different between the two methods.

5. The Blue Company has failed to reach its planned activity level during its first two years of operation. The following table shows the relationship between units produced, sales, and normal activity for these years and the projected relationship for Year 3. All prices and costs have remained the same for the last two years and are expected to do so in Year 3. Income has been positive in both Year 1 and Year 2.

Units Produced Sales Planned ActivityYear 1 90,000 90,000 100,000Year 2 95,000 95,000 100,000Year 3 90,000 90,000 100,000

Because Blue Company uses an absorption costing system, one would predict gross margin for Year 3 to beA. Greater than Year 1. C. Equal to Year 1.B. Greater than Year 2. D. Equal to Year 2.

ReconciliationIncome under absorption costing6. A company had income of P50,000 using direct costing for a given period. Beginning and

ending inventories for that period were 13,000 units and 18,000 units, respectively. Ignoring income taxes, if the fixed overhead application rate were P2.00 per unit, what would the income have been using absorption costing?A. P40,000B. P50,000C. P60,000D. Cannot be determined from the information given.

Income under variable costing

Variable unit cost (P35,000 ÷ 10,000) P3.50Add Fixed overhead per unit (P9,000 ÷ 10,000) 0.90 Absorption unit cost P4.40

7. Luna Company had income of P65,000 using absorption costing for a given period. Beginning and ending inventories for that period were 13,000 units and 18,000 respectively. Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what would the income have been using variable costing?A. P 77,500 C. P 52,500B. P 60,000 D. P 20,000

Unit contribution margin8. The following information was extracted from the first year of absorption-based accounting

records of Soulmate Co.Total fixed costs incurred P100,000Total variable costs incurred 50,000Total period costs incurred 70,000Total variable period costs incurred 30,000Units produced 20,000Units sold 12,000Unit sales Price P 12

Based on variable costing, if Soulmate Co. had sold 12,001 units instead of 12,000, its income before taxes would have beenA. P 9.50 higher C. P11.00 higherB. P 8.50 higher D. P 8.33 higher

9. At its present level of operations, a small manufacturing firm has total variable costs equal to 75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales change by P1.00, income will change byA. P 0.25 C. P 0.75B. P 0.12 D. P 0.10

Segmented Income StatementEffect of dropping a department10. Zambales Mining Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable

costs are P600,000 per ton, and fixed mining costs are P5,000,000. The segment margin for 2005 was P(1,000,000). The management of Zambales Mining was considering dropping the mining of Gold Ore. Only one-half of the fixed expenses are direct and would be eliminated if the segment was dropped. If Gold Ore were dropped, net income for Zambales Mining wouldA. Increase by P1,000,000 C. Decrease by P1,000,000B. Increase by P1,500,00 D. Decrease by P1,500,000

11. Aging Company plans to discontinue a segment with a P32,000 segment margin. Common

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expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be eliminated if the segment were closed. The effect of closing down the segment on Aging Company’s before tax profit would beA. P12,000 decrease C. P 7,000 decreaseB. P12,000 increase D. P 7,000 increase

Use this data to respond to questions 16 through 17.Omid Publishing Company has three divisions: A, B, and C. The revenues of these divisions are P29,000, 48,000, and 63,000 respectively. Variable costs of these divisions amount to 57%, 59%, and 64% of the given revenues. The divisions' short-term controllable fixed costs are P4,200, 5,200, and 6,200 respectively. The divisions' long-term controllable fixed costs amount to P3,800, 4,900, and 5,700 in the order given. The company's uncontrollable costs amount to P7,150, and income tax is at 20% of operating income.

12. Long-term controllable margin for division A amounts toA. P4,470 C. P12,470B. P8,270 D. P16,470

5 . Answer: CThe production and unit sales during year 3 matched with year 1.

6 . Answer: CThe income under absorption costing is higher by P10,000 because the amount of fixed overhead that related to unsold units was deferred and was included as cost of finished goods inventory. The variable costing income statement immediately wrote the entire fixed overhead that was incurred during the year as period cost.

Fixed overhead deferred as product cost: 5,000 x P2 P10,000 Absorption income (P50,000 + P10,000) P60,000

8 . Answer: BCMR per unit = Selling Price – Unit variable cost P8.50 = P12.00 – P3.50Variable Cost Per unitProduct: (50,000 – 30,000) / 20,000 = P1.00Selling & Adm. (variable period costs) 30,000/12,000 2.50 Total variable cost/unit P3.50 * Total variable costs – variable period cost (selling & adm.) = variable product cost.

13. Short-term controllable margin for division B amounts toA. P9,580 C. P19,680B. P14,480 D. P23,580

ComprehensiveQuestions 10 through 13 are based on the following annual flexible budget which has been prepared for use in making decisions relating to Product X.

Budgeted units 100,000 150,000 200,000 Sales Volume P800,000 P1,200,000 P1,600,000Manufacturing costs: Variable P300,000 P 450,000 P 600,000 Fixed 200,000 200,000 200,000

P500,000 P 650,000 P 800,000Selling expenses: Variable P200,000 P 300,000 P 400,000 Fixed 160,000 160,000 160,000

P360,000 P 460,000 P 560,000Income (or loss) (P60,000) P 90,000 P 240,000

9 . Answer: A1.00 - (1.00 x .75) = P0.25

10 . Answer: AThe only relevant information to compute the effect of dropping the mining of gold ore is the negative segment margin. If the product line is dropped, the company can avoid the negative margin of P1 million.

11 . Answer: CAvoidable common expenses P 25,000Segment margin lost 32,000 Decrease in profit P( 7,000)

13 . Answer: BRevenues P48,000Variable cost (P48,000 x 0.59) 28,320Contribution margin 19,680Short-term controllable fixed cost 5,200Short-term controllable margin – Div B P14,480

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The 200,000-unit budget has been adopted and will be used for allocating fixed manufacturing costs to units of Product X. At the end of the first six months the following information is available:

UnitsProduction completed 120,000Sales 60,000

All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred coincide with the budget.

Over- and underapplied fixed manufacturing costs are deferred until year-end. Annual sales have the following seasonal pattern:

Portion of Annual SalesFirst quarter 10%Second quarter 20%Third quarter 30%Fourth quarter 40%

100%

14. The amount of fixed factory costs applied to product during the first six months under absorption costing would beA. Overapplied by P20,000. C. Underapplied by P40,000.B. Equal to the fixed costs incurred. D. Underapplied by P80,000

15. Reported net income (or loss) for the first six months under absorption costing would beA. P160,000 C. P 80,000

B. P 40,000 D. P (40,000)

16. Reported net income (or loss) for the firs six months under direct costing would beA. P144,000. C. P 72,000B. P0 D. P(36,000)

17. Assuming that 90,000 units of Product X were sold during the first six months and that this is to be used as a basis, the revised budget estimate for the total number of units to be sold during this year would beA. 360,000. C. 240,000

14 . Answer: ABudgeted actual fixed overhead (0.5 x P200,000) P100,000Applied fixed overhead (120,000 x P1.00) 120,000Overapplied fixed overhead (favorable volume variance) P 20,000

15 . Answer: BSales (60,000 x P8) P480,000Cost of goods sold (60,000 x P4) 240,000Gross profit 240,000Selling and other expenses (60,000 x 2) + P80,000 200.000Absorption profit P 40,000

16 . Answer: BTotal contribution margin (60,000 x P3) P180,000Less: Fixed manufacturing OH P100,000

7 . Answer: CAbsorption income 65,000Less Fixed Overhead in decrease in inventory (18,000 – 15,000) x 2.50 12,500 Income, Variable costing 52,500

12 . Answer: ARevenues P29,000Variable cost (P29,000 x 0.57) 16,530Contribution margin 12,470Less Short-term controllable fixed cost 4,200Short-term controllable margin 8,270Long-term controllable fixed cost 3,800Long-term controllable margin P 4,470

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B. 200,000. D. 300,000

Fixed selling and other expenses 80,000 180,000Variable costing profit NILCM per unit (P1.6M – P0.6M – P0.4M) ÷ 200,000) P3.00

17 . Answer: DThe sales pattern indicated that sales for the first semester was 30%. The assumption was that the pattern was still valid. Therefore the assumed 90,000 units would be 30 percent of expected annual sales.

(90,000 ÷ 0.3) = 300,000 units

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