Ch 6 Flashcards
RST Company produces a product that has a variable cost of $6 per unit. The company’s fixed costs are $30,000. The product sells for $10 per unit. RST desires to earn a profit of $20,000. The contribution margin ratio is ….
%.
40%
((10-6)/10) × 100
The contribution margin ratio is interpreted as the percent of:
each sales dollar that remains after deducting unit variable cost
Under the …..
(absorption,variable) costing method only variable costs are assigned to products.
variable
The main difference between absorption and variable costing is their treatment of
fixed overhead.
Loudon Company has the following unit costs: direct materials $6, direct labor $3, variable overhead $2, fixed overhead $1. Under absorption costing, total unit cost is:
$12
6+3+2+1
A company has sales of $125,000, variable costs of $45,000 and fixed costs of $30,000. The contribution margin ratio is …..
%
64%
((125,000−45,000)
÷125,000)×100
Brother Company uses variable costing. Their direct materials are $8, direct labor is $6 and total overhead is $5 of which $3 is variable. What is Brother Company’s total unit cost?
$17
8+6+3
The percent by which a product’s unit selling price exceeds its total unit variable cost is the:
contribution margin ratio.
An income statement which shows the excess of sales over variable costs is referred to as a….. income statement.
contribution margin
The variable costing method includes all of the following costs (select all that apply):
direct materials
direct labor
variable overhead
When units produced equals units sold, income under absorption costing will be …….
(greater than,less than,equal to) net income under variable costing.
equal to
The key difference between absorption and variable costing is
… (fixed, variable) overhead.
Fixed
Makum Company is using a traditional (absorption) costing system. Which of the items below would you see on Makum’s income statement?
cost of goods sold
net income
gross profit
Commonwealth Company has the following unit costs: direct materials $2, direct labor $4, variable overhead $1, fixed overhead $3. Under the absorption costing method, what is the total unit cost?
$10
Reason: $2 + $4 + $1 + $3.
A ……format income statement reports variable costs separately from fixed costs.
contribution margin
Hamilton Company has decided to use variable costing and has identified the following costs: direct materials $5, direct labor $10, variable overhead $3, fixed overhead $2. What is Hamilton Company’s total unit cost?
$18
Reason: $5 + $10 + $3.
Sales minus variable costs is called
.
Contribution margin
A contribution margin income statement shows:
sales-variable costs
Under absorption costing, fixed overhead is allocated to products sold, so when production is greater than units sold, net income will be
…. (greater, less) than income calculated under variable costing.
greater
When units produced equals units sold, income under variable costing as compared to net income under absorption costing will be
equal to
True or false: When units produced are less than units sold, net income under absorption costing will be less than net income computed under variable costing.
True
Makum Company is using variable costing. Which of the items below would you see on Makum’s income statement?
variable expenses
contribution margin
net income
An income statement which separately reports variable costs from fixed costs is known as a(n)
contribution format
Contribution margin is the excess of
sales - variable costs.
Regardless of whether variable costing or absorption costing is used, if quantity produced differs from quantity sold, income will be ….
(similar, different, indeterminable).
different
When using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to:
ending inventory
When units produced are greater than units sold, variable costing net income will be ……
(less, greater) than net income calculated under absorption costing.
less
When units produced are less than units sold, net income computed under variable costing will be …..
(greater, less) than net income computed under absorption.
greater
A system of rewarding managers by linking bonuses to income computed under absorption costing may result in:
excess inventory buildup
If management incentives are tied to income under absorption costing, which of the following may occur (select all that apply):
possible obsolescence
increased storage costs.
Differences in income between variable costing and absorption costing is due to
timing
Cost information from ……
(neither, both) costing method(s) is helpful to management in setting prices.
both
When units produced are greater than units sold under variable costing, fixed overhead is an expense and results in …..
(lower, higher) net income than under absorption costing.
lower
Over the
_ run, selling prices must cover both fixed and variable costs.
long
Production planning is important because producing too much can lead to ……
(excess, insufficient) inventory.
excess,
Since service firms do not produce inventory, they should focus primarily on
variable costs.
The costing system which is considered acceptable for external reporting under U.S. GAAP is
absorption costing
If management incentives are tied to income under absorption costing, which of the following may occur:
possible inventory obsolescence
Which costing method can be helpful to management in setting prices because it reflects full costs that sales must exceed for the company to be profitable?
Absorption costing
If income under variable costing is $500,000, fixed overhead in ending FG inventory is $10,000 and fixed overhead in beginning FG inventory is $15,000 then income under absorption costing is:
$495,000
(500,000+10,000)
−15,000
Managers should accept special orders if the special-order price
is greater than variable cost
Service firms should focus on _____ costs in managerial decisions.
variable
The formula to convert income from variable to absorption costing is:
income under variable costing plus fixed overhead in ending finished goods inventory minus fixed overhead in beginning finished goods inventory.
CH 6 CV
Units produced 1,000
Direct materials $ 6
Direct labor $ 10
Fixed overhead $ 6,000
Variable overhead $ 6
Fixed selling and administrative $2,000
Variable selling and administrative $2
The total product cost per unit under absorption costing is:
$28
total product cost per unit is determined as follows:
Direct materials of $6 + Direct labor of $10 + Variable overhead of $6 + Fixed overhead of $6 (or $6,000 ÷ 1,000) = Total product cost of $28 per unit.
Units produced 1,000
Direct materials $ 6
Direct labor $ 10
Fixed overhead $ 6,000
Variable overhead $ 6
Fixed selling and administrative $ 2,000
Variable selling and administrative $ 2
The cost per unit under variable costing is:
$22
Direct materials of $6 + Direct labor of $10 + Variable overhead of $6 = Unit cost of $22 per unit.
Freshmart, Incorporated, began operations this year. The company produced 1,000 units and sold 1,000 units at a selling price of $100 per unit. Fixed overhead costs totaled $30,000 and fixed selling and administrative expenses were $15,000. Variable production costs were $25.00 per unit while variable selling and administrative expenses were $10.00 per unit. Using absorption costing, income was:
$20,000
((1,000×100)−(1,000×25))
−(30,000+(15,000+(10
×1,000)))
Freshmart, Incorporated, began operations last year when it produced and sold the same number of units. This year, the company produced 1,000 units and sold 750 units at a selling price of $100 per unit. Fixed overhead costs totaled $30,000 and fixed selling and administrative expenses were $15,000. Variable production costs were $25.00 per unit while variable selling and administrative expenses were $10.00 per unit. Using absorption costing, income was:
$11,250
Sales 750 × $100 = $75,000
Variable production 750 × $25 = $18,750
Fixed overhead ($30,000 ÷ 1,000) = $30 × 750 = $22,500
Variable selling and administrative expenses 750 × $10 = $7,500
Fixed selling and administrative expenses $15,000
Sales $ 75,000
Variable production 18,750
Fixed overhead 22,500
Gross margin $ 33,750
Variable selling & administrative 7,500
Fixed selling & administrative 15,000
Income $ 11,250
Under absorption costing, when _____________blank units are produced than are sold, some of the fixed overhead is assigned to ending inventory on the balance sheet.
more
When manager bonuses are tied to income computed under _____________blank costing, these managers may be tempted (even enticed) to increase production, since doing so will increase income and their bonuses.
absorption
Managers cannot increase income under _____________blank costing by merely increasing production without increasing sales.
variable
An income statement prepared using the _____________blank highlights the impact of each cost element for income and is also useful in aiding managers in pricing.
absorption costing
Over the long run, the starting point for setting selling prices should be established by adding the target markup to the _____________blank cost per unit.
absorption
A special-order price that is less than fixed and variable costs, can be accepted if the special order price:
is greater than variable costs
Fireplace Service company provides fireplace cleaning services and has variable costs of $100 per fireplace cleaning and revenue of $250. Their contribution margin is $_____________blank.
150
250-100
The contribution margin ratio is computed as: Contribution margin _____________blank Sales.
divided by
If sales are $1,000,000 and contribution margin is $250,000, the contribution margin ratio is _____________blank%.
25%
250,000÷1,000,000×100
The fixed overhead cost in ending finished goods inventory is _____________blank the variable costing income when converting income under variable costing to income under absorption costing.
added to
CH 6 HW
