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BSA III
TRUE OR FALSE
TRUE 1. When a company is planning to enter a new market, variable costing provides
useful information.
TRUE 2. Another name for variable costing is direct costing.
FALSE 3. Under variable costing, inventoriable cost include direct materials, direct labor
and all overhead costs.
FALSE 4. Fixed manufacturing overhead is shown after the contribution margin on an
absorption costing income statement.
FALSE 5. Operating Income (OI), under variable costing is greater than OI under
absorption costing when there is an inventory buildup.
FALSE 6. Variable costing is supported by the Internal Revenue Service.
FALSE 7. Common fixed costs are deducted from the contribution margin to arrive at a
segment’s margin.
TRUE 8. Segment reporting is useful because it allows management to identify troubled
segments.
FALSE 9. For a multiproduct firm, C-V-P analysis cannot be accomplished with
segmented data.
TRUE 10. In reconciling variable costing income to absorption costing income, fixed
overhead in the beginning inventory is deducted.
MULTIPLE CHOICE
Sales 127,500
Less: Variable cost 60,000
Contribution Margin 67,500
Less: Fixed cost 41,000
Net Income: 26,500
8. The contribution margin and segment margin respectively for product 2 was:
a. $92,000 and $108,000
b. $108,000 and $92,000
c. $123,000 and 92,000
d. $23,000 and $108,000
10.Assume the same facts except the operating income of $728,000 was derived by
using the variable costing approach. The absorption costing operating income
would be:
a. $464,000
b. $552,000
c. $904,000
d. $992,000
Solution:
182,000 – 160,000 = 22,000 X 8 = 176,000
728,000 + 176,000 = 904,000
11.Variable costing provides useful information for managerial decisions in all of the
following except:
a. Discontinuing a product line.
b. Taking a special order at less than full price.
c. Completing the corporate tax return.
d. Making or buying component parts.
EXERCISES
Use the following information to answer questions 1-4.
Glasglo Corporation manufactures and sells three products: X,Y, and Z. The
management is concerned about the profitability of product Y since it has shown a loss
for the last three quarters on the external financial statement. The following data
comes from the fourth quarter of the current year:
Per Unit X Y Z
Selling Price $5.00 $15.50 $7.00
Prime Costs 1.00 9.00 1.00
Variable Overhead 1.00 2.00 3.00
Additional Data:
Units sold 10,000 30,000 20,000
Fixed Overhead* $5,000 $25,000 $20,000
Fixed admin.** $20,000 $30,000 $20,000
*All units during the quarter were sold.
**Fixed administrative costs for all 3 products is 30% direct and 70% common.
1. Prepare a segmented income statement using the absorption costing approach.
PRODUCT X Y Z
Sales 50,000 375,000
140,000
Less: COGS 25,000 355,000
100,000
GROSS MARGIN 25,000 20,000
40,000
Less: Fixed administrative 3,000 9,000 6,000
PRODUCT LINE MARGIN 22,000 11,000
34,000
Less: Common Cost 42,000
Divisional segment margin 25,000