Responsibility Accounting and Transfer Pricing

(C. Variable Costing & Segmented Reporting)

C. VARIABLE COSTING AND SEGMENTED REPORTING B.​ Profits fluctuate with sales
C.​ An idle facility variation is calculated
THEORIES: D.​ Product costs include “direct” (variable) administrative costs.
Direct costing
1.​ A basic tenet of direct costing is that period costs should be currently expensed. What is the 5.​ Which of the following is an argument against the use of direct (variable) costing?
rationale behind this procedure? A.​ Absorption costing overstates the balance sheet value of inventories.
A.​ Period costs are uncontrollable and should not be charged to a specific product. B.​ Variable factory overhead is a period cost.
B.​ Period costs are generally immaterial in amount and the cost of assigning the amounts to C.​ Fixed factory overhead is difficult to allocate properly.
specific products would outweigh the benefits. D.​ Fixed factory overhead is necessary for the production of a product.
C.​ Allocation of period costs is arbitrary at best and could lead to erroneous decisions by
management. 10.​ Advocates of variable costing for internal reporting purposes do not rely on which of the
D.​ Because period costs will occur whether or not production occurs, it is improper to allocate following points?
these costs to production and defer a current costs of doing business. A.​ The matching concept
B.​ Price-volume relationships
17.​ In a variable costing system, product cost includes C.​ Absorption costing does not include selling and administrative expenses as part of
A.​ direct materials, direct labor, variable overhead inventoriable cost
B.​ direct materials, direct labor, fixed overhead D.​ Production influences income under absorption costing
C.​ direct labor, variable overhead, fixed overhead
D.​ direct materials, variable overhead, fixed overhead 13.​ Which costing method is not acceptable to the SFAS external reporting?
A.​ absorption costing​ C.​ full costing
2.​ Which of the following must be known about production process in order to institute a direct B.​ variable costing​ D.​ all of these are acceptable
costing system?
A.​ The variable and fixed components of all costs related to production. 16.​ Variable costing can be used for
B.​ The controllable and noncontrollable components of all costs related to production. A.​ external reporting
C.​ Standard production rates and times for all elements of production. B.​ internal reporting
D.​ Contribution margin and breakeven point for all goods in production. C.​ either external reporting or internal reporting
D.​ neither external reporting nor internal reporting
3.​ Under the direct costing concept, unit product cost would most likely be increased by
A.​ A decrease in the remaining useful life of factory machinery depreciated on the 12.​ Which of the following is not true of variable costing?
units-of-production method. A.​ Profits may increase though sales decrease.
B.​ A decrease in the number of units produced. B.​ Profits fluctuate with sales.
C.​ An increase in the remaining useful life of factory machinery depreciated on the C.​ The cost of the product consists of all variable production costs.
sum-of-the-years’-digits method. D.​ The income statement under variable costing does not include overhead volume variance.
D.​ An increase in the commission paid to salesmen for each unit sold.
Contribution margin format income statement
4.​ Which of the following statements is true for a firm that uses variable (direct) costing? 15.​ When variable costing is used, the income statement is usually prepared using
A.​ The cost of a unit of product changes because of changes in the number of units A.​ a contribution margin format​ C.​ a functional format
manufactured. B.​ an operational format​ D.​ all of these

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determined using direct costing by computing the difference between
Absorption costing A.​ Inventoried fixed costs in the beginning and ending inventories and any deferred over- or
8.​ Absorption costing of inventories, as required by GAAP, has been criticized for encouraging underapplied fixed factory overhead.
managers to increase year-end inventories in order to boost reported profits. Which of the B.​ Inventoried discretionary costs in the beginning and ending inventories.
following techniques is the most effective at resolving this problem? C.​ Gross margin (absorption costing method) and contribution margin (direct costing
A.​ Senior management control of inventory levels method).
B.​ Adoption of just-in-time (JIT) production system D.​ Sales as recorded under the direct costing method and sales as recorded under the
C.​ Reward managers based upon the residual income approach absorption costing method.
D.​ Use variable costing to determine income for bonus purposes
23.​ Net profit under absorption costing may differ from net profit determined under direct costing.
11.​ When absorption costing is used, all of the following costs are considered product costs except How is this difference calculated?
A.​ direct labor​ C.​ variable selling and administrative costs A.​ Change in the quantity of all units in inventory times the relevant fixed costs per unit.
B.​ variable overhead​ D.​ fixed overhead 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.
21.​ Unabsorbed fixed overhead costs in an absorption costing system are D.​ Change in the quantity of all units produced times the relevant variable cost per unit.
A.​ Fixed factory costs not allocated to units produced.
B.​ Variable overhead costs not allocated to units produced. Sensitivity analysis
C.​ Excess variable overhead costs. 20.​ The level of production affects income under which of the following methods?
D.​ Costs that should be controlled. A.​ absorption costing​ C.​ variable costing
B.​ both absorption and variable costing​ D.​ neither absorption nor variable costing
Variable costing vs. Absorption costing
6.​ What is the primary difference between variable and absorption costing? 18.​ Variable-costing income will usually exceed absorption costing income when
A.​ inclusion of fixed selling expenses in product costs A.​ sales exceed production​ C.​ production exceeds sales
B.​ inclusion of variable factory overhead in period costs B.​ production and sales are equal​ D.​ none of these
C.​ inclusion of variable selling expenses in product costs
D.​ inclusion of fixed factory overhead in product costs 19.​ Variable costing net income is
A.​ higher than absorption net income when more units are sold than produced
7.​ Which of the following statements is true? B.​ lower than absorption net income when more units are produced than sold
A.​ Absorption costing net income exceeds variable costing net income when units produced C.​ the same as absorption net income when all units produced are sold
and sold are equal. D.​ all of the above
B.​ Variable costing net income exceeds absorption costing net income when units produced
exceed units sold. 9.​ A manufacturing company prepares income statements using both absorption and variable
C.​ Variable costing net income exceeds absorption costing net income when units produced costing methods. At the end of a period actual sales revenues, total gross profit, and total
equal units sold. contribution margin approximated budgeted figures, whereas net income was substantially
D.​ Absorption costing net income exceeds variable costing net income when units produced greater than the budgeted amount. There were no beginning or ending inventories. There most
are greater than units sold. likely explanation of the net income increase is that, compared to budget, actual
A.​ Manufacturing fixed costs had increased.
22.​ Net earnings determined using full absorption costing can be reconciled to net earnings B.​ Selling and administrative fixed expenses had decreased.

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C.​ Sales prices and variable costs had increased proportionately. A.​ 2, 3, 5, 6​ C.​ 2, 3, 4, 5
D.​ Sales prices had declined proportionately less than variable costs. B.​ 1, 2, 4, 5​ D.​ 1, 4, 5, 6

14.​ When variable costing is used, fixed manufacturing overhead is recognized as an expense 28.​ Which of the following costs would continue to be incurred even if a segment is eliminated?
when the A.​ direct fixed expenses
A.​ cost is incurred​ C.​ product is sold B.​ common fixed costs
B.​ product is completed​ D.​ product is inventoried C.​ variable cost of goods sold
D.​ variable selling and administrative expenses
Segment reporting
24.​ A segment is any part of an organization about which a manager seeks Cost allocation policy
A.​ cost data​ C.​ quantitative data 31.​ Which of the following is a good reason for allocating indirect costs to operating departments?
B.​ revenue data​ D.​ any of the above A.​ The company could lose money if the operating departments do not pay for the services
they use.
26.​ Which of the following could be considered a segment? B.​ To remind managers of the need to cover indirect costs.
A.​ division​ C.​ product line C.​ To encourage managers to use more services.
B.​ sales territory​ D.​ all of these D.​ To determine the true costs of operating departments.

25.​ The guideline(s) used in assigning costs to a segment include(s) whether 33.​ The cost allocation policy most likely to encourage use of a service is based on
A.​ costs are fixed​ C.​ costs are directly traceable A.​ budgeted total costs of the service department
B.​ costs are variable​ D.​ all of the above B.​ actual total costs of the service department
C.​ budgeted variable costs for the service department
27.​ Segment margin is equal to D.​ actual variable costs for the service department
A.​ sales less variable costs
B.​ sales less variable costs and direct fixed costs 32.​ The term “dual rates” refers to
C.​ sales less variable costs and indirect fixed costs A.​ allocating costs to several operating departments
D.​ sales less cost of goods sold B.​ allocating fixed costs based on capacity requirements and variable costs based on use
C.​ allocating both actual costs and budgeted costs
29.​ Revenue less variable costs and direct fixed costs equals D.​ using the budgeted rate to allocate some costs, the actual rate to allocate others
A.​ contribution margin​ C.​ income before taxes
B.​ segment margin​ D.​ income after taxes 34.​ The WORST method of allocating service department costs is to allocate
A.​ total actual costs based on actual use of the service
30.​ Indicate which of the following costs would be avoided if a segment is eliminated. B.​ total budgeted costs based on long-term expected use of the service
1.​ variable manufacturing costs C.​ total budgeted cost based on actual use of the service
2.​ direct fixed costs D.​ none of the above, because all the above are equally undesirable
3.​ common fixed costs
4.​ variable selling costs PROBLEMS:
5.​ direct fixed selling costs Variable costing
6.​ common fixed selling costs Ending inventory

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1
.​ The following information pertains to Sharapova Corporation: Sales​ P40,000
Beginning inventory ​ 0 units Direct materials​ 9,050
Ending inventory​ 5,000 units Direct labor​ 6,000
Direct labor per unit​ P10 Rent (9/10 factory, 1/10 office)​ 3,000
Direct materials per unit​ 8 Depreciation on factory equipment​ 2,000
Variable overhead per unit​ 2 Supervision (2/3 factory, 1/3 office)​ 1,500
Fixed overhead per unit​ 5 Salespeople’s salaries​ 1,300
Variable selling costs per unit​ 6 Insurance (2/3 factory, 1/3 office)​ 1,200
Fixed selling costs per unit​ 8 Office supplies​ 750
What is the value of ending inventory using the variable costing method? Advertising​ 700
A.​ P155,000​ C.​ P100,000 Depreciation on office equipment​ 500
B.​ P125,000​ D.​ P195,000 Interest on loan​ 300
Based on the above data, the gross margin percentage for the last period (rounded to nearest
Absorption costing percent) was
Gross margin A.​ 41%​ C.​ 46%
2
.​ A company manufactures a single product for its customers by contracting in advance of B.​ 44%​ D.​ 49%
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: Variable costing vs. Absorption costing
Unit costs
1
.​ Answer: C 3
.​ During May, Roy Co. produced 10,000 units of Product X. Costs incurred by Roy during May
Direct materials​ P 8 were as follows
Direct labor​ 10 Direct materials​ P10,000
Variable overhead​ 2 Direct labor​ 20,000
Total unit cost- variable costing​ P20 Variable manufacturing overhead​ 5,000
Value of ending inventory (5,000 x P20)​ P100,000 Variable selling and general ​ 3,000
Fixed manufacturing overhead​ 9,000
2
.​ Answer: C Fixed selling and general​ 4,000
Sales​ P40,000
Cost of goods sold
3
Direct materials​ P9,050 .​ Answer: C
Direct labor​ 6,050 Direct materials​ P10,000
Rent (0.9 x P3,000)​ 2,700 Direct labor​ 20,000
Depreciation​ 2,000 Variable overhead​ 5,000
Supervision (2/3 x P1,500)​ 1,000 Total variable product cost​ P35,00
Insurance (2/3 x P1,200)​ 800​ (21,600) Variable unit cost (P35,000 ÷ 10,000)​ P3.50
Gross margin​ P18,400 Add Fixed overhead per unit (P9,000 ÷ 10,000)​ 0.90
Gross margin percentage (P18,400 ÷ P40,000)​ 46% Absorption unit cost​ P4.40

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Total​ P51,000 Year 2 95,000 95,000 100,000
What are the unit costs under absorption and variable costing methods, respectively? Year 3 90,000 90,000 100,000
A.​ P5.10; P3.80​ C.​ P4.40; P3.50 Because Blue Company uses an absorption costing system, one would predict gross margin
B.​ P3.80 P5.10​ D.​ P3.50: P4.40 for Year 3 to be
A.​ Greater than Year 1.​ C.​ Equal to Year 1.
Difference in income B.​ Greater than Year 2.​ D.​ Equal to Year 2.
4
.​ Consider the following:
Sales price, per unit​ P18 per unit Reconciliation
Standard absorption cost rate​ P12 per unit Income under absorption costing
Standard variable cost rate​ P8 per unit 6
.​ A company had income of P50,000 using direct costing for a given period. Beginning and
Variable selling expense rate​ P2 per unit ending inventories for that period were 13,000 units and 18,000 units, respectively. Ignoring
Fixed selling and administrative expenses​ P40,000 income taxes, if the fixed overhead application rate were P2.00 per unit, what would the
Fixed manufacturing overhead​ P60,000 income have been using absorption costing?
Last period, 13,000 units were produced. In the current period, 15,000 units were produced. In A.​ P40,000
each period, 13,000 units were sold. What is the difference in reported income under B.​ P50,000
absorption and variable costing for the current period? C.​ P60,000
A.​ The variable-costing income exceeded absorption-costing income by P4,000. D.​ Cannot be determined from the information given.
B.​ The absorption-costing income exceeded variable-costing income by P8,000.
C.​ The variable-costing income exceeded absorption-costing income by P6,000. Income under variable costing
D.​ Net income will not be different between the two methods. 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.
5
.​ The Blue Company has failed to reach its planned activity level during its first two years of Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what would
operation. The following table shows the relationship between units produced, sales, and the income have been using variable costing?
normal activity for these years and the projected relationship for Year 3. All prices and costs A.​ P 77,500​ C.​ P 52,500
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. 6
.​ Answer: C
Units Produced Sales Planned Activity The income under absorption costing is higher by P10,000 because the amount of fixed
Year 1 90,000 90,000 100,000 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
4
.​ Answer: B that was incurred during the year as period cost.
Fixed overhead rate per unit: ​ P12 – P8​ P4 Fixed overhead deferred as product cost: 5,000 x P2 ​ P10,000
Difference in income: ​ 2,000 x P4​ P8,000 Absorption income ​ (P50,000 + P10,000)​ P60,000
During the current year, the company’s production equaled the budgeted. The inventory
7
increased. Therefore, absorption costing income is higher than the variable costing income. .​ Answer: C
Absorption income​ 65,000
5
.​ Answer: C Less Fixed Overhead in decrease in inventory ​ (18,000 – 15,000) x 2.50​ 12,500
The production and unit sales during year 3 matched with year 1. Income, Variable costing​ 52,500

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B.​ P 60,000​ D.​ P 20,000 Effect of dropping a department
10
.​ Zambales Mining Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable
Unit contribution margin costs are P600,000 per ton, and fixed mining costs are P5,000,000. The segment margin for
8
.​ The following information was extracted from the first year of absorption-based accounting 2005 was P(1,000,000). The management of Zambales Mining was considering dropping the
records of Soulmate Co. mining of Gold Ore. Only one-half of the fixed expenses are direct and would be eliminated if
Total fixed costs incurred​ P100,000 the segment was dropped. If Gold Ore were dropped, net income for Zambales Mining would
Total variable costs incurred​ 50,000 A.​ Increase by P1,000,000​ C.​ Decrease by P1,000,000
Total period costs incurred​ 70,000 B.​ Increase by P1,500,00​ D.​ Decrease by P1,500,000
Total variable period costs incurred​ 30,000
11
Units produced​ 20,000 .​ Aging Company plans to discontinue a segment with a P32,000 segment margin. Common
Units sold​ 12,000 expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be
Unit sales Price​ P 12 eliminated if the segment were closed. The effect of closing down the segment on Aging
Based on variable costing, if Soulmate Co. had sold 12,001 units instead of 12,000, its income Company’s before tax profit would be
before taxes would have been A.​ P12,000 decrease​ C.​ P 7,000 decrease
A.​ P 9.50 higher​ C.​ P11.00 higher B.​ P12,000 increase​ D.​ P 7,000 increase
B.​ P 8.50 higher​ D.​ P 8.33 higher
Use this data to respond to questions 16 through 17.
9
.​ At its present level of operations, a small manufacturing firm has total variable costs equal to Omid Publishing Company has three divisions: A, B, and C. The revenues of these divisions are
75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales P29,000, 48,000, and 63,000 respectively. Variable costs of these divisions amount to 57%, 59%,
change by P1.00, income will change by and 64% of the given revenues. The divisions' short-term controllable fixed costs are P4,200,
A.​ P 0.25​ C.​ P 0.75 5,200, and 6,200 respectively. The divisions' long-term controllable fixed costs amount to P3,800,
B.​ P 0.12​ D.​ P 0.10 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.
Segmented Income Statement
12
.​ Long-term controllable margin for division A amounts to
8
.​ Answer: B
10
CMR per unit = Selling Price – Unit variable cost .​ Answer: A
P8.50 = P12.00 – P3.50 The only relevant information to compute the effect of dropping the mining of gold ore is the
Variable Cost Per unit negative segment margin. If the product line is dropped, the company can avoid the negative
Product: (50,000 – 30,000) / 20,000 =​ P1.00 margin of P1 million.
Selling & Adm. (variable period costs) ​ 30,000/12,000 ​ 2.50
11
Total variable cost/unit ​ P3.50 .​ Answer: C
* Total variable costs – variable period cost Avoidable common expenses​ P 25,000
(selling & adm.) = variable product cost. Segment margin lost​ 32,000
Decrease in profit​ P( 7,000)
9
.​ Answer: A
12
1.00 - (1.00 x .75) = P0.25 .​ Answer: A
Revenues ​ P29,000

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A.​ P4,470​ C.​ P12,470 The 200,000-unit budget has been adopted and will be used for allocating fixed manufacturing
B.​ P8,270​ D.​ P16,470 costs to units of Product X. At the end of the first six months the following information is available:
​ Units
13
.​ Short-term controllable margin for division B amounts to Production completed​ 120,000
A.​ P9,580​ C.​ P19,680 Sales​ 60,000
B.​ P14,480​ D.​ P23,580
All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred
Comprehensive coincide with the budget.
Questions 10 through 13 are based on the following annual flexible budget which has been
prepared for use in making decisions relating to Product X. Over- and underapplied fixed manufacturing costs are deferred until year-end. Annual sales have
Budgeted units 100,000 150,000 200,000 the following seasonal pattern:
Sales Volume P800,000 P1,200,000 P1,600,000 ​ Portion of Annual Sales
Manufacturing costs: First quarter​ 10%
Variable P300,000 P 450,000 P 600,000 Second quarter​ 20%
Fixed 200,000 200,000 200,000 Third quarter​ 30%
P500,000 P 650,000 P 800,000 Fourth quarter​ 40%
Selling expenses: ​ 100%
Variable P200,000 P 300,000 P 400,000
14
Fixed 160,000 160,000 160,000 .​ The amount of fixed factory costs applied to product during the first six months under
P360,000 P 460,000 P 560,000 absorption costing would be
Income (or loss) (P60,000) P 90,000 P 240,000 A.​ 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 be
Variable cost (P29,000 x 0.57)​ 16,530 A.​ P160,000​ C.​ P 80,000
Contribution margin​ 12,470
14
Less Short-term controllable fixed cost​ 4,200 .​ Answer: A
Short-term controllable margin ​ 8,270 Budgeted actual fixed overhead​ (0.5 x P200,000)​ P100,000
Long-term controllable fixed cost​ 3,800 Applied fixed overhead ​ (120,000 x P1.00)​ 120,000
Long-term controllable margin​ P 4,470 Overapplied fixed overhead (favorable volume variance) ​ P 20,000
13 15
.​ Answer: B .​ Answer: B
Revenues​ P48,000 Sales (60,000 x P8)​ P480,000
Variable cost (P48,000 x 0.59)​ 28,320 Cost of goods sold (60,000 x P4)​ 240,000
Contribution margin​ 19,680 Gross profit​ 240,000
Short-term controllable fixed cost​ 5,200 Selling and other expenses (60,000 x 2) + P80,000​ 200.000
Short-term controllable margin – Div B​ P14,480 Absorption profit​ P 40,000

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B.​ P 40,000​ D.​ P (40,000)
16
.​ Reported net income (or loss) for the firs six months under direct costing would be
A.​ P144,000.​ C.​ P 72,000
B.​ 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 be
A.​ 360,000.​ C.​ 240,000
B.​ 200,000.​ D.​ 300,000

16
.​ Answer: B
Total contribution margin (60,000 x P3)​ P180,000
Less: Fixed manufacturing OH​ P100,000
Fixed selling and other expenses​ 80,000​ 180,000
Variable costing profit​ NIL
CM per unit (P1.6M – P0.6M – P0.4M) ÷ 200,000)​ P3.00
17
.​ Answer: D
The 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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