Accounting Chapter 6 disc questions

If fixed manufacturing overhead costs are released from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?

if fixed manufacturing overhead cost is released from inventory, then inventory levels must have decreased and therefore production must have been less than sales.

Under absorption costing, how is it possible to increase net operating income without increasing sales?

net operating income can be increased by increasing the level of production without any increase in sales. If production exceeds sales, units of product are added to inventory. These units carry a portion of the current period's fixed manufacturing overhead costs into the inventory account, reducing the current period's reported expenses and causing operating income to increase.

Are selling and administrative expenses treated as product costs or as period costs under variable costing?

(Fixed and variable) selling administrative expenses are treated as PERIOD costs for both variable and absorption costing

What are the arguments in favor of treating fixed manufacturing overhead costs as product costs?

Absorption costing advocates argue that: 1- absorption costing does a better job of MATCHING COSTS WITH REVENUES than variable costing 2-all manufacturing costs must be assigned to products to properly state the full cost of costing a product 3-managers, misled when they work with product cost information that fails to include the allocated share of fixed cost, make incorrect pricing decisions

If the units produced exceed unit sales, which method would you expect to show the higher net operating income?

Absorption costing will usually show higher net operating income than variable costing. When production exceeds sales, inventories increase and under absorption costing part of the fixed manufacturing overhead cost of the current period is deferred in inventory to future periods (Less expenses are recorded). In contrast, all of the fixed manufacturing overhead cost of the current period is immediately expensed under variable costing.

Why aren't common costs allocated to segments under the contribution margin?

If common costs were allocated to segments, then segment costs would increase and segment margins would decrease. As a consequence, some segments may appear to be unprofitable and managers may be tempted to eliminate them. If a segment were eliminated because of the existence of arbitrarily allocated common costs, the overall profit of the company would decline because that portion of the common fixed costs allocated to the now-eliminated segment would not have disappeared. Those common fixed costs previously allocated to the now-eliminated segment would remain and have to be allocated to one of the remaining business segments.

If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?

If production and sales are equal, net operating should be the same under absorption and variable costing. When production equals sales, inventories do not increase or decrease and therefore under absorption costing fixed manufacturing overhead cost is not deferred in inventory or released from inventory.

Explain how the segment margin differs from the contribution margin.

The contribution margin is the difference between sales revenue and variable expenses. The segment margin is the amount remaining after deducting traceable fixed expenses from the contribution margin. The contribution margin is useful as a planning tool for many decisions, particularly those in which fixed costs don't change. The segment margin is useful in assessing the overall profitability of a segment.

Explain how fixed manufacturing overhead costs are shifted from one period to another under absorption costing.

They are included in product costs along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold at, say the end of 2016, then they are carried into 2017 AS INVENTORY. Assuming all those units are sold in 2017, the 2016 fixed manufacturing overhead cost that was included in the 12.31.2016 ending inventory is included as part of the 2017's COST OF GOODS SOLD.

Distinguish between a traceable cost and a common cost. Give several examples of each,

Traceable cost of a segment is a cost that arises specifically because of the existence of that segment. If the segment were eliminated, the cost would disappear.(Examples- salary of the department's supervisor, depreciation of machines used exclusively by the department, and the costs of supplies used by the department.)A common cost is a cost that supports more than one segment. If one of the supported segments were eliminated, there would be no change in the common fixed cost. (Examples- salary of the general counsel of the entire company, the lease cost of the headquarters building, corporate image advertising, and periodic depreciation of machines shared by several departments)

What are the arguments in favor of treating fixed manufacturing overhead costs as period costs?

Variable costing advocates argue that: 1- fixed manufacturing costs are not really the cost of any particular unit of product.If a unit is made or not, the total fixed manufacturing costs will be exactly the same. Therefore, how can one say that these costs are part of the costs of the products? These costs are incurred to have the capacity to make products during a particular period and should be charged against that period as period costs according to the marketing principle.

In what fundamental ways does activity based costing differ from traditional costing methods such as job-order costing?

activity based costing differs from traditional costing: 1-ABC seeks to estimate the entire cost of a product not just its manufacturing cost.Consequently, in addition to manufacturing costs, some nonmanufacturing costs, such as product design, freight-out, marketing and sales costs, may be treated as products costs. ABC excludes from product costs some manufacturing overhead costs such as the costs of unused or idle capacity. 2- 3-

How does Lean Production reduce or eliminate the difference in reported net operating income between absorption and variable costing?

differences in reported operating income between absorption and variable costing arise because of changing levels of inventory. In lean production, goods are produced strictly to customers' orders. With production geared to sales, inventories are largely (or entirely) eliminated. If inventories are completely eliminated, they are zero from one period to another and absorption costing and variable costing will report the same net operating income

What is the basic difference between absorption costing and variable costing?

they differ in how they handle fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is expensed on the current period's income statement.