Acct 2302 Chapter 7

Difference in Operating Income Between Absorption Costing & Variable Costing =

(Change in inventory level in units) x (Fixed MOH cost per unit)

Difference Between Full and Variable Costing

-The only difference between full and variable costing is their treatment of fixed manufacturing overhead: -Under full costing, fixed manufacturing overhead is included in inventory (i.e., is a product cost) -These costs enter into the determination of expense only when the inventory is sold -Under variable costing, fixed manufacturing overhead is a period cost -Under variable costing, the income statement reports a contribution margin

What is a segment

A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. An individual store A service center A sales territory

Absorption (Full) Costing or Variable Costing is required by GAAP for external reporting purposes

Absorption (Full) Costing

Inventory costs include:

DM, DL, MOH ◦Direct materials used (DM) Generally variable ◦Direct labor incurred (DL) Generally variable ◦Manufacturing overhead (MOH) Includes both fixed and variable costs

Inventory costs includes:

DM, DL, VOH ◦Direct materials used (DM) ◦Direct labor incurred (DL) ◦Variable manufacturing overhead (VOH) **(NOT fixed MOH)**

The difference between Full and Variable costing Net Operating Income:

Difference = Unit change in inventory * Fixed MOH cost per unit

Variable Costing is helpful for what

Helpful for internal decision making

Fixed Manufacturing Overhead per Unit =

Total Fixed MOH / Total Units Produced

T/F. Fixed manufacturing overhead treated as a period cost

True

Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends...

a. Absorption costing.

Examples of common fixed costs include:

◦The salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors. ◦The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the various departments.

Examples of traceable fixed costs include:

◦The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo. ◦The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing.