ACC 202 Ch. 6- BURGESS

is greater than

When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is equal to is less than is greater than

Traceable fixed costs

arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared.

Traceable fixed cost:

incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.

Units produced < Units sold

inventory decreases, absorption < variable

units produced > units sold

inventory increases, absorption > variable

Units produced=units sold

no change in inventory, absorption=variable

Absorption Costing

GAAP method DM, DL, Variable MO, Fixed MO are product costs

Variable (internal) Absorption (external)

2 Applications of contribution income statement

Change in inventories

If inventories increase during a period, under absorption costing some of the fixed manufacturing overhead of the current period will be deferred in ending inventories. When units produced exceed the units sold and hence inventories increase, Net income is higher under absorption. MO overhead from the period is deferred. When units sold exceed units produced and inventories decrease, net operating income is lower under absorption costing. MO overhead from period is released.

d) No effect/ Decrease

In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.) Variable/ Absorption a) No effect/ increase b) Decrease/ Increase c) Decrease/ Decrease d) No effect/ Decrease

$200,000 Contribution margin = Sales of $500,000 × 60% contribution margin = $300,000 Segment margin = Contribution margin of $300,000 - Traceable fixed expenses of $100,000 = $200,000

Max, Inc., has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000, respectively. What is the segment margin for the South Division? $100,000 $200,000 $300,000 $400,000

Absorption Costing:

Method that includes all manufacturing costs-direct materials, direct labor, and both variable and fixed manufacturing overhead- in unit product costs. Allocates a portion of fixed MO to each unit of product, along with the variable manufacturing costs. An absorption costing income statement categorizes costs by function- manufacturing versus selling and administrative. All the Manufacturing costs flow through the absorption costing COGS an all the S & A

fixed overhead costs

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________. all overhead costs fixed overhead costs selling and administrative expenses variable overhead costs

Common fixed costs examples

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

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.

The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin

Which of the following statements about the segment margin is not true? In preparing a segmented income statement, the variable expenses are deducted from sales to yield the contribution margin for each segment. The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin The segment margin represents the margin available after a segment has covered all of its own costs. The segment margin is the best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment.

Segment

any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

a. None of it. Common fixed expenses cannot be eliminated by dropping one of the segments.

How much of the common fixed expense of $200,000 can be avoided by eliminating the bar? a. None of it. b. Some of it. c. All of it.

Unit Cost computatiaons

Since the variable costs per unit, total fixed costs, and the number of units produced remained unchanged, the unit cost computations also remain unchanged.

Variable

Which of the following costing approaches is best suited for cost-volume-profit analysis? Absorption Normal Standard Variable

Variable Costin

Not GAAP DM, DL, Variable MO are product Fixed MO, Variable S and A, fixed S and A are period

2 Keys to segmented income

A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories.

A reason why absorption costing income statements are sometimes difficult to interpret is that: they include all fixed manufacturing overhead on the income statement each year as a period cost. they ignore inventory levels in determining cost of goods sold they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories. they omit variable expenses entirely in computing net operating income.

Variable vs. Absoprtion

Absorption Costing= Fixed manufacturing costs must be assigned to products to properly match revenues and costs. Variable Costing= Fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced.

Changes in Net income (Absorption)

Absorption costing income is influenced by changes in unit sales and units of production. Net operating income can be increased simply by producing more units even if those units are not sold.

variable and fixed cost distinctions

Absorption costing income statements ignore ________. direct materials and direct labor costs direct and indirect cost distinctions product and period cost distinctions variable and fixed cost distinctions

$400,000 Traceable fixed costs of the mobile phone division = Total traceable fixed costs of $500,000 - Traceable fixed costs of the television division of $300,000 = $200,000.Mobile phone segment margin = Contribution margin of $600,000 - Traceable fixed costs of $200,000 = $400,000.

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. Assuming the traceable fixed costs of the television division are $300,000, what is the segment margin of the mobile phone division? $100,000 $200,000 $300,000 $400,000

Omission of Costs

Costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain.

Variable

Method that includes only variable manufacturing costs- direct materials, direct labor, and variable manufacturing overhead- in unit product costs. Fixed Manufacturing overhead is considered a period cost and is reported as an expense on the income statement in its entirety. Can be referred to as direct costing and marginal costing.

$128 per unit Explanation: Direct materials $ 51 Direct labor 12 Variable manufacturing overhead 2 FMO cost ($441,000 ÷ 7,000 units) 63 Absorption costing unit product cost $ 128

Mullee Corporation produces a single product and has the following cost structure: Number of units produced each year 7,000 Variable per unit DM= 7,000 DL= 12 VMO= 2 V S & A= 5 Fixed per Unit Fixed MO= 441,000 Fixed S & A= 112,000 The absorption costing unit product cost is: $128 per unit $149 per unit $65 per unit $63 per unit

Segment Margin:

Obtained by deducting the TFC of a segment from the segment's contribution margin.

Product Period Product Period Period

Period or product under variable Direct labor Fixed MO Variable MO Fixed S & A Variable S & A

Cost Volume Profit Analysis:

Requires that we break costs down into variable and fixed. · It is much easier to use the variable costing income statement. o Absorption costing income statements are confusing. § Sales can stay the same, but the net income can go up because the number of units produced exceeded the number of units sold in the second month. o Under absorption costing, if inventories increase, fixed manufacturing overhead costs are deferred in inventories, which in turn increases net operating income. § If inventories decrease, fixed MO costs are released from inventories, which in turn decreases net income. § When absorption is used, fluctuations in net income can be caused by changes in inventory and changes in unit sales.

Common fixed cost:

Supports more than one business segment but is not traceable in whole or in part to any of the business segments.

a. $20,000 The bar would be allocated 1/10 of the cost or $20,000.

Suppose square feet is used as the basis for allocating the common fixed expense of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000 b. $30,000 c. $40,000 d. $50,000

Segment Margin Best guage

The _____, which is computed by subtracting the traceable fixed costs of a segment from its contribution margin, is the _____ of the long-run profitability of a segment.

Absorption Costing

Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost.

Variable Costing

Under variable costing, only the variable production costs are included in product costs.

Changes in Net income (Variable)

Variable costing income is only affected by changes in unit sales. It is not affected by the number of units produced. As a general rule, when sales go up, net operating income goes up, and vice versa.

less than absorption costing net income

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________. the same as absorption costing net income greater than absorption costing net income less than absorption costing net income

Equal to

When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is greater than is equal to is less than

is less than

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is greater than is equal to is less than

remain constant.

When unit sales are constant, but the number of units produced fluctuates and everything else remains the same, net operating income under variable costing will: be greater than net operating income under absorption costing. fluctuate in direct proportion to changes in production. fluctuate inversely with changes in production. remain constant.

Traceable fixed expenses ÷ Segment CM ratio

When using data from a segmented income statement, the dollar sales for a segment to break even is equal to: Non-traceable fixed expenses ÷ Segment CM ratio Traceable fixed expenses ÷ Segment CM ratio (Traceable fixed expenses + Common fixed expenses) ÷ Segment CM ratio Common fixed expenses ÷ Segment CM ratio

a. Absorption costing.

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

They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.

Which of the following is a common mistake made by companies when assigning costs to segments? They use allocation bases that drive the costs when assigning costs to segments. They trace fixed expenses to segments when it is feasible to do so. They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs. They include "upstream" and "downstream" costs when preparing profitability analyses that relate to individual product costs.

Common fixed costs

arise because of the overall operation of the company and would not disappear if any particular segment were eliminated.