Accounting 2: CH 19

Absorption Costing

Assumes that products absorb all costs incurred to produce them. -Method can result in misleading product cost information for managers' business decisions

Production Planning Importance

-Too much leads to excess inventory, which leads to higher storage and financing costs -Too little can lead to lost sales and customer dissatisfaction

Uncontrollable Costs

Are not within the manager's control or influence

Controllable Costs

Costs that the manager has control of or at least a strong influence

Computing Unit Cost

Direct Materials cost +Direct Labor Cost =Overhead Cost Variable Overhead cost +Fixed overhead cost =Total overhead cost Expected units produced

True or False? It is not possible to convert reports prepared using variable costing to absorption costing reports.

False

True or False? Variable costing is the only acceptable basis for both external reporting and tax reporting.

False

True or False?Absorption costing results in expensing of fixed manufacturing overhead based on the number of units produced, rather than units sold.

False

True or False? Does Fixed manufacturing overhead change with changes in production?

False. -Fixed overhead is treated as a period cost, meaning it is expensed in the period when it is incurred.

Contribution Format

Income statement that separately reports variable costs and fixed costs -Makes it easier to identify problem areas and to take cost control measures

Income Under Absorption Costing =

Income under variable costing + Fixed overhead cost in ending inventory -Fixed overhead cost in beginning inventory

Contribution Margin Income Statement

Is the excess of sales over variable costs. -The income statement under variable costing

Which of the following statements is true regarding absorption costing?

It assigns all manufacturing costs to products

Variable Costing

Only costs that change in total with changes in production level are included in product costs.

Manufacturing Margin

Sales less: variable production costs

Steps: Determining Product selling prices

Step 1: Determine the product cost per unit using absorption costing Step 2: Determine the target markup on product cost per unit. Step 3: Add the target markup to the product cost per unit

When the number of units sold exceed the number of units produced, income reported under absorption costing will be lower under absorption than under variable costing. Which of the following gives the best justification of the above statement?

The fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory.

True or False? Companies commonly use absorption costing for external reporting and tax reporting?

True

True or False? Companies commonly use variable costing for internal reporting and business decisions?

True

True or False? Contribution margin divided by sales equals the contribution margin ratio.

True

True or False? Information presented in a variable costing format can assist management when making short-term pricing decisions.

True

True or False? The level of inventory at the end of the year does affect the calculation of operating income under both variable and absorption costing.

True

Which of the following statements is true? Variable costing treats fixed overhead as a period cost. Absorption costing treats fixed overhead as a period cost. Absorption costing treats fixed overhead as an expense in the period it is incurred. Variable costing excludes all overhead from product costs. Managers can manipulate earnings more easily under variable costing by varying the production level.

Variable costing treats fixed overhead as a period cost.