Accounting Chapter 7

Cost-volume-profit

(CVP) analysis requires that we break costs down into their

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 operating income - greater than absorption costing net operating income - less than absorption costing net operating income

- less than absorption costing net operating income

Generally speaking, net operating income under variable and absorption costing will: A) be equal only when production and sales are equal. B) be equal only when production exceeds sales. C) never be equal. D) always be equal.

A

Absorption Costing Income Statements Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss)

Absorption costing

segment margin formula

Contribution Margin - Traceable fixed costs

Hayworth Corporation has just segmented last year's income statement into its ten product lines. The chief executive officer (CEO) is curious as to what effect dropping one of the product lines at the beginning of last year would have had on overall company profit. What is the best number for the CEO to look at to determine the effect of this elimination on the net operating income of the company as a whole? A) the product line's contribution margin B) the product line's segment margin minus an allocated portion of common fixed expenses C) the product line's sales dollars D) the product line's segment margin

D

Unit product cost under variable costing:

DM,DL, and VMOH

Dollar sales for a segment to break even

Traceable fixed expenses ÷ Segment CM ratio

fixed manufacturing costs can become deferred under absorption costing

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 manufacturing overhead costs are released from inventories, which in turn decreases net operating income.

Variable Costing Contribution Format Income Variable expenses: Variable cost of goods sold Variable selling and administrative expense Total variable expenses Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expense Total fixed expenses Net operating income (loss)

Variable costing

traceable fixed cost

a fixed cost that is incurred because of the existence of the segment ex: 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 liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of The Walt Disney Corporation.

common fixed cost

a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. ex: 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 store's various departments—groceries, produce, bakery, meat, and so forth. The cost of the receptionist's salary at an office shared by a number of doctors is a common fixed cost of the doctors. The cost is traceable to the office, but not to individual doctors.

Absorption costing:

all manufacturing costs are treated as product costs: DM, Fixed MOH, Variable MOH, and DL. Period costs are variable and fixed SG and A. They ignore variable and fixed cost distinctions. - Fixed moh = month payment/units produced - COGS: (period costs) * units sold

common fixed expenses for a company with two segments

combined CM - traceable fixed expenses - Net operating income

dollar sales for company to breakeven

company fixed costs / company contribution margin ratio

absorption costing income statements

generally used for external reports, ignore variable and fixed cost distinctions. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead.

segment

is a part or activity of an organization about which managers would like cost, revenue, or profit data.

segment margin

obtained by deducting the traceable fixed costs of a segment from the segment's contribution margin. It 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

variable costing income statements

rely on the contribution format, for internal decision making purposes. hey categorize expenses based on cost behavior. include direct materials, direct labor, and the variable portion of manufacturing overhead.

Contribution Margin

separates fixed and variable costs

True or false: absorption treats all manufacturing costs as product costs

true

The number of units produced does not affect net operating income under...

variable costing