Ch. 6: Variable Costing & Segment Reporting

traceable fixed cost; 1. product manager 2. maintenance cost for Boeing 747 builiding traceable to business segment of Boeing 3. liability insurance at Disney World traceable to business segment

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated; Give 3 examples

common fixed cost; 1. CEO salary 2. cost of heating a Safeway is common amongst all departments 3. receptionist's salary at a shared doctor's office is common fixed cost of all the doctors

A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments. Give 3 examples

fixed, inventories; some of the Fixed MOH of tthe current period will be deferred in ending inventories (in contrast all of the fixed MOH appears on the income statement in variable costing), absorption costing

Differences in net operating incomes between variable costing and absorption costing models occur because under absorption costing some _________ MOH is capitalized in __________________ rather than being immediately expensed on the Income Statement. What happens in absorption costing if inventories increase during a period? Consequently, which net operating income will be higher with an increase?

This occurred because one aircraft produced in February is not sold until March. This aircraft has $35,000 of Fixed MOH attached to it that was incurred in Feb., but will not be recorded as part of COGS until March.

Example from book: Even though sales were exactly the same in Jan. & Feb. and the cost structure did not change, net operating income was $35,000 higher in Feb. than in Jan. under absorption costing. Why?

1) cost of WIP -- units completed--> Finished Good inventory -- units sold--> costs go to Income Statement via COGS 2) Fixed MOH goes immediately to the Income Statement as period expenses

Give the routes of fixed MOH for 1) absorption and 2) variable

Company $BE = (Traceable Fixed expenses + Common fixed expenses)/Overall CM Ratio; Segment $BE = Segment traceable fixed expenses/Segment CM ratio; the segment break-even calculations do not include the company's common fixed expenses; NO, allocating common fixed expenses to business segments artificially inflates each segmen'ts break-even point -> discontinuation of segments that appear unprofitable

How do you calculate dollar sales for company to break even? Dollar sales for a segment to break even? Why is the sum of the segment break-even sales figures in the example less than the company-wide break-even point? Should a manager allocate common fixed expenses to cover the company's common fixed expenses?

Contribution margin - traceable fixed costs of segment = margin available after a segment has covered all of its own costs; best gauge, profitability, it should be dropped unless it has important side effects

How do you calculate segment margin and what does that tell you? The segment margin is the _________ _________ of the long-run ____________________________ of a segment because it includes only those costs caused by the segment. If a segment can't cover its own costs, what should happen?

variable expenses are deducted from sales to yield CM for the segment (tells us what happens to profits as volume changes); yes; when it involves temporary uses of capacity such as special orders (which often involve only variable costs and revenues)

How do you prepare a segmented income statement? Do you hold a segment's capacity and fixed costs constant? When is the CM especially useful in decisions?

absorption costing, Dm, DL, both variable and fixed MOH, full

Method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs. What does the cost of a unit of product under this method consist of? aka _____ cost method

1. Yes, but differently 2. V: categorize expenses based on cost behavior (variable reported separately from fixed); A: ignor V & F fixed cost distinctions 3. figures often differ because of how the income statements account for fixed manufacturing overheard (all other costs are treated the same)

Overview of Variable & Absorption Costing: 1. Do both income statement formats include product costs and period costs? 2. How do variable costing income statements categorize costs compared to absorption costing income statements? 3. Are the net operating income figures the same? Why or why not?

segment margin: most useful in major decisions that affect capacity such as dropping a segment; contribution margin: most useful in decisions involving short-run changes in volume (such as pricing special orders)

Segment Margin & Decision-Making: segment margin v. contribution margin?

omit, upstream, downstream, customer service, undercosting; traceable fixed 1. failure to trace costs directly 2. Inappropriate allocation base (should be allocated to segments only when the allocation base actually drives the cost being allocated or is very highly correlated), arbitrarily

Segmented Income Statements - Common Mistakes: 1. O_______ some costs: all costs attributable to that segment from the company's entire value chain should be included but many companies use absoprtion costing for both reports, omiting "u__________" costs (R&D, product downstream) and "d____________" costs (marketing, distribution, c______________ ________) from their profitability analysis, which leads to u_________________________ 2. Inappropriately assign t__________________ f_________ costs; what are the two ways 3. A__________________ allocate common fixed costs (often justified on grounds that "someone has to cover the common costs") -> will make segment appear unprofitable

($140 + $19) x 780 quilts sold = $124,020

The Quilt produces and sells handmade quilts. V MOH costs total $140 per quilt. F MOH totals $68,250 per quarter. V S&A costs are $19 per quilt sold, and F S&A costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. The total Variable cost reported on Quilt's variable costing income statement is?

variable, units sold, fixed

The ______________ costing net operating income for each period can always be computed by multiplying the number of ________ _________ by the contribution margin per unit and the subtracting total f_______ costs.

variable costing; direct materials, direct labor, and the variable portion of manufacturing overhead, a period cost (expensed in its entirety each period), direct, marginal

The costing method that assigns only variable manufacturing costs to products. What three things does this include? What is fixed manufacturing overhead treated as? aka _______________ costing or m_____________________ costing

11,000 = 100,000 x 10% x 60,000/100,000 is 6,000 + 5,000 saved from stopping catalog sales

Two divisions: Catalog and Online Sales. For the last quarter, the Catalog Sales segment margin was (5,000). Online sales were $100,000, CM was $60,000, and segment margin was $40,000. If Catalog Sales are discontinued, it's estimated that online sales will increase by 10%. Discontinuing sales should increase company's profit by:

absorption costing, they are the same; MOH deferred in (released from) inventory = Fixed MOH in ending inventories - Fixed MOH in beginning inventories

When the units produced > until sales (and hence inventories increase), net operating income is higher under which method? What about if the units produced = unit sales? What is the equation for the fixed MOH that is deferred in or released from inventories?

absorption costing; all manufacturing costs must be assigned to products in order to properly match the costs of producing units of product with their revenues when they are sold; fixed manufacturing costs are not really the costs of any particular unit of product.

Which costing method is required for external reports according to GAAP principles? What do advocates argue? What do advocates of the other method argue? US GAAP and IFRS require that publicly traded companies include segmented financial and other data in their a_____ reports and that segmented reports prepared for _______________ users must use the same methods and definitions that the companies use in ____________ segmented reports. Companies are often very reluctant to use contribution formats then because it contains confidential info.

Traceable fixed costs are charged to segments and common fixed costs are not; only those costs that would disappear over time if the segment itself disappeared; common, reduce, common

Why is distinguishing between traceable and common fixed costs crucial in segment reporting? What is the general guideline for differentitating? - Any allocation of c___________ costs to segments r____________ the value of the segment margin as a measure of long-run segment profitability and segment performance. - Traceable Costs can become c____________ costs