Managerial Accounting Module 2

traceable fixed costs

arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared -salary of a manger -maintenance cost for the building (if the segment goes away, would the cost go away)

common fixed costs

arise because of the overall operation of the company and would not disappear if any particular segment were eliminated -salary of the CEO of general motors -cost of heating Kroger (if the segment goes away, the cost would not)

sales mix

is the relative proportion in which a company's products are sold

activity based costing improves accuracy of product costs by

using multiple pools to accumulate overhead costs

what cost approach is best suited for cost-volume-profit analysis?

variable

absorption costing income statements ignore

variable and fixed cost distinctions

keys to building segmented income statements

- 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

key cost volume profit analysis assumptions

- selling price is constant -costs are linear and can be accurately divided into variable and fixed components

WHy direct labor for allocation base?

-direct labor information was already being reordered -direct labor was a large component of product costs -managers believed direct labor and overhead costs were highly correlated

Plantwide overhead disadvantages

-most companies sell a large variety of products that consume differing amounts of overhead

margin of safety

-want it high, wiggle room you have unit you break even

Three common approaches

1. plantwide overhead 2. departmental overhead rates 3. activity- based costing

4 level hierarchy

1. unit level 2. batch level 3. product- level 4. facility level

activity cost pool

a "cost bucket" in which costs related to a particular activity measure are accumulated

activity rate

a predetermined overhead rate for each activity used to assign overhead costs to cost objects

Which method will produce the highest values for work in process and finished good inventories

absorption costing-> keeps fixed overhead as a product-> keeps it in inventory

facility-level activities

activities that are carried out regardless of which products are produced or how many batches or units produced

Activity

any event that causes consumption of overhead resources

segment

any part or activity of an organization about which a manager seeks cost, revenue, or profit data -an individual store -service center -sales territory

absorption costing income is influenced by

changes in unit sales and units of production

variable costing is only affected by

changes in unit sales, not affected by the number of units produced

what do we not allocate

common costs to segments

use the contribution margin ration to

compute changes in contribution margin and net operating income resulting from changes in sales volume

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.

decrease

activity based management involves focusing on activities to

eliminate waste, decrease processing time, and reduce defects

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 absorption costing method

equal to

Activity measure

expresses how much of the activity is carried out and is used as the allocation base for applying overhead costs

The different between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for

fixed overhead costs

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

greater than

implementing an activity based costing system often results in a shift of overhead cost from

high volume to low volume products

net operating income can be

increased simply by producing more units even if those units are not sold

what method do managers use to estimate the fixed and variable components of mixed cost by analyzing past records of cost and activity data

least squares regression

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

less than

when the number of units produced is greater than the number of units sold, variable costing net operating income will be

less than absorption costing net operating income

the measure of how sensitive net operating income is to a given percentage change in volume sales is called

operating leverage

unit level activities

performed each time a unit is produced; costs should be proportional to the number of units produced

product-level activities

related to specific products and typically must be carried out regardless of how many batches or units produced

what is the best gauge of the long-run profitability of a segment

segment margin

batch-level activities

tasks that are performed each time a batch is processed; costs depend on the number of batches processed not units produced

variable costing correctly identifies

the additional variable costs incurred to make one more unit

contribution margin

the amount remaining from sales revenue after variable expenses have been deducted -used first to cover fixed expenses

common mistake by companies when assigning costs to segments

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

activity and costs should be combined only if...

they fall within the same level in the cost hierarchy

most important decisions involve...

what activities will be included and how they will be measured