acc 213 chapter 6

direct materials, direct labor, variable manufacturing overhead

what makes up the manufacturing cost per unit of a product under variable costing?

increase

when units produced are greater than units sold, units in inventory ____, absorption income is greater than variable costing income

decrease

when units produced are less than units sold, units in inventory ____, absorption costing income is less than variable costing income

same

when units produced equals units sold, the two methods report the _____ net operating income.

total fixed manufacturing overhead is expensed in the period incurred

when using variable costing

manufactured overhead deferred in (released from) inventory

= fixed manufacturing overhead in ending inventories - fixed manufacturing overhead in beginning inventories

dollar sales to attach target profit

= target profit + fixed expenses / CM ratio

variable costing net income for each period

=# of units sold by the contribution margin per unit - total fixed costs

traceable fixed cost

a fixed cost that is incurred b/c of the existence of the segment. if the segment never existed the fixed cost would not have been incurred and if the segment were eliminated, the fixed cost would disappear. examples: 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 disney corporation

unit sales, units of production

absorption costing income is influenced by changes in ____ and ____. net operating income can be increased simply by producing more units even if those units are not sold.

traceable fixed expense

an example: if a company produces shoes and clothing, the salary of the manager of the shoe segment is a traceable fixed expense because it does not change based on sales revenue and it would not exist if the company eliminated the shoe department. this is an example of what?

segment

any part or acting of an organization about which managers seek cost, revenue, or profit data.

a fixed expense is known as a common expense if it is not tied to a specific segment of the business. if it is tied to a specific segment, then it is a traceable fixed expense

common vs traceable expenses

divisions of the company, sales territories, individual stores, service centers, manufacturing plants, marketing departments, individual customers and product lines.

examples of business segments are...

common fixed cost

fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. even if a segment were entirely eliminated, there would be no change in a true common cost.

a cost that stays the same regardless of how much revenue the business generates.

fixed expense

sales - cost of goods sold

gross margin

fixed manufacturing overhead is treated as part of the per unit product cost and expensed as units are sold

how is fixed manufacturing overhead costs treated in absorption costing?

fixed manufacturing overhead is treated as a period cost and expensed in full each period

how is fixed manufacturing overhead costs treated in variable costing?

segment margin

obtained by deducting the traceable fixed costs of a segment from the segments contribution margin. it represents the margin available after a segment has covered all of its own costs. it is the best gauge of the long run probability of a segment b/c it includes only those costs that are caused by the segment. the amount of profit or loss produced by one component of a business.

variable costing

only those manufacturing costs that vary w/ output are treated as product costs. they usually include product costs: DM, DL, Variable portion of MOH. period costs: variable selling expenses, variable administrative expenses. fixed MOH is treated as a period cost and like selling & administrative expenses it is expensed each period. referred as direct costing or marginal costing.

dollar sales for a segment to break even

segment traceable fixed expenses / segment CM ratio

a costing method that classifies all direct labor and MOH costs as fixed period costs and only DM as a variable product cost

super variable costing

a fixed cost that is incurred because of the existence of the segment

what is a traceable fixed cost?

1. sales 2. variable costs 3. contribution margin 4. fixed costs 5. net operating income

what is the order of a contribution format income statement?

fixed expense

the rent a company pays for a building for the term of the lease is a ___ ____.

variable expense

the total amount of commissions a company pays to salesmen is a __ __ because it increases as sales volume increases.

1. direct laborers are paid hourly wage, companies are required by a labor contract to guarantee workers a minimum number of paid hours 2. direct labor is not usually the constraint, so there is no reason to increase the number of direct laborers 3. TOC emphasizes the role direct laborers play in driving continuous improvement

theory of constraints approach. TOC is a form of variable costing. it treats direct labor as a fixed cost for three reasons :

dollars sales for company to break even

traceable fixed expenses + common fixed expenses / overall CM ratio

absorption costing

treats all manufacturing costs as product costs regardless if they are variable or fixed. consists of DM, DL, both variable & fixed MOH. referred to as full cost method under absorption & variable costing, variable & fixed selling and admin expenses are treated as period costs and expensed as incurred. deducted from revenue

unit sales

variable costing income is only affected by changes in _____. 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.

contribution margin, gross margin

variable costing income statement shows ____ but the absorption costing income statement shows ____

an expense that changes in response to sales volume.

variable expense