Acct. 2332, Ch. 5
Variable Costing
An alternative approach to Absorption Costing which includes: direct material direct labor, and variable (but not fixed) manufacturing overhead.
Absorption costing Also referred to as full costing
An approach to product costing that includes: direct material direct labor fixed Manufacturing Overhead Variable manufacturing overhead in product cost.
artificially inflate
Because the performance of managers is often evaluated in relation to earnings, managers may have an incentive to ___________profit by producing more units than they can sell.
total amount
Consider depreciation, which usually is a fixed cost component of manufacturing overhead. Under the variable costing method, however, the _______________ of depreciation is treated as an expense of the period
some portion
Consider depreciation, which usually is a fixed cost component of manufacturing overhead. Under full costing, ______________ of depreciation for the period remains in ending inventory when not all of the items produced are sold. Under the variable costing method, however, the _______________ of depreciation is treated as an expense of the period
Variable cost information will prove helpful to competitors who, with the variable cost information, will have better insight into a rival company's cost structure. and Separating costs into fixed and variable components may be quite subjective.
General Accepted Accounting Principles (GAAP) imply imply that variable costing is not acceptable for external reporting purposes. Why?
make assumptions that are incorrect and leading to poor plans and poor decisions
Having a variable costing income statement can be very useful for planning and decision making. Not having one may lead managers to:
increased
In a Full Costing method Unit costs decrease because production has _____________, spreading fixed costs out over more units.
period costs
In variable costing, only variable production costs are included in inventory costs. All fixed production costs are treated as __________ and expensed in the period they were incurred.
Gross Margin - S&AE = Net Income
Income Statement prepared using Full Costing:
Contribution Margin -Total Fixed Costs= Net Income
Income Statement prepared using Variable Costing:
external internal
Income statements of manufacturing firms prepared for _________ purposes use full costing. An alternative to full costing for __________ reporting purposes is variable costing.
Gross Margin
Sales - Cost of Goods Sold
Contribution Margin
Sales - Variable Costs
This can't be determined from the full costing income statement because we don't know which costs are fixed and which costs are variable. However, using the variable costing income statement, we can easily calculate the contribution margin ratio as the contribution margin divided by sales, which equals 65 percent. If sales increase by $10,000,000, profit is estimated to increase by $6,500,000: Increase in Sales: $10,000,000 Contribution Margin Ratio: .65 ____________________________ Increase in Contribution Margin $10,000,000 * .65 = $6,500,000
Suppose sales of Lee Dress Manufacturing Company are expected to increase by $10,000,000. What is the expected increase in profit?
Gross Margin / Sales
The Profit Margin Ratio is:
planning and decision making
The contribution margin can be very helpful in ________________________. This is important because the variable costs are not assumed
Contribution Margin Ratio
The contribution margin divided by sales. (CONTRIBUTION MARGIN/SALES) or the contribution margin per unit divided by the selling price
cost of goods sold includes both fixed and variable costs The problem is that we don't know how much of cost of goods sold is fixed—or variable, for that matter—under full costing.
The full costing income statement cannot be used to estimate the increase in profit due to a $10,000,000 increase in sales. The reason is that ___________________________.
fixed
The only difference between the two methods (Absorption Costing and Variable Costing) is their treatment of ________ manufacturing overhead.
Absorption Costing and Variable Costing
The two methods of costing that are used to prepare income statements are:
A) Sales - Variable Cost =CMU. B) CMU/Sales = CMR C) CMR * $ Increase in Sales
To find the increase in profit (Contribution , you must know:
full Increase
Under GAAP, COGS for manufacturing firms is calculated using ________ costing. So if sales increase, and fixed costs don't change, we would expect the profit margin ratio to _______.
inventory
Under the full costing method, the fixed manufacturing overhead are included in __________. They enter into the determination of expense only when the inventory is sold.
non-manufacturing period costs
Under the variable costing method, fixed manufacturing costs enter into the determination of expense in the same way as other_____________________.
separates
Variable costing ____________ fixed and variable costs, a necessary step in performing cost-volume-profit (CVP) analysis and, relatedly, planning and decision making. Managers simply can't estimate accurately the impact of changes in volume on cost and profit unless they know which costs are fixed and which costs are variable.
more visible
Variable costing makes fixed overhead:
"what if" analysis
When fixed and variable costs are commingled, or combined, and it is very difficult to untangle the costs to perform ___________ that requires separating fixed and variable costs.
net income
When the quantity produced equals the quantity sold there is no difference between _________________ calculated using full versus variable costing.
full costing
When the quantity produced is greater than the quantity sold income will be greater using ______________ as opposed to variable costing.
management's subjective judgment
account analysis costs are simply classified using -----------------------.
under that method, none of the fixed costs can be included in ending inventory.
the strategy of producing more than you can sell will not increase income under the variable costing method, because