Managerial Accounting Ch.6 Review

Give the equation for the Dollar Break Even for a company: How does the sum of the segment break-even sales differ?

( traceable fixed expenses + common fixed expenses ) / overall CM ratio The sum of the segment break-even sales is always less than the companywide break even point because segmented calculations do not include the common fixed expenses

Which method will produce the highest values for work in process and finished goods inventories? Why? (a) Absorption costing. (b) Variable costing. (c) They produce the same values for these inventories. (d)It depends...

(a) Absorption Costing Because it includes FMOH in product cost thus, raising values of a product cost in WIP and FG

define CVP analysis

(cost volume profit) requires that costs are broken down into variable and fixed components

Define a Segment

Any part or activity of an organization about which managers seek cost, revenue, or profit data.

Give another name for Absorption costing

Full Cost Method

When should a segment be discontinued?

It cannot cover its own costs It has a contribution margin that cannot cover traceable fixed costs

When units sold exceed the units produced (and inventories decrease) net operating income is ______ under absorption than variable

Lower

TF, why Changes in the level of production do not affect net operating income under the variable costing method.

True Changes in the number of units sold—not produced—affect net operating income un- der the variable costing method.

Why is it unusual that the USGAAP and the IRFS require that Segmented reports prepared for external users must use the same methods and definitions that the companies use in internal segmented reports that are prepared to aid in making operating decisions What does this requirement incentives?

because companies are not ordinarily required to report the same data to external users that are used for internal decision making purposes This requirement incentives publicly traded companies to avoid using the contribution format for internal segmented reports

Why is a Segment Margin the best gauge of long-run profitability:

because it includes only those costs that are caused by the segment

Why is Absorption Costing attractive to many accountants and managers:

because they believe that it better matches costs with sales

In general when the units produced exceed units sold (and inventories increase) net income is _______ under absorption than variable costing

higher

Define Traceable fixed cost - (of a segment)

is a fixed cost that is incurred because of the existence of the segment If the segment never existed the fixed cost wouldn't have been incurred And if the segment is eliminated, the fixed cost would disappear

Both income statements formats include _______ and _______costs, they just define the cost classifications differently

product and period costs

According toUS GAAP and IRFS what are their rules on segmented financials?

publicly traded companies include segmented financial and other data in annual reports Segmented reports prepared for external users must use the same methods and definitions as internal reports

Describe Variable Costing Income Statements:

rely on the contribution format for internal decision making purposes

What do upstream cost consist of

research and development and product design

What does a Segment Margin represent:

the margin available after a segment has covered all of its own costs

Explain how to find COGS for absorption costing for a year in a company if there was left 25 units left over in inventory for the year before and you produced 40 more and sold 65 the product cost from the first year was 2 and the product cost from the second year was 4

you would take the product cost of the first year and multiply it by 25 and add that to the product cost of the new year multiplied by the 40,000 that were made this year

How can Net income be calculated under Variable Costing:

(units sold x CM per unit)- Fixed Expenses

US GAAP AND IRFS What type of costing is required for external reports according to the GAAP and IFRS

Absorption Costing, Most companies use them for both internal and external to avoid confusion

Why is it easier to use CVP Analysis with a Variable Costing Income Statement

Because variable costing income statements categorize costs as variable and fixed, it's much easier to use that income statement format to perform CVP analysis than trying to use absorption costing format (which mixes together fixed and variable costs)

Describe why Net Income may be different in Variable and Absorption Costing:

Differences may occur because under absorption costing some fixed manufacturing overhead is capitalized in inventories (included in product costs) rather than being immediately expensed on the income statement

TF: Costs that can be traced directly to a specific segment should be charged directly to that segment and should be allocated to other segments

F Costs that can be traced directly to a specific segment should be charged directly to that segment and should NOT be allocated to other segments

TF, why: Under absorption costing, it is possible to defer some of the fixed manufacturing overhead costs of the current period to future periods.

Fixed manufacturing overhead costs are deferred to the future under absorption costing when production exceeds sale

Describe how Absorption costing income statement categorizes cost by function:

Manufacturing vs selling and admin All manufacturing costs flow through the absorption costing COGS and all of the selling are separate period expenses

Construct the Absorption Costing Income Statement:

Sales -COGS =Gross margin -Selling and Admin expense =Net operating Income

TF: Segmented contribution format income statements contain vital information that companies are reluctant to release to the public (and competitors)

T

TF: Fixed costs that are traceable to one segment may be a common cost of another segment

T

TF: To avoid having to maintain two costing systems many companies use absorption costing for internal reporting as well as external reporting in segmented income statements

T

TF: Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost.

T

Under variable costing, only the variable production costs are included in product costs.

T

Give 2 key points on Absorption Costing:

Unit cost consists of direct materials, labor, and both variable and fixed overhead Allocates a portion of fixed overhead cost to each unit produced along with the variable manufacturing cost

If inventories increase during a period, under __________________________ some of the __________________ of the current period will be deferred in ending inventories

absorption costing Fixed MO

Another names for Variable Costing

direct costing or marginal costing

why are upstream and downstream cost important

essential in determining product profitability as manufacturing costs they are usually included in selling and admin expenses can represent half or more of total organizational costs If either up or downstream costs are omitted in profitability analysis, the product is undercosted and management may unwittingly develop and maintain products that result in losses in the long run

TF, why Absorption costing data are generally better suited for cost-volume-profit analysis than variable costing data.

f The reverse is true - variable costing data are much better suited for CVP analysis than absorption costing data.

Define Segment Margin

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

When should •Costs should be allocated to segments for internal decision making purposes ?

only when the allocation base actually drives the cost being allocated

Define Absorption Costing:

treats all manufacturing costs as product costs regardless of whether they are variable or fixed

Construct the variable Costing Income Statement:

1. Sales 2. -Variable Expenses: 2a. Variable COGS 2b. Variable Selling and Admin Expense 3. =Contribution Margin 4. -Fixed Expenses: 4a. Fixed MOH 4b. Fixed Selling and Admin Expense 5. = Net Operating Income

Define Segment Margin

A segment's CM-traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs.

Describe how the Contribution approach categorizes expenses how they behave:

All variable expenses are listed together and all fixed expenses are listed together Variable expense category includes manufacturing costs (variable COGS) as well as selling and admin expenses Fixed expenses category also includes both manufacturing costs and selling and admin expenses

List some main points of Variable Costing:

Only manufacturing costs that vary with output are treated as product costs Fixed overhead = period cost The cost of a unit of product in inventory or in cost of goods sold under the variable costing method does NOT contain any fixed overhead cost

List what is included in under variable Costing for Product Cost and Period Cost

Product Cost: DM, DL, Variable MOH Period Cost: Fixed MOH, Variable selling and admin exp, fixed selling and admin exp

List what is included in under absorption Costing for Product Cost and Period Cost

Product Costs: DM DL Variable Manufacturing Overhead Fixed Manufacturing Overhead Period Costs: Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses

TF, why Selling and administrative expenses are treated as period costs under both variable costing and absorption costing.

T, Selling and administrative expenses are never treated as product costs under either costing method.

What do Absorption Costing advocates argue:

That all manufacturing costs must be assigned to products to properly match the costs of producing units of product with their sales Fixed costs of depreciation, taxes, insurance, supervisor salaries etc are just as essential to manufacturing products as variable costs

Give an example of some mistakes companies do when assigning costs to segments"

They omit some costs inappropriately assign traceable fixed costs arbitrarily (randomly or on a whim/without reason) allocate common fixed costs

To avoid having to maintain two costing systems many companies use absorption costing for internal reporting as well as external reporting in segmented income statements because of this how does it affect upstream and downstream cost?

They omit them from profitability analysis

TF: Absorption vs. Variable: When units produced and units sold are equal, no change in inventory occurs and both costing method incomes are the same

True

Describe the Contribution Margin income Statement:

Variable and fixed costs are listed in separate sections of the statement Cost of goods sold consists only of variable manufacturing costs

Describe what variable costing is based on How they categorize expenses and how Absorption costing differs

Variable costing income statements are grounded in the contribution format. They categorize expenses based on cost behavior - variable expenses are reported separately from fixed expenses. Absorption costing income statements ignore variable and fixed cost distinctions

Describe the process of deciding to cut or not cut a segment:

When deciding whether or not to cut a segment: 1. first look at the segment margin. If it's negative it will be added to net operating income and if It's positive it will be subtracted. 2. calculate the change in the contribution margin as a result of the increase in sales for the other segment. 3. Take that change and add or subtract the other segment margin to get the change in net income

Year 1 Units Produced 20,000 Units sold.............15,000 Year 2 Units Produced 20,000 Units Sold............25,000 FMOH=18 per Unit How much would you Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing or Less: Fixed manufacturing overhead cost released from inventory under absorption costing to change net income from Variable costing to asorbtion?

Year 1 : Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing = 90,000 (5,000*18) Year 2 Less: Fixed manufacturing overhead cost released from inventory under absorption costing =90,000 (5,000*18)

Construct a Segmented income Statement

______________________Total______________ A____________B__________ Revenues...........xxxxxxx..............xxxx............xxxx -Variable exp........xx..........................x..................x.. =CM......................xxxxxx..................xxx...............xxx -Traceable F.E.....xxxx.....................xx.................xx =Segment Marg....xx.........................x...................x -Common F.E.........x =Net O.I......................x

Define Variable Costing

a costing method that includes only variable manufacturing costs (direct materials, labor and (variable) overhead) in unit product costs

Define a Common Fixed cost: What happens if a segment using this common cost is eliminated

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

calculator: Last year, Peck Company produced 10,000 units and sold 9,000 units. Fixed manufacturing overhead costs were $20,000, and variable manufacturing overhead costs were $3 per unit. For the year, one would expect net operating income under absorption costing to be: a) $2,000 more than net operating income under variable costing; b) $5,000 more than net operating income under variable costing; c) $2,000 less than net operating income under variable costing; d)$5,000 less than net operating income under variable costing

a) $2,000 more than net operating income under variable costing;

Which of the following costs are treated as period costs under the variable costing method? a) fixed manufacturing overhead and both variable and fixed selling and administrative expenses; b) both variable and fixed manufacturing overhead; c) only fixed manufacturing overhead and fixed selling and administrative expenses

a) fixed manufacturing overhead and both variable and fixed selling and administrative expenses;

Define Segment

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

Describe Absorption Costing Income statements:

are generally used for external reports Calculates gross margin by deducting COGS from sales

When production exceeds sales, fixed manufacturing overhead costs: a) are released from inventory under absorption costing; b) are deferred in inventory under absorption costing; c) are released from inventory under variable costing; d) are deferred in inventory under variable costing.

b) are deferred in inventory under absorption costing; When production exceeds sales, units are added to inventory. Thus, fixed manufacturing overhead costs are deferred in inventory under absorption costing.

When sales are constant but production fluctuates: a) net operating income will be erratic under variable costing; b) absorption costing will always show a net loss; c) variable costing will always show a positive net operating income; d) net operating income will be erratic under absorption costing.

d) net operating income will be erratic under absorption costing. When production fluctuates, net operating income will be erratic under absorption costing because fixed manufacturing overhead costs will be shifted into and out of inventory as production goes up and down.

TF, why Variable costing net operating income will always be higher than absorption costing net operating income

false Variable costing will produce higher net operating income than absorption costing only when sales exceed production.

What do downstream cost consist of

marketing distribution and customer service

Define Selling and Admin Expenses

never treated as product costs regardless of costing method Always treated as period costs and are expensed on the income statement as incurred

When is Arbitrarily allocating common costs to segments is often justified

on the grounds that "someone" has to "cover the common costs" While this is true arbitrarily allocating common costs to a segment does not ensure that this will happen in reality this can make an otherwise profitable segment appear to be unprofitable If this segment is then eliminated the common fixed costs arbitrarily assigned to the segment don't disappear, they are reallocated to remaining segments which can make the remaining segments appear unprofitable as well

Tf, why When production exceeds sales, the net operating income reported under absorption costing will generally be greater than the net operating income reported under variable costing.

t When production exceeds sales, fixed manufacturing overhead cost is deferred in inventory under absorption costing. Consequently, net operating income is higher under absorption costing than under variable

What do Variable Costing Advocates Argue?

that fixed manufacturing costs are not really the costs of any particular unit of product These costs are incurred to have the capacity to make products during a particular period and will be incurred even if nothing is made during that period They say that Whether a unit is made or not the fixed manufacturing costs will be exactly the same Therefore variable costing advocates argue that fixed manufacturing costs are not part of the costs of producing a particular unit of product and think that the matching principle dictates that fixed manufacturing costs should be recognized as an expense in the current period