Acct 2332, Ch6

Net income computed under ____ costing may not agree with the results of CVP analysis.

absorption

When using absorption costing:

fixed MOH cost per unit = total fixed MOH / Units produced

Absorption costing is separated by:

manufacturing and selling and administrative

When the number of units produced equals the number of units sold:

no change in inventories occurs. absorption costing & variable costing net operating incomes are the same.

Contribution format income statement

sales variable expenses contribution margin fixed expenses net operating income

income statement using absorption costing

sales - Total cost of goods sold = gross margin gross margin - Total selling & administrative costs = Net operating income

A segment should be discontinued when...

segment margin is negative. segment contribution margin doesn't cover the traceable fixed costs.

In segmented reporting, what are the two kinds of fixed costs?

traceable and common

Segment contribution margin equals segment revenue minus the _________ expenses for the segment.

variable

variable costing is separated by:

variable and fixed

absorption costing

Fixed MOH costs are expensed as units are sold as part of COGS. Treats all manufacturing costs as product cost, regardless if they're variable or fixed. Includes direct materials, direct labor, and both variable & fixed MOH. Manufacturing & selling & administrative

selling and administrative expenses

NEVER treated as PRODUCT costs, regardless of the costing method. Under absorption and variable costing, variable & fixed selling & admin ex are ALWAYS treated as PERIOD costs.

Absorption costing is:

Required by GAAP & IFRS. Used by most companies for both internal & external reports.

segment contribution margin equation

Segment contribution margin = segment revenue - variable expenses for the segment.

Usefulness of the segmented income statement:

Segmented income statement can be broken down by department & further broken down by product lines within each department.

Segment break-even calculations include:

only traceable fixed expenses

Segment

A part or activity of an organization about which managers would like cost, revenue, or profit data. Company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories, aka segments.

Discontinuing a profitable segment results in:

A reduction in the overall profits of the company. The loss of the segment's revenues.

Common mistake made by companies when assigning costs to segments include:

Arbitrarily allocating common fixed costs. Omitting costs that should be included. Inappropriately assigning traceable fixed costs.

When preparing a contribution margin income statement:

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

A variable costing income statement:

Calculates contribution margin while the absorption costing income statement calculates gross margin. Focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs.

When a segment is eliminated, a...

Common fixed cost will remain unchanged. Traceable fix cost will disappear.

When inventory increases, absorption costing net operating income is higher than variable costing net income but to the fix manufacturing overhead:

Deferred in the inventory account on the balance sheet.

variable costing

Expensed in full with period costs. Includes direct materials, direct labor, & variable portion of MOH. Fixed MOH is not included. Variable & fixed

Using variable costing and the contribution approach for internal decision making:

Facilitates explaining changes in net income. Enables CVP analysis. Supports decision making.

Absorption costing & variable costing net operating income will be equal when:

There is no beginning & no ending inventory. The number of units produced equals the number of units sold.