Chapter 5

Variable Costing Income Statement

Contribution Income Statement

Traceable Costs

Costs that would be eliminated if the segment were eliminated; variable costs are ALWAYS CONSIDERED TRACEABLE; Fixed costs MAY BE TRACEABLE OR NOT.

Production > Sales

(Inventory Increases) Absorption Costing NOI is higher

Production = Sales

(No change in inventory) Absorption Costing NOI = Variable Costing NOI

Common Fixed Costs

A fixed cost that supports more than one business segment, but is not traceable to any one segment.

Segment

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

To find Fixed Manufacturing Overhead per unit

Fixed Manufacturing Overhead divided by Number of units produced annually

Variable Costing

Only those manufacturing costs that vary with output are treated as product costs.

Under Absorption Costing

Product cost include ALL manufacturing costs. - DIRECT MATERIALS - DIRECT LABOR - VARIABLE MANUFACTURING OVERHEAD - FIXED MANUFACTURING OVERHEAD The following costs are Period Costs and are excluded from product costs. - VARIABLE SELLING AND ADMINISTRATIVE EXPENSES - FIXED SELLING AND ADMINISTRATIVE EXPENSES

Under Variable Costing

Product costs include only the variable manufacturing costs. - DIRECT MATERIAL - DIRECT LABOR - VARIABLE MANUFACTURING OVERHEAD The following costs are Period Costs and excluded from product costs. - FIXED MANUFACTURING OVERHEAD - VARIABLE SELLING AND ADMINISTRATION EXPENSES - FIXED SELLING AND ADMINISTRATIVE EXPENSES

Segment Margin

The Contribution Margin for a segment of a company minus the traceable fixed costs.

Absorption Costing Income Statement

Traditional Income Statement

Absorption Costing

Treats ALL manufacturing costs as product costs, regardless of whether they are variable or fixed.

Production < Sales

Variable Costing NOI is higher