Chapter 6

segment

a part or activity of an organization about which managers would like cost, revenue, or profit data.

all manufacturing costs are products, fixed or variable, under

absorption costing

fixed manufacturing overhead costs are included as part of the cost of work in process (product cost); flow to income statement after sold under

absorption costing

full cost method

absorption costing

traceable fixed cost

fixed cost that is incurred because of the existence of the segment----if the segment never existed the fixed cost would not have been incurred;

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

under absorption costing if inventories decrease

fixed manufacturing overhead costs are released from inventories, net operating income decreases

under absorption costing if inventories increase

fixed manufacturing overhead cots are deferred in inventories; net operating income increases

variable costing

income statements that are grounded in the contribution format; distinguish between variable and fixed costs

Net operating income (absorption) =

net operating income (variable) + deferred fixed MOH

if inventories do not change (same number of units produced and sold)

net operating income will be identical for both costing

segment margin

segment contribution margin - traceable fixed cost

best gauge of the long-run profitability of a segment

segment margin

segment margin ratio =

segment margin / sales

if inventories increase during a period, under absorption costing,

some of fixed manufacturing overhead will be differed; net operating income will be relatively higher than variable b/c cogs will be relatively lower

if inventories decrease during a period, under absorption costing

some of fixed manufacturing overhead will be released; net operating income will be lower than variable b/c cogs will be higher

dollar sales to attain target profit =

target profit + fixed expenses / CM ratio

this fixed cost disappears when the segment is elminated

traceable fixed costs

fixed manufacturing costs is treated as a period cost and recorded on the income statement as period expenses under

variable costing

under this costing, direct labor, direct materials, and variable portion of manufacturing costs are treated as product costs

variable costing