Chapter 6 Accounting 212

variable costing:

- only manufacturing costs that vary with output are treated as product costs. Ex --> direct labor, direct materials, and variable manufacturing overhead

From a decision making point of view... (short run)

- the contribution margin is most useful in decisions involving short-run changes in volume -Ex. such as pricing special orders that involve temporary use of existing capacity.

EXAMPLES of Common Fixed Costs:

- the salary of the CEO of General Motors - the cost of heating a Safeway or Kroger grocery store - the cost of the receptionist's salary at an office shared by a number of doctors

EXAMPLES of Traceable Fixed Cost:

- the salary of the Fritos product manager at PepsiCo - the maintenance cost for the building in which Boeing 747s are assembled - the liability insurance of Disney World

From a decision making point of view... (long run)

- the segment margin is most useful in major decisions that affect capacity such as dropping a segment

Absorption Costing:

--> treats all manufacturing costs as product costs, regardless of whether they are variable or fixed.

3 factors between variable and absorption costing?

1) both income statement formats include product and period costs 2) variable costing is on contribution format 3) N.O.I. different between one another

All of the manu. costs flow through the absorption costing COGS and...

all of the selling and admin. expenses are listed separately as period expenses

In the contribution approach...

costs are categorized according to how they behave

What is variable costing referred to?

direct costing OR marginal costing

Segments consist of:

divisions, individual stores, grographic regions, customers, and product lines.

In Variable Costing:

fixed manu. overhead costs are considered to be period costs -- just like selling and admin. costs -- and are taken immediately to the income statement as period expenses.

In absorption costing:

fixed manu. overhead costs are included as part of the costs of work in process inventories. When units are completed, these costs are transferred to finished goods and only when the unit are sold do these costs flow through to the income statement as part of cost of goods sold.

Selling and Administrative Expenses in the variable costing method?

is expensed in its entirety each period.

Traceable fixed cost:

is incurred because of the existence of the segment -- if the segment never existed, the fixed cost would not have been incurred; and if the segment was eliminated, the fixed cost would disappear.

when unit sales exceed the units produced and hence inventories decrease, net operating income is lower under absorption costing than under variable costing because

some of the fixed manu. overhead of previous periods is RELEASED from inventories under absorption costing.

when the units produced exceed unit sales and hence inventories increase, NOI is higher under absorption costing than under variable costing because

some of the fixed manu. overhead of the period is DEFFERED in inventories under absorption costing.

Common Fixed Cost:

supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. Even if a segment were eliminated, there would be no change in a true common fixed cost.

Segment Margin:

the best gauge of the long-run profitability of a segment (WHY?) --> because it includes only those costs that are caused by the segment.

what does a segment margin represent?

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

Key point when assigning costs to segments?

to resist the temptation to allocate cost that are clearly common and that will continue regardless of whether the segment exists.

Absorption Costing:

- EXTERNAL! - ignore variable and fixed cost distinctions

What does absorption costing allocate?

- a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing costs.

What does the cost of a unit of product in inventory or in cost of goods sold under the variable costing method contain?

- any fixed manufacturing overhead cost.

Why is absorption costing usually referred to as FULL COST method?

- because it includes all manufacturing costs in product costs.

Variable Costing:

- contribution format - INTERNAL! - categories expenses based on cost behavior -reported separate from fix exp.

What does the cost of a unit of product under the absorption costing method consist of?

- direct labor, direct materials, and BOTH variable and fixed manufacturing overhead.

An absorption costing income statements...

Categories costs by functions

What is fixed Manu. overhead considered as with variable costing?

a period cost (and expensed in the full amount each period)

What isn't as a product cost under variable costing?

Fixed Manufacturing overhead

T/F: Any allocation of common costs to segments reduces the value of the segment margin as a measure of long-run segment profitability and segment performance.

TRUE

T/F: Common fixed costs are not allocated to segments.

TRUE

When are absorption and variable costing NOI's the same?

When the units produced and unit sales are equal

If a segment can't cover its own costs, then...

it should be dropped

Selling and administrative expenses are...

never treated as product costs, regardless of the method.

What's the general guideline to treat a traceable cost?

only those costs that would disappear over time is the segment itself disappeared.

segment

part or activity of an org. about which managers would like cost, rev, or profit data.