Acct 230- Chapter 7: Variable Costing and Segment Reporting

When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is greater than is less than is equal to

is equal to

Inappropriate Allocation Base Used

**Mistake in Seg. Income stmt. - failure to trace cost directly (failure to trace) - allocate cost to segments

Arbitrarily divide common costs among segments

**Mistake in Seg. Income stmt. - segment might appear unprofitable - managers held accountable for costs not under their control

Omission of Costs

**Mistake in Seg. Income stmt. costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain

Common Mistake in Segmented Income stmts

- Inappropriate allocation base used - Arbitrarily divide common costs among segments

3 common mistakes in Segmented Income Stmt

1. Omission of costs 2. Inappropriate Allocation Base Used 3. Arbitrarily divide common costs among segments

Potential advantages of Variable Costing

1. Variable costing is consistent with cost-volume-profit analysis and supports decision making 2. Net income computed under variable costing is unaffected by changes in production levels - Management may be tempted to overproduce in a given period in order to increase net income under absorption costing (bonuses)

Absorption (Full) Costing

Accumulate all product costs w/ inventory - all manufacturing costs are charged to, or absorbed by, the product

Variable Costing (contribution margin income stmt)

Accumulate only VARIABLE product costs with inventory WIP----> FG----> CGS

Absorption costing does not facilitate......

CVP Analysis and other mgmt decisions

Variable Costing: Assign the following to inventory... (unit product costs)

DM Used DL Variable MOH

Absorption Costing: Assign the following to inventory... (unit product costs)

DM used DL Variable MOH Fixed MOH WIP----> FG----> CGS

Common Fixed Cost

Exist bc of multiple departments; must be allocated, but the allocations are not useful for evaluating segments ex. Salary of VP of Production who oversees 4 product lines to any product like

Direct Fixed Cost

Exist because the segment exists (traceable) Ex. Salary of store manager to CSTAT store

How is Fixed OH treated in variable absorption

Expensed in FULL in the period incurred **TREAT AS PERIOD COST

T or F The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin.

F

If production = sales volume

NI will be equal under the two costing methods - Fixed OH expensed the same

if production > sales volume

NI will be higher under ABSORPTION - Expense less Fixed OH than incurred under absorption

if production < sales volume

NI will be higher under VARIABLE - Expense more Fixed OH than incurred under absorption

Variable costing is used...

ONLY for internal purposes - facilitates planning (CVP analysis) - evaluation of segments etc.

Income stmt product vs period format

Sales - COGS (DM, DL, Variable OH & Fixed OH) (products) = Gross Margin - Operating Expenses (Variable AND Fixed S&A) = Net Income

Income stmt (Variable/fixed format)

Sales - Variable costs (V. COGS (DM, DL, V. MOH) - Variable Selling & Admin exp = Contribution Margin - Fixed costs (fixed MOH, Fixed S&A)

T or F In preparing a segmented income statement, the variable expenses are deducted from sales to yield the contribution margin for each segment.

T

T or F The segment margin is the best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment.

T

T or F The segment margin represents the margin available after a segment has covered all of its own costs.

T

Which of the following is a common mistake made by companies when assigning costs to segments? - They use allocation bases that drive the costs when assigning costs to segments. - They trace fixed expenses to segments when it is feasible to do so. - They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs. - They include "upstream" and "downstream" costs when preparing profitability analyses that relate to individual product costs.

They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs. ***Assigning common costs, such as the cost of the corporate headquarters buildings to segments is inherently arbitrary. It overstates the amount of cost that would disappear if any given segment were discontinued.

What causes the difference in operating Income?

Treatment of FIXED OH

Which of the following costing approaches is best suited for cost-volume-profit analysis? Absorption Normal Standard Variable

Variable **The contribution approach income statement can be used for cost-volume-profit analysis because costs are separated as fixed and variable.

Sales and variable costs are generally traceable to a....

given segment but fixed costs may not

Segment

any part or activity of an organization about which a manager seeks cost, revenue or profit data ex. store, geographic location, product line

Segmented Income stmts are useful in...

evaluating the effect dropping a segment will have on company-wide profit as well as identifying the BE point for each product based on the direct fixed costs related to the product line.

Absorption is required for ....

external reporting (GAAP and IRFS)

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________. all overhead costs fixed overhead costs selling and administrative expenses variable overhead costs

fixed overhead costs

When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is less than is greater than is equal to

is greater than ***because in the absorption approach some of the fixed costs deferred in inventory during a prior period will be released to the income statement during the current period

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is less than is equal to is greater than

is less than ***because fixed costs are deferred in ending inventory and will be expensed in the next period under absorption costing

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________. the same as absorption costing net operating income greater than absorption costing net operating income less than absorption costing net operating income

less than absorption costing net operating income - because the absorption approach will defer some fixed overhead costs in ending inventory whereas the variable costing approach will expense all fixed overhead costs on the income statement.

GAAP and IRFS requires segmented certain data be reported by...

publicly traded companies

To facilitate performance evaluation and decision making....

segmented income stmts can be prepared at various levels

Absorption costing income statements ignore ________. direct materials and direct labor costs direct and indirect cost distinctions product and period cost distinctions variable and fixed cost distinctions

variable and fixed cost distinctions