Acct Chapter 18

Margin of Safety Percentage

Margin of Safety in Dollars/Total Sales in dollars

Operating Leverage

Tool used to increase NOI. Measure of how sensitive NOI is to a given % change in dollar sales. Measures impact of fixed vs variable costs in business

Dollar Sales to Break Even

Total Fixed Costs/CMR

Unit Sales to Break Even Formula

Total Fixed Costs/Unit CM

Margin of safety in dollars

Total Sales-Breakeven Sales reduction in sales of Margin of safety dollars would result in just breaking even

Traceable Fixed Cost

a fixed cost that is incurred because of the existence of a segment-if the segment had never existed, the fixed cost would not have been incurred, and if the segment were eliminated, the fixed cost would disappear.

Common Fixed Cost

a fixed cost that 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 entirely eliminated, there would be no change in a true common fixed cost.

Operating Leverage (text)

a measure of how sensitive NOI is to a given percentage change in dollar sales. Acts as a multiplier. If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in NOI.

Segment

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

Direct Materials Budget

details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

Target Profit Analysis

estimate what sales volume is needed to achieve a specific target profit.

A true common fixed cost would disappear if a segment was entirely eliminated.

false

The variable costing contribution format income statement categorizes costs based on their function.

false

Cost-Volume-Profit (CVP)

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain

Income Sttement

provides and estimate of net income for the budget period and it relies on information from the sales budget and the cash budget.

Merchandising purchases budget

shows the amount of goods to be purchased from suppliers during the period Budgeted COGS + desired ending merchandise inventory =Total Needs -Beginning merchandise inventory =Required purcahses

Direct Labor Budget

shows the direct labor-hours required to satisfy the production budget

Margin of Safety

the amount by which sales can drop before losses are incurred. Lower Margin of Safety, the higher the risk of the company not breaking even, and the higher the risk of the company incurring a loss. Lower Margin of Safety is concerning bc company is more vulnerable to downturn is sales.

Cash Budget Format

Beginning cash balance +Cash receipts =Total cash available -Cash disbursements =Excess of cash available over disbursements

Sales Budget Format

Budgeted unit sales x Selling Price per unit =Total Sales Beginning Accounts Receivable Forst quarter sales Second quarter sales Third quarter sales Forth quarter sales Total cash collections

CM Ratio

CM as a % of sales. Shows how the CM will be affected by a change in total sales. CM/Sales (total and unit) **For each dollar increase in sales, total CM will increase by the CMR**

Change in CM formula

CM ratio x Change in sales The impact of any given dollar change in total sales can be computed by applying the CM ratio to the dollar change.

Segment margin

CM-Traceable Fixed Costs represents the margin available after a segment has covered all of it's own costs. Best gauge of the long-run profitability of a segment because is includes only those costs that are caused by the segment

Degree of operating leverage

CM/NOI a measure of how a percentage change in sales volume will affect profits (noi). quickly estimates what impact carious percent changes in sales will have on profits, without the necessity of preparing detailed income statements.

Base Corporation has sales of $100,000, variable costs of $40,000, and fixed costs of $30,000 currently. The company is expecting a $36,000 increase in sales. What is the change in contribution margin for the company?

Change in Contribution Margin = CM Ratio × Change in Sales = 60% × $36,000 = *$21,600*.

What happens when sales are zero?

If sales are zero, the company's loss will equal its fixed expenses. Each unit that is sold reduces the loss by the amount of the unit contribution margin. Once the break-even point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin.

Relationship between FC and Operating Leverage

Increase in FC = Increase in Operating Leverage= Greater NOI

Increase in NOI after break even is reached

Increased number of units sold x unit CM = Increase in NOI

How do you increase margin of safety?

Increasing Total Sales, decreasing Costs, or Both.

Manufacturing overhead deferred in inventory formula

Fixed Manufacturing overhead in ending inventories - Fixed manufacturing overhead in beginning inventories

CM rule #1

For each addition unit sold, NOI increases by the unit CM

Higher VC and Lower Fixed Costs

Greater profit stability and will be more protected from losses during bad years, but have a lower net operating income during good years

Deferring costs

If inventories increase during a period, some of the fixed manufacturing overhead of the current period will be deferred in ending inventories.

Relationship between Sales and Degree of Operating Leverage

Increase in Sales = Decrease in Degree of Operating Leverage = further away company moves from break even point

Conclusion of the master budget

preparation of cash budget, income statement, and balance sheet

Variable COGS

#of units sold * variable unit product cost

Max, Inc., has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000 respectively. What is the segment margin for the South Division?

$200,000

If sales increase by $50,000, what will be the net operating income for the company? Sales: $100,000 VC: $50,000 CM: $50,000 FC: $20,000 NOI: $30,000

$25,000 *$55,000* $15,000 $50,000 50% CM * $50,000 increase= $25,000 change in CM new CM=$50,000+$25,000=$75,000 75,000-$20,000=NOI

What is Ralph Corporation's margin of safety in dollars? Selling Price: $200 per unit Variable Cost: $150 per unit Fixed Costs: $1,000,000 per year Unit sales: $25,000 units per year

$4 million $5 million *$1 million* $2.2 million Margin of Safety in dollars = Total budgeted (or actual) sales - Break-even sales = $5,000,000 - $4,000,000 = $1,000,000. Total Sales: $200*25,000= $5,000,000 CMR:200-150= $50/200= 25% Break-even Sales: FC/CMR= 1,000,000/.25= $4,000,000 Margin of Safety in $: 5,000,000-4,000,000=1,000,000

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle?

$500 $300 *$200* $20,200

Profit formula

(Sales - VC)- FC

Dollar sales to attain target profit

(Target Profit + Fixed Costs)/CMR

Unit sales to attain the TP

(Target Profit + Fixed Costs)/Unit CM

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. Compute the profit from the sale of 100 bicycles.

*$12,000* $10,000 $20,000 $8,000 Total CM= $200*100 units=$20,000 CM-FC=Profit 20,000-8,000=12,000

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars?

*$25,000* $2,500 $250 $16,667 =10,000/.4

Identifying Traceable Fixed Costs

**Only those costs that would disappear over time if the segment itself disappeared** The key point is to resist the temptation to allocate costs such as depreciation of corporate facilities that are clearly common and that will continue regardless of whether the segment exists or not. 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

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage?

*3.00* 0.60 2.00 1.67 =$300,000/$100,000

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio?

*40%* 60% 100% 20%

The use of absorption costing for segmented income statements results in:

*omission of upstream and downstream costs.* failure to trace costs directly. inappropriate use of allocation base. arbitrary division of common costs among segments. Only manufacturing costs are included in product costs under absorption costing. Many companies also use absorption costing for their internal reports such as segmented income statements. As a result, such companies omit from their profitability analysis part or all of the "upstream" costs in the value chain and the "downstream" costs, which consist of marketing, distribution, and customer service.

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

*unit contribution margin* unit selling price variable expense per unit fixed expense per unit

Advantage of Budgeting

1. Budgets communicate management's plans throughout the organization 2. Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies 3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively 4. The budgeting process can uncover potential bottlenecks before they occur 5. Budgets coordinate the activities of the entire organization by integrating the plans of it's various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales?

63 units 167 units 50 units *100 units* =5000/(80-50)

10 Key questions master budget answers

1. How much sales revenue do we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing cost ( DM, DL, OH) will we incur? 5. How much cash will we pay to our suppliers and our direct laborers and how much will we pay for OH resources? 6. What is the total cost that will be transferred from FG inventory to COGS? 7. How much selling and administrative expense will we incur and how much cash will we pay related to those expenses 8. How much money will we borrow from or repay to lenders-- including interest? 9. How much NOI will we earn? 10. What will our balance sheet look like at the end of the budget process?

CVP assumptions

1. Selling price is constant. The price of a product or service will not change as volume changes. 2. Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit. The fixed element is constant in total over the entire relevant range. 3. In multi product companies, the mix of products sold remains constant.

Examples of common fixed costs

1. The salary of the CEO of GM is a common fixed cost of the various divisions of GM 2. The cost of heating a grocery store is a common fixed cost of the store's various departments- groceries, produce, bakery, meat etc. 3. The cost of the receptionist's salary at an office shared by a number of doctors is a common fixed cost of the doctors.-> traceable to office, but not individual doctors

Examples of Traceable fixed costs

1. The salary of the Fritos product manager at Pepsi is a traceable fixed cost of the Fritos business segment of Pepsi 2. The maintenance cost for the building in which Boeing 747's are assembled is a traceable fixed cost of the 74 business segment of Boeing 3. The liability insurance at Disnes World is a traceable fixed cost of the Disney World business segment of the Walt Disney Corp.

3 Key concepts about variable and absorption income statements

1. both income statement formats include product costs and period costs, although they define these cost classifications differently. 2. Variable costing income statements are grounded in the contribution format. They categorize expenses based on cost behavior--- variable expenses are reported separately from fixed expenses. Absorption costing income statements ignore variable and fixed cost distinctions. 3. Variable and Absorption NOI differ from one another because they account for fixed overhead differently

The cash Budget

1. receipts section 2. disbursements section 3. cash excess for deficiency section 4. financing section

Differences between income statements

1. variable i/s categorizes costs according to behavior(variable vs fixed) 2. abs categorizes by function (manufacturing vs selling and administrative)

What is the degree of operating leverage for Rite Corporation? Sales: $300,000 Variable Cost: $150,000 CM: $150,000 Fixed Cost: $50,000 NOI: $100,000

2.00 *1.50* 0.33 0.67

What is Ralph Corporation's margin of safety in percentage? Selling Price: $200 per unit Variable Cost: $150 per unit Fixed Costs: $1,000,000 per year Unit sales: $25,000 units per year

20% 100% 80% 50% Margin of Safety Percentage = Margin of Safety in dollars / Total budgeted (or actual) sales in dollars = ($5,000,000 - $4,000,000) / $5,000,000 = 20%.

Team Corporation has sales of $1 million, fixed expenses of $200,000, and variable expenses of $650,000 for the month of March. What is the contribution margin ratio of the company for the month of March?

20% 65% 100% *35%* =$35,000/$100,000

The current sales of Trent, Inc., are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Inc.?

24% 30% *60%* 25% =2*.3

What are the unit sales required to attain a target profit of $120,000? Target Profit: $120,000 Unit CM: $40 Fixed Expenses: $40,000 CMR: 40% Selling Price: $100

400,000 units 400 units 1,600 units *4,000 units* $120,000+$40,000/40

The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Calculate the increase or decrease in net operating income. Per Unit of Sales: Percent: Selling price $90 100% Variable expenses $63 70% Contribution margin $27 30%

Current Sales;Sales with Additional Advertising Budget; Difference Sales $180,000 $189,000 $9,000 Variable expenses $126,000 $132,300 $6,300 Contribution margin $54,000 $56,700 $2,700 Fixed expenses $30,000 $35,000 $5,000 Net operating income $ 24,000 $21,700 $(2,300) *OR* Expected total contribution margin: $189,000 × 30% CM ratio $56,700 Present total contribution margin: $180,000 × 30% CM ratio $54,000 Incremental contribution margin $2,700 Change in fixed expenses: Less incremental advertising expense $5,000 Change in net operating income $ (2,300)

Ending Finished Goods Inventory Budget

DM DL OH =Unit product cost Budgeted FG inventory: Ending FG in units x unit product cost =Ending FG inventory in $$

Calculating Unit Product cost (Variable)

DM+DL+VOH

Calculating Unit Product Cost (Absorption)

DM+DL+VOH+FOH FOH=Fixed manufacturing overhead/ units produced

What is the unit product cost for the month of February, using the variable costing method?

DM= 40,000 DL= 10,000 VOH=2,000 =*$52,000*

Percentage change in NOI formula

Degree of operating leverage x %change in sales

Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $2 per unit. The marketing manager believes that the higher-quality product would increase sales by 10% per month. Calculate the change in total contribution margin.

Expected total contribution margin with the higher-quality components: 2,200 units × $25 per unit= $55,000 Present total contribution margin: 2,000 units × $27 per unit= $54,000 Change in total contribution margin $1,000

What is the unit product cost for the month of February, using the absorption costing method?

FOH per month= $140,000 units produced in Feb= 5 FOH units=140,000/5=$28,000 DM= 40,000 DL= 10,000 VOH=2,000 =$52,000 +28,000 = *80,000*

Calculating FOH for absorption costing

FOH= Fixed manufacturing overhead per month/# of units PRODUCED per month

Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes? Selling Price: $110,000 Total $110 per unit VC: 60,000 Total 60 per unit CM: 50,000 ; 50 FC 30,000 NOI: $20,000 #of units: 1000

New selling price = $110 - $10 = $100. New sales level = 1,000 units x 150% = 1,500 units. Net operating income = Sales of $150,000 (or 1,500 units × Selling price of $100 per unit) - Variable expenses of $90,000 (or 1,500 units × variable expense of $60 per unit) - Fixed expenses of $35,000 (or $30,000 + $5,000) = *$25,000*.

Variable Costing

ONLY variable costing costs. DM, DL, VOH

What is Operating Leverage?

Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales. The degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is not a constant; it is greatest at sales levels near the break-even point and decreases as sales and profits rise, assuming everything else is equal.

Purposes of Budgets

Planning and Control

Product vs Period Costs

Product: Direct Materials, Direct Labor, Variable Manufacturing Overhead Period Period:Fixed Selling and Administrative Expenses, Variable Selling and Administrative Expenses,Fixed Manufacturing Overhead

Which of the following is an example of a common fixed cost?

Salary of the Fritos product manager at PepsiCo. *Salary of the CEO of Apple, Inc.* Maintenance cost for the building in which Boeing 747's are assembled for Boeing, Inc. Advertising campaigns of the computer division of Sony Corporation.

Absorption Costing Income Statementt

Sales Less: COGS (# of units PRODUCED x Absorption costing unit product cost) =Gross Profit Less: Selling and Administrative Expenses =NOI

Variable Costing Income Statement

Sales Less: Variable expenses Variable COGS (Variable unit product cost x # of units SOLD) Variable Selling and Administrative Expenses =Total Variable Expenses =Contribution Margin Less: Fixed Expenses Fixed Manufacturing Overhead Fixed Selling and administrative expense =Total Fixed Expenses =Net Operative Income

First Step in budgeting process

Sales Budget

Absorption Costing Income Statement

Sales Revenue -COGS (DM, DL, VOH, FOH) =Gross PRoofit -Selling and administrative expenses (including variable and fixed selling admin. expenses =NOI

Variable Income Statement Format

Sales Revenue -Variable Production expenses (DM, DL, VOH) -Variable Selling and Administrative =Contribution Margin -FOH -Fixed selling and administrative =NOI

Contribution Margin (textbook)

Sales Revenue - Variable Expenses it is the amount available to cover fixed expenses and then to provide profits for the period If CM is not sufficient to cover fixed costs, then a loss occurs for the period

Break Even Point

Sales level where profit is $0. NOI will increase by the unity CM for each additional unit sold

Which of the following explains contribution margin?

Sales minus fixed cost Fixed cost minus variable cost Sales minus variable cost minus fixed cost *Sales minus variable cost*

Unit CM formula

Sales price per unit - variable cost per unit

Sales Formula

Sales price per unit x quantity sold (P x Q)

Way to check if you're correct using CM!

Selling price per unit Less: Variable production cost per unit (DM+DL+VOH)+Variable Selling and Administrative cost) =Contribution Margin

Calculating Sales Revenue

Selling price per unit * units sold

Steps for putting together VC income statement

Step 1: Calculate Variable costing unit product cost (DM+DL+VOH) Step 2: Calculate Variable COGS (Variable unit product cost x # of units SOLD) Step 3: Variable Selling and administrative expense + Fixed Selling and administrative expense = Total selling and administrative expense

What is the contribution margin ratio and its uses?

The CM ratio shows how the contribution margin will be affected by a change in total sales. The impact on net operating income of any given dollar change in total sales can be computed by applying the CM ratio to the dollar change.

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. What is the segment margin of the mobile phone division, assuming the traceable fixed costs of the television division are $300,000?

The traceable fixed costs of the mobile phone division is $200,000 ($500,000 total traceable fixed costs minus $300,000 traceable fixed costs of television division). Thus, the mobile phone segment margin is $400,000 ($600,000 contribution margin minus the $200,000 traceable fixed costs).

What happens to unprofitable products?

They are replaced with products that have a higher contribution margin.

The target profit is zero in break-even analysis.

True

Alpha Corporation is currently selling 500 skateboards per month. The unit selling price and variable expenses are $60 and $35 respectively. The fixed expenses amount to $5,000 per month. The company has an opportunity to make a bulk sale of 100 skateboards. This sale will not affect the company's regular sales or total fixed expenses. What unit price should be charged if the company is seeking a profit of $2,000 on the bulk sale?

Unit price= Variable cost per skateboard + Desired profit per skateboard = $35 + ($2,000/100) = *$55*.

Reconciliation

Variable Costing NOI +Ending inventory under Absorption Costing =Subtotal -Beginning inventory ABS =Absorption Costing NOI

Variable Cost Formula

Variable cost per unit x quantity sold

in an absorption costing income statement, in addition to direct materials and direct labor, cost of goods sold also includes:

Variable manufacturing overhead and fixed manufacturing overhead

Break Even

When enough units are sold so that the CM can cover all of the companies fixed expenses, and there is neither a profit or loss (NOI=$0)

Rules for NOI under abs and var costing

When units produced > units sold (inventories increase) Abs NOI > Var NOI -occurs because some of FOH of the period is deferred in inventories under absorption siting When units produced < units sold (inventories decrease) Abs NOI=I < Var NOI When units produced = units sold, Abs NOI=Var NOI

Lower VC and Higher FC

Wider swings in net income as sales fluctuate, Greater profit in good years and greeter losses in bad years

Budget

a detailed plan for the future that is usually expressed in formal quantitative terms

Cash Budget

a detailed plan showing how cash resources will be acquired and used.

Sales Budget

a detailed schedule showing the expected sales for the budget period. All other parts of the master budget depend on the sales budget. Influences the variable portion of the selling and administrative expense budget and it feeds into the production budget, which defines how many units need to be produced.

Changes in sales mix

a shift in the sales mix from high-margin items to low-marginitems can cause total profits to decrease even though total sales may increase. a shift in the sales mix from low-margin items to high-margin items can cause total profits to increase even though total sales decrease.

Absorption costing

all costs are product costs. DM, DL, FOH, VOH

Contribution Margin

amount remaining from sales revenue after variable expenses are deducted. Covered Fixed costs and Profit.

Production budget

and it feeds into the production budget, which defines how many units need to be produced. during the budget period. Used to determine DM, DL, and OH budgets.

Selling and Administrative Expenses

are NEVER treated as product costs regardless of costing method. Expensed as incurred

Balance sheet

assets, liabilities and stockholder's equity

Incremental analysis

considering only the costs and revenues that will change if the new program is implemented.

Master budget

consists of a number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals

Planning

involves developing goals and preparing various budgets to achieve these goals

Controlling

involves gathering feedback to ensure that the plan being properly executed or modified as circumstances change

BEP

level of sales at which profit is 0. Once BEP has been reached, NOI will increase by the amount of the unit CM for each additional unit sold

manufacturing overhead budget

lists all costs of production other than direct materials and direct labor

Selling and administrative budget

lists the budgeted expenses for areas other than manufacturing. Budgeted unit sales x Variable selling and administrative expense per case =Variable selling and administrative expense +Fixed selling and administrative expenses: - - - Total Fixed expenses =Total Selling and admin expenses -Depreciation =Cash disbursements for S&A expenses

Production Budget Format

lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending finished goods inventory Budgeted unit sales +desired units of ending FG inventory =Total Needs -units of beginning FG inventory =Required production in units

different ways in which variable costing and absorption costing treat fixed manufacturing overhead.

nder variable costing, direct materials, direct labor, and the variable portion of manufacturing overhead are treated as product costs. So, only those manufacturing costs that vary with output are treated as product costs under variable costing. Fixed manufacturing costs are expensed as period costs. Absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. In each month, fixed manufacturing overhead cost is divided by the number of units produced to determine the fixed manufacturing overhead cost per unit under absorption costing.

Variable Costing (direct/marginal costing)

only those manufacturing costs that vary with output are treated as product costs. Includes DM, DL and VOH. FOH is not treated as a product cost under this method. IT is treated as a period cost like selling and administrative expenses, and is expensed entirely in each period. COGS does not containing any FOH costs.

Margin of Safety (textbook)

the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss

Sales Mix

the relative proportions in which a company's products are sold. The idea is to achieve the combination that will yield the greatest profits.

Variable Cost Ratio

the variable cost ratio is the ratio of variable expenses to sales. The effect of changes in variable costs, fixed costs, selling price, and volume can be computed on an incremental basis or on a total basis. CVP concepts can be applied to study the impact of changes in variable costs, fixed costs, selling price, and sales volume. CVP concepts can also be used to determine the selling price the company can quote on special orders.

Calculating NOI each period

the variable costing NOI for each period can always be computed by multiplying the # of units sold by the CM per unit and then subtracting total fixed costs. (unit CM x # units SOLD)-Total FC

Primary Purpose of CVP

to estimate how profits are affected by: 1. selling prices 2. sales volume 3. unit variable cost 4. total fixed costs 5. mix of product costs

Break-even point is the level of sales at which ______.

total profits equal total costs total profits exceed total costs *total revenue equals total costs* total sales equal projections Break-even point is the level of sales at which total revenue equals total costs and the profit is zero.

Absorption Costing (full cost)

treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. The cost of a unit of product consists of DM, DL, VOH and FOH. It allocates a portion of FOH to each unit of product along with variable manufacturing costs. FOH is included as part of WIP inventories. When completed, transferred to finished goods and only when the units are sold do these costs flow through to the income statement as a part of COGS.

In absorption costing, fixed manufacturing overhead is recorded as a product cost.

true

Variable selling and administrative expenses

variable selling and arm. expenses per unit * # of units sold