Acct chapter 5 & 6 (wk 3)

5 limitations of ABC

1. substantial resources required to implement and maintain 2. resistance to unfamiliar numbers and reports 3. desire to fully allocate all costs to products 4. potential misinterpretation of unfamiliar numbers 5. does not conform to GAAP. Two costing systems may be needed.

Absorpotion v. Variable Costing (net operating income year 1)

Absorption: fixed manufacturing costs must be assigned to products to properly match revenue and costs Variable: fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced

For external reporting, income statements are generally prepared using _____ costing, while _____ costing is used for internal decision making purposes

absorption costing: external reporting variable costing: internal decision making purposes

organizational-sustaining activities (general overhead)

activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. ie. lightening and heating the company's production facility. Preparation of the company's quarterly financial reports.

Customer-level activities

activities that are carried out to support customers, but that are not related to any specific product ie. Sales representative periodic visits to customers to keep them informed about the company's existing products and its new products introductions.

Batch-level activities

activities that are performed each time a batch of goods is handled or processed regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch. ie. programming and calibrating the" top hat" logo application machine so that it properly applies the logo for a specific customer's production run. preparing shipping documents and packaging for a customer order.

Activity Measure (Cost Driver)

an allocation based in an activity-based costing system

Activity

an event that causes the consumption of overhead resources

Segment Margin

computed by subtracting the traceable fixed costs of a segment from its contribution margin, is the best gauage of the long-run profitability of a segment.

Variable costing income statements are based upon a ______ format.

contribution margin

ABC computing customer margin (step 1 & 2)

the first-step - gather its sales and direct cost data

Activity-based management

used in conjunction with ABC to identify areas that would benefit from process improvements by focusing on activities to eliminate waste, decrease processing time, and reduce defects

Unit-level activities

activities that are performed each time a unit is produced ie. visually inspecting each flash drive that has been produced to ensure that the logo has been applied in a defect free manner.

Product-level activities

activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run. ie. engaging in price negotiations with the company's suppliers of flash drives periodic maintenance of the equipment used to process wristband flash drives

Segment

any part or activity of an organization about which managers seek cost, revenue, or profit data ie. individual store, service center, sales territory

Traditional Costing: Plantwide overhead rate calculation (step 1 & 2)

first step - gather each product's sales and direct cost data

common costs and segments

*common fixed expenses cannot be eliminated by dropping one of the segments*

two keys to building segmented income statements

1. A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin 2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

activity cost pool

A "cost bucket" in which costs related to a single activity measure are accumulated.

Absorption Costing (product costs)

Direct Materials, Direct Labor, Variable Manufacturing Overhead, Fixed Manufacturing Overhead Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost Although fixed manufacturing overhead is a fixed cost, absorption costing treats it as though it were a variable cost by allocating the fixed costs to units of product (just like variable product costs.)

Traceable and Common Costs

Don't allocate common costs to segments

Variable Costing (period costs)

Fixed Manufacturing Overhead, Variable Selling and Administrative Expenses, Fixed Selling and Administrative Expenses Under variable costing, only the variable production costs are included in product costs.

Absorption Costing (period costs)

Variable Selling & Administrative Expenses, Fixed Selling & Administrative Expenses Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost

Variable Costing Contribution Format (Income Statement)

Variable manufacturing costs only units sold * variable manufacturing costs = variable cost of goods sold 20,000 * $10 all fixed manufacturing overhead is expensed

ABC computing product margins (step 1 & 2)

first step - gather each product's sales and direct cost data

Balance Scorecard

a combination of performance measures directed toward the company's long and short term goals and used as the basis for awarding incentive pay *involves measuring four main aspects of a business: learning and growth, business processes, customers, and finance.*

Traceable fixed costs

arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared It is important to realize that traceable fixed costs of one segment may be a common fixed cost of another segment ie. the landing fee paid to land an airplane at an airport is traceable to the flight but not to the passengers

ABC activity rates

can also provide valuable clues concerning where there is waste and the opportunity for improvement. = Total Cost / Total activity ie. $4,520,000 / 10,000 orders

Benchmarking

can be used to compare activity cost information with standards of performance achieved by other organizations.

omission of costs

costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain

Activity-Based Costing (ABC)

designed to provide managers with cost information for strategic and other decisions that potentially affect capacity, and therefore, "fixed" as well as variable costs. It is ordinarily used as a supplement to, rather than as a replacement for, the company's usual costing sysetm

Variable Costing (product costs)

direct materials, direct labor, variable manufacturing overhead Under variable costing, only the variable production costs are included in product costs.

Segmented Income Statement - break-even analysis: companywide formulas

division margins are used to calculate the break-even point

Segmented Income Statement - break-even analysis: business segment formulas

exclude common expenses - not traceable to segments and are not influenced by segment-level decisions

ABC overhead costs

exclude traceable costs

Which method will produce the highest values for work in process and finished goods inventories?

Absorption Costing

Absorpotion v. Variable Costing (net operating income year 2)

Absorption: fixed manufacturing costs must be assigned to products to properly match revenue and costs Variable: fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced

Absorption Costing (IS)

Unit product cost * units sold = Cost of goods sold 16 * 20,000

Common fixed costs

arise because of the overall operation of the company and would not disappear if any particular segment were eliminated costs arise because of the overall operating activities *not traceable to one segment* ie. The salary of receptionist at an office shared by a number of doctors is a common fixed cost of the doctors. The cost is traceable to the office, but not to any one of the doctors individually. salary of CEO who controls all segments

The difference between reported net income on variable costing and absorption costing income statements is based on how ______. Multiple choice question.

fixed overhead is accounted for

Variable costing treats fixed manufacturing overhead as a(n)

period cost