Managerial Accounting Module 2
traceable fixed costs
arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared -salary of a manger -maintenance cost for the building (if the segment goes away, would the cost go away)
common fixed costs
arise because of the overall operation of the company and would not disappear if any particular segment were eliminated -salary of the CEO of general motors -cost of heating Kroger (if the segment goes away, the cost would not)
sales mix
is the relative proportion in which a company's products are sold
activity based costing improves accuracy of product costs by
using multiple pools to accumulate overhead costs
what cost approach is best suited for cost-volume-profit analysis?
variable
absorption costing income statements ignore
variable and fixed cost distinctions
keys to building segmented income statements
- a contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin -traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin
key cost volume profit analysis assumptions
- selling price is constant -costs are linear and can be accurately divided into variable and fixed components
WHy direct labor for allocation base?
-direct labor information was already being reordered -direct labor was a large component of product costs -managers believed direct labor and overhead costs were highly correlated
Plantwide overhead disadvantages
-most companies sell a large variety of products that consume differing amounts of overhead
margin of safety
-want it high, wiggle room you have unit you break even
Three common approaches
1. plantwide overhead 2. departmental overhead rates 3. activity- based costing
4 level hierarchy
1. unit level 2. batch level 3. product- level 4. facility level
activity cost pool
a "cost bucket" in which costs related to a particular activity measure are accumulated
activity rate
a predetermined overhead rate for each activity used to assign overhead costs to cost objects
Which method will produce the highest values for work in process and finished good inventories
absorption costing-> keeps fixed overhead as a product-> keeps it in inventory
facility-level activities
activities that are carried out regardless of which products are produced or how many batches or units produced
Activity
any event that causes consumption of overhead resources
segment
any part or activity of an organization about which a manager seeks cost, revenue, or profit data -an individual store -service center -sales territory
absorption costing income is influenced by
changes in unit sales and units of production
variable costing is only affected by
changes in unit sales, not affected by the number of units produced
what do we not allocate
common costs to segments
use the contribution margin ration to
compute changes in contribution margin and net operating income resulting from changes in sales volume
A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.
decrease
activity based management involves focusing on activities to
eliminate waste, decrease processing time, and reduce defects
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 absorption costing method
equal to
Activity measure
expresses how much of the activity is carried out and is used as the allocation base for applying overhead costs
The different between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for
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
greater than
implementing an activity based costing system often results in a shift of overhead cost from
high volume to low volume products
net operating income can be
increased simply by producing more units even if those units are not sold
what method do managers use to estimate the fixed and variable components of mixed cost by analyzing past records of cost and activity data
least squares regression
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
less than
when the number of units produced is greater than the number of units sold, variable costing net operating income will be
less than absorption costing net operating income
the measure of how sensitive net operating income is to a given percentage change in volume sales is called
operating leverage
unit level activities
performed each time a unit is produced; costs should be proportional to the number of units produced
product-level activities
related to specific products and typically must be carried out regardless of how many batches or units produced
what is the best gauge of the long-run profitability of a segment
segment margin
batch-level activities
tasks that are performed each time a batch is processed; costs depend on the number of batches processed not units produced
variable costing correctly identifies
the additional variable costs incurred to make one more unit
contribution margin
the amount remaining from sales revenue after variable expenses have been deducted -used first to cover fixed expenses
common mistake by companies when assigning costs to segments
they assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs
activity and costs should be combined only if...
they fall within the same level in the cost hierarchy
most important decisions involve...
what activities will be included and how they will be measured