ACCTG 225

Advocated of variable costing believe fixed manufacturing costs

1. are period expenses 2. are not caused by and cannot be meaningfully traced to specific units of production

Absorption vs Variable Costing

Absorption: - Product Costs: DM, DL, VMOH, FMOH - Period Cost: Variable Selling and Admin, Fixed Selling and Admin Variable: - Product Costs: DM, DL, VMOH - Period Costs: FMOH, Variable Selling and Admin, Fixed Selling and Admin

Failure to Trace Costs Directly

Costs that can be traced directly to a specific segment should be charged directly to that segment and should not be allocated to other segments Example: The rent for a branch office of an insurance company should be charged directly to the branch office rather than included in a company wide overhead pool and then spread throughout the company.

Traceable Costs

Only those costs that would disappear over time if the segment itself disappeared. Example: If one division within a company were sold or discontinued, it would no longer be necessary to pay that division manager's salary.

Variable Costing advocates believe that under the matching principle, fixed costs should be treated as _________ costs.

Period

GAAP and IFRS rules

U.S GAAP and IFRS require that publicly traded companies include segmented financial and other data in their annual reports and that the segmented reports prepared for external users must use the same methods and definitions that the companies use in internal segmented reports that are prepared to aid in making operating decisions.

Upstream costs Downstream

Upstream: research and development, product design Downstream: marketing, distribution and customer service If either the upstream or downstream costs are omitted in profitability analysis, then the product is under costed and management may unwittingly develop and maintain products that in the long run result in losses.

Segment contribution margin equals segment revenue minus the _________ expenses for the segment.

Variable

Segmented Income Statements

may be prepared for activities at many levels in a company - Division - Product Lines - Sales Channels

Costs should be allocated to segments for internal decision-making purposes:

only when the allocation base actually drives the cost being allocated

The use of ______ costing can lead to the omission of segment costs because non manufacturing costs are not included as costs of a product

variable

Discontinuing a profitable segment results in:

1. A reduction in the overall profits of the company 2. The loss of the segment's revenues

Using absorption costing for segmented income statements can lead to

1. Under-costing of segments 2. Omission of upstream and downstream costs

One mistake companies make when preparing segmented income statements is arbitrarily assigning _____________ fixed costs to segments.

All of the costs attributable to a segment- and only those costs- should be assigned to the segment. Unfortunately, companies often make mistakes when assigning costs to segments. They omit some costs, inappropriately assign TRACEABLE FIXED COSTS, and arbitrarily allocate COMMON FIXED COSTS.