BUS 215 exam #2

net operating income is less under absorption costing than under variable costing when inventory for the period ________________

decreases

Variable costing NI =

(# of units sold x CM) - total expenses

steps for implementing ABC

1. Define activities, activity cost pools, and activity measures. 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects. 5. Prepare management reports.

ABC costing differs from traditional costing in 3 ways:

1. Non-manufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis. 2. Some manufacturing costs may be excluded from product costs. 3. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.

incorrectly or arbitrarily assigning common costs to segments:

1. holds managers responsible for costs they can't control 2. could reduce the overall profits of the company 3. distorts the profitability of segments

2 types of non-manufacturing costs for ABC

1. trace all direct non-manufacturing costs to products. ex: Commissions paid to salespersons, shipping costs, and warranty repair costs are examples of non-manufacturing costs that can be directly traced to individual products 2. allocate indirect non-manufacturing costs to products whenever the products have presumably caused the costs to be incurred

step-fixed cost

A cost that remains fixed over wide ranges of activity, but jumps to a different amount for activity levels outside that range.

when inventory increases, which costing method generally results in a higher net income?

Absorption costing

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

Common

customer margin =

Customer margin = customer sales - customer costs = customer sales - DL - DM - overhead cost pools

benchmarking

a systematic approach to identifying the activities with the greatest room for improvement.

fixed manufacturing overhead costs are expensed as units are sold as part of COGS under ________________ costing, and expensed in full with period costs under ________________ costing

absorption variable

second stage allocation

activity rates are used to apply costs to cost objects such as products and customers

duration driver

amount of time to perform an activity is measured by a duration driver

organizational-sustaining activities

are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. This category includes activities such as heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, and so on.

Batch-level activities

are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers are batch-level activities. They are incurred once for each batch (or customer order). Costs at the batch level depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume. For example, the cost of setting up a machine for batch processing is the same regardless of whether the batch contains one or thousands of items.

a variable costing income statement calculates ____________ while absorption costing calculates ____________

contribution margin (CM) Gross margin (GM)

variable costing NI may be computed by multiplying he number of units sold by the ______________ _______________ per unit and subtracting total ____________ expenses

contribution margin (CM) fixed

a variable costing income statement focuses on ____________ & _____________ expenses while absorption costing focuses on ____________ & ________________ costs

fixed & variable product & period

ABC also called "activity-based management"

focusing on activities to eliminate waste, decrease processing time, and reduce defects

ABC costing

includes both manufacturing and non-manufacturing costs when calculating entire cost of a product designed to be used for internal decisions making provides managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable

when inventory decreases, COGS under absorption costing will be _______________ COGS under variable costing

more than

unit level activities

performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced. For example, providing power to run processing equipment would be a unit-level activity because power tends to be consumed in proportion to the number of units produced.

customer-level activities

relate to specific customers and include activities such as sales calls, catalog mailings, and general technical support that are not tied to any specific product.

product-level activities

relate to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold. For example, activities such as designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities.

from a decision point of view, ______________ margin is most useful for major capacity decisions and _____________ margin or short-term sales volume decisions

segment margin contribution margin

segment margin =

segment margin = segment's CM - segment's traceable fixed costs

transaction driver

simple counts of the number of times an activity occurs

first stage allocation

the process of assigning functionally organized overhead costs derived from a company's general ledger to the activity cost pools.

the # of units produces does not affect net operating income when using __________________ costing

variable