Managerial Accounting Ch. 6 Exam

Why aren't common costs allocated to segments under the contribution approach?

if it was allocated, the costs of segments would be overstated and their margins would be understated. consequence, some segments would appear to be unprofitable and be eliminated. thus can cause the overall profit of the company appear less profitable.

If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why/

if production equals sales, net operating income should be the same under absorption and variable costing. also inventories do not increase or decrease.

How is it possible for a cost that is traceable to a segment to become a common cost if the segment is divided into further segment?

There are often limits to how far down an organization a cost can be traced. Therefore, costs that are traceable to a segment may become common as that segment is divided into smaller segment units. For example, the costs of national TV and print advertising might be traceable to a specific product line, but be a common cost of the geographic sales territories in which that product line is sold.

Should a company allocate its common fixed expenses to business segments when computing the break-even point for those segments

? no?

Explain how fixed manufacturing overhead costs are shifted from one period to another under absorption costing?

If some of the units are not sold by the end of the period, then they are carried into the next period as inventory. When the units are finally sold, the fixed costs that have been carried over with the units is included as part of the period's cost of goods sold.

What are the arguments in favor of treating fixed manufacturing overhead costs as product costs?

absorption costing argue that absorption costing does a better job of matching costs revenue than variable costing. all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues for the units when they are sold. no distinction should be made between variable and fixed costs for the purpose of matching costs and revenues

If the units produced exceed unit sales, which method would you expect to shoe the higher net operating income, variable costing or absorption costing? Why?

absorption costing will usually show higher net operating income. when production exceeds sales, inventories increase and under absorption costing part of the fixed cost of the current period is deferred in inventory to the next period. in contrast, all of the fixed costs of the current period is immediately expenses under variable costin

What is a segment of an organization? Give several examples of segments.

any part or activity of an organization about which a manager seeks cost, revenue, or profit data. Ex: departments, operations, sales territories, divisions, and product lines.

Under absorption costing, how is it possible to increase net operating income without increasing sales?

by simply increasing the level of production.

Explain how the segment differs from the contribution margin.

contribution margin is the difference between sales revenue and variable expenses and is useful as a planning tool for decision making. Segment margin is the amount remaining after deducting traceable fixed expenses from the contribution margin and useful in assessing the overall profitability of a segment.

What costs are assigned to a segment under the contribution approach?

costs are assigned to a segment if and only if the costs are traceable to the segment. common costs are not allocated to segments under the contribution approach

How does Lean Production reduce or eliminate the difference in reported net operating income between absorption and variable costing?

differences in reported net operating income between absorption and variable costing arise because of changing levels of inventory. in lean, production, goods are produced strictly to customers' orders/ with production geared to sales, inventories are largely eliminated. if inventories are eliminated, they cannot change from one period to another and absorption costing from one period to another and absorption costing and variable costing will report the same net operating income.

If fixed costs are releases from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?

the inventory levels must have decreased and therefore production must have been less than sales

What is the basic difference between absorption costing and variable costing?

they differ by how they handle fixed manufacturing overhead. absorption costing: treated as product cost. variable costing: treated as a period cost

Distinguish between a traceable cost and a common costs. Give several examples of each.

traceable costs is a cost that arises specifically because of the existence of that segment. if segment eliminated, the cost would disappear. common cost is a cost that supports more than one segment, but is not traceable in whole or part to any on of the segments. ex: If the departments of a company are treated as segments, then examples of the traceable costs of a department would include the salary of the department's supervisor, depreciation of machines used exclusively by the department, and the costs of supplies used by the department. Examples of common costs would include the salary of the general counsel of the entire company, the lease cost of the headquarters building, corporate image advertising, and periodic depreciation of machines shared by several departments.

Are selling and administrative expenses treated as product costs or as periods costs under variable costing?

treated as period cost under variable costing and absorption costing

What are the arguments in favor of treating fixed manufacturing overhead costs as period costs?

variable costing argue that fixed costs are not cost of any particular unit of product. whether the unit is made or not, fixed costs are the same. therefore, how can cost be part of the cost of the products.