CH 7: Variable Costing and Segment Reporting

fixed overhead costs

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________.

segment traceable FC / segment CM ratio

equation for dollar sales needed to breakeven for segment:

variable and fixed cost distinctions

Absorption costing income statements ignore ________.

less than

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ______ absorption costing net operating income.

segment margin

best gauge of the long-run profitability of a segment because it only includes costs that are caused by the segment

absorption and variable

what are the two methods of costing for income determination?

absorption costing

all manufacturing costs are charged to (or are absorbed by) the product

absorption costing

also known as “full costing”

all product costs

for absorption costing, accumulate ___ with inventory

Dm used, DL, Variable and Fixed OH

what is included with inventory in absorption costing?

traditional

absorption costing uses the ___ income statement

Sales - COGS = Gross Margin - operating expenses = net operating income

formula for traditional income statement (absorption costing)

change

for absorption costing, the cost/unit will ___ when there is a change in production levels.

absorption costing

required costing method by GAAP and IFRS

absorption costing

doesn’t facilitate CVP analysis or other management decisions

variable costing

accumulate only variable product costs with inventory

stay the same

for variable costing, the cost/unit will ___ when there is a change in production levels.

contribution margin

variable costing uses the ___ income statement

sales - VC = contribution margin - FC = Net Operating Income

Formula for CM income statement:

DM used, Dl, and variable OH

for variable costing, assign ___ to inventory

variable costing

fixed OH is expensed in full in the period incurred (ie treated as a period cost)

variable costing

used for internal purposes only

facilitates planning (CVP analysis) and evaluation of segments

variable costing: (what is it used for? it is good for…)

NI will be equal under both costing approaches

If Production = Sales Volume

the amount of fixed OH expensed is the same under both methods of costing

If Production = Sales Volume then NI will be equal under both costing approaches. Why?

NI will be higher under absorption

if production > Sales Volume

LESS fixed OH was expensed than was incurred under absorption costing

if production > Sales Volume, then NI will be higher under absorption. Why?

NI will be higher under variable

If Production < Sales Volume

MORE fixed OH was expensed than was incurred under absorption costing

If Production < Sales Volume, then NI will be higher under variable. Why?

variable costing is consistent with CVP analysis and NI computed is unaffected by changes in production levels

advantages of using variable costing (2)

overproduce

management may be tempted to ___ in a given period in order to increase NI under absorption costing

segment

any part or activity of an organization about which a manager seeks cost / revenue / profit data

a product line or department

examples of a segment

direct fixed costs

exist because the segment exists (tracable)

production department manager’s salary

example of a direct fixed costs to the production department

common fixed costs

exist because of multiple departments (cannot be traced to one); must be allocated but the allocations are not useful for evaluating segments

VP of Productions Salary

example of a common fixed cost to one of four departments of production

inappropriate allocation base used and arbitrary division among segments

what are the common mistakes that come with common fixed costs? (2)

sales - VC = contribution margin - Direct FC = segment margin - common FC = net operating income

Formula for Segmented Income statement:

sales - direct costs

equation for segment marggin

segment margin

most important item for evaluating segments:

segment income statements

useful for evaluating the effects that dropping a segment will have on company-wide profits as well as identifying the breakeven point for each product based on direct FC related to the product line

less

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________ than absorption costing net operating income.

variable and fixed cost distinctions

Absorption costing income statements ignore ________.

period and product cost distinctions

absorption costing separates costs by ___ (that is but manu costs v selling and admin costs)

equal to

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 the absorption costing method.

less

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ than the net operating income using the absorption costing method.

greater than

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.

disappear

If a segment disappeared, than a traceable FC that is attached to that segment should ___.

are not

common costs ___(are/are not)___ applied to the segment margin.

loss

if company broke even in its segments, it would still incur a ___

undercosted

in absorption costing, products are ___ (because they ignore upstream costs [R&D / product design] and downstream costs [marketing, distribution, customer service])

They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.

Which of the following is a common mistake made by companies when assigning costs to segments?