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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?
