Accounting Midterm 2

variable cost income impacted by

changes in unit sales (sales up, NOI up)

absorption cost income impacted by

changes in unit sales and units of production (NOI can go up if more units are produced- don’t need to be sold)

Variable costing and decision making

variable costs identifies the cost of making one additional unit

• emphasizes impact of fixed costs on profits

absorption cost and decision making

• assigns fixed MOH to units produced (makes it seem that F MOH is variable but it is not)

• inappropriate pricing decisions and product discontinuation decisions

Segment

any part or activity of an organization about which a manger seeks cost, revenue, or profit data

• store, service center, sales inventory

Keys to a segmented Income statement

1. contribution format should be used

• separates fixed from variable costs

• calculate CM

2. traceable fixed costs should be separated from common fixed costs to enable calculation of a segment margin

Traceable fixed costs

existence of a particular segment would disappear over time if the segment itself disappeared

• salary of Fritos product manager at PepsiCO for Fritos segment

• maintenance costs of the building where a particular plane is made

• may be a common fixed cost to another segment

Common Fixed Costs

arise bc of overall operation of the company and would not disappear if a segment were eliminated

• salary of CEO at General Motors of various divisions

• cost of heating at Safeway or Kroger grocery store of various departments

Segment Margin

subtracting traceable fixed costs from the contribution margin

• best gauge of long run profitability of a segment

activity based costing (ABC)

gives managers info for strategic and other info that potentially impact capacity, and therefore fixed and variable costs and acts as a supplement (not a replacement)

• has its own unique measure of activity

activity

event that causes the consumption of overhead resources

activity cost pool

cost bucket in which costs related to a single activity measure are accumulated

activity measure

allocation base

• transaction driver

• duration driver

• five levels of activity

5 activity cost pools

1. customer orders

2. design changes

3. order size

4. customer relations

5. other

overcost

lower product margin

undercost

higher product margin

3 differences of traditional and ABC costing

1. Traditional costing allocates all
   manufacturing overhead to products. ABC
   costing only assigns manufacturing
   overhead costs consumed by products to
   those products.

2. Traditional costing allocates all manufacturing
   overhead costs using a volume-related allocation
   base. ABC costing also uses non-volume related
   allocation bases

3. Traditional costing disregards selling and
   administrative expenses because they are
   assumed to be period expenses. ABC costing
   directly traces shipping costs to products and
   includes nonmanufacturing overhead costs caused
   by products in the activity cost pools that are
   assigned to products

benchmarking

compare activity cost information with standards of performance achieved by other organizations

5 limitations of ABC

1. substantial resources needed

2. desire to fully allocate all costs to products

3. resistance to unfamiliar numbers and reports

4. potential misinterpretation of unfamiliar numbers

5. doesn’t replace two costing system that supports external reporting

budget

detailed quantitative plan for acquiring and using financial and other resources over a specified future time period

• usually cover one year period

• perpetual: 12 month that continuously rolls forward

key purposes: planning and control

planning

developing objectives and preparing various budgets to achieve those objectives

control

steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward a goal

benefits of budgets

• communicate plans

• define goals and objectives

• coordinate activites

• uncover potential bottlenecks

• means of allocating resources

• think about and plan for the future

why make budgets (control)

• improve efficiencies and effectiveness of operations

• evaluate and reward employees

how to companies make budgets

relying on some combination of top-down budgeting and self- imposed budget

self imposed budget

prepared with the full cooperation and participation of managers at all levels

Why self imposed

1. It shows respect for their opinions when lower-level managers
are involved in the budgeting process.
2. Budget estimates prepared by front-line managers are often
more accurate than estimates prepared by top managers.
3. Motivation is generally higher when individuals participate in
setting their own goals than when the goals are imposed from
above.
4. It empowers them to take ownership of the budget and to be
accountable for deviations from it.

master budget 3 assumptions

1. what are the budgeted unit sales

2. what is the budgeted selling price per unit

3. what percentage of accounts receivable will be collected in the current and subsequent periods?

which method produces highest values for WIP and FG?

absorption

transaction driver (activity measure)

simple count of the number of times an activity occurs

Duration Driver

measure of the amount of time needed for an activity

customer order

assigned all costs of resources that are
consumed by taking and processing customer orders

design changes

assigned all costs of resources consumed by
customer requested design changes

order size

assigned all costs of resources consumed as a
consequence of the number of units produced

Customer relations

assigned all costs associated with
maintaining relationships with customers

Other

assigned all organization-sustaining costs and unused
capacity costs