3. Value Chain & Product Costing Revisited; Absorption vs Variable Costing Segment Reporting

Question 1

What is a value chain?

Answer 1

A set of linked processes or activities that begins with acquiring resources and ends with providing and supporting products or services that customer value

Question 2

What are the 4 types of cost for products?

Answer 2

Upstream (R&D, Supply)
Primary Processes (MFG and production)
Downstream (marketing, distribution, customer service
Support Services (HR, Finance, legal, IT, communications)

Question 3

What are the three types of MFG costs?

Answer 3

Direct material
Direct labour
MFG overhead

Question 4

What makes up prime cost?

Answer 4

Direct material and direct labour

Question 5

What GL accounts are on the balance sheet in relation to MFG?

Answer 5

Raw materials inventory
WIP (Work in process)
Finished goods
All make up COGS

Question 6

What makes up an income statement?

Answer 6

Sales Revenue 
-COGS
Totals Gross Profit
-Sales and Admin expenses 
Totals Net Profit

Question 7

Why are both variable costing and absorption costing used?

Answer 7

Variable costing can not be used for financial and tax statements but is most helpful in making decisions
Absorption costing must be used for tax and statement purposes.

Question 8

Whats the main difference between variable and absorption costing?

Answer 8

How they treat fixed overhead.
Fixed MFG overheads are included in the cost of inventory with absorption costing.
Fixed MFG overheads are not included with variable costing, they are considered as period costs

Question 9

What makes up the variable costing income statement? (Also called contribution margin format)

Answer 9

Sales
-Variable expenses (VCOGS + V selling and admin)
= Contribution margin
-Fixed expenses (F OH + F selling and admin)
=Net Income

Question 10

What are some advantages of using variable costing?

Answer 10

Performance evaluation
Segment reporting
Planning and Controls

Question 11

What are the relationships between production, sales and income?

Answer 11

If (NI = Net Income)
Production > Sales = Absorption NI > Variable NI
Production

Question 12

What is absorption costings affect on profitability?

Answer 12

Absorption can be used to manipulate profitability by deferring fixed costs in inventory. By increasing production: more fixed costs will be left in inventory therefore, less fixed costs will be transferred to COGS. Which means a higher profit. This doesn’t work in VC because all fixed costs are expensed

Question 13

What is segmented reporting?

Answer 13

This relies on variable costing, managers need more detailed info than on financial statements

Question 14

What are segments?

Answer 14

Any profit-making unit or activity with an organisation. So they can be divisions, plants, products, territories etc

Question 15

What are common costs?

Answer 15

The costs of activities that are incurred for the benefit of more than one unit

Question 16

What is conversion costs?

Answer 16

Conversion costs the costs of direct labour and manufacturing overhead incurred to convert raw material to a finished product

Question 17

What are period costs?

Answer 17

Costs that are expensed in the accounting period in which they are incurred