Chapter 6: Variable Costing & Segmented Reporting Flashcards
Variable Costing- Product
Direct Materials, Direct Labor, Variable MOH
Variable Costing- Period
Fixed MOH, Variable Selling and Admin Expense, Fixed Selling and Admin Expense
Absorption Costing- Product
Direct Materials, Direct Labor, Variable MOH, Fixed MOH
Absorption Costing- Period
Variable Selling and Admin Expense, Fixed Selling and Admin Expense
Price per Unit
Fixed MOH/ Units Produced
All FMOH is expensed
immediately
When Units produced=Units sold
No change in inventory, absorption income= variable income
When Units produced > Units sold
Inventory increases, absorption income> variable income
HINT: More produced— more fixed costs
When Units produced < Units sold
Inventory decreases, absorption income < variable income HINT: with less inventory, less fixed costs
Segment
any part or activity of an organization about which a manager seeks revenue or profit data. Ex. Service center, individual store, sales territory.
Segmented Income Statement uses what format __
Contribution Format- separates fixed/variable costs, enables the calculation of CM
Common fixed costs
Arise because the overall operations of the company would not disappear if any particular segment were eliminated.
Traceable fixed costs
Costs that their only reason for existence is that segment
Traceable fixed costs of one segment may ___
be common fixed costs of another segment
Segment Margin=
= Traceable FC of segment- C Margin
Segment Margin is
the best gauge of the long term profitability of the segment
Common costs should not be allocated
to individual segments
Break-even point=
(traceable F/E + Common F/E) / CM Ratio
CM ratio=
CM/Sales
Segment-wide Breakeven Point=
traceable F/E / CM ratio (its own)
Omission of Costs
costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain.
Value Chain
R & D, Product Design, Manufacturing, Marketing, Distribution, Customer Service
Reasons to not allocate fixed costs (2)
- makes segments look unprofitable
2. managers held accountable for uncontrollable-s
Both GAAP & IFRS require
segmented financial data and annual reporting
Segmented Income Statement Format
Sales -Variable Expenses= CM -Traceable F.E.= Segment Margin -C. Fixed Expense= N. Operating Expense
NOI (simplified)
Sales -COGS= GM -Selling and Admin= NOI
Variable costing treats fixed manufacturing overhead as a product cost. T/F
False.
Variable costing treats fixed manufacturing overhead as a period cost. T/F
True.
Absorption costing treats fixed manufacturing overhead as a period cost. T/F
False.
In absorption costing, variable manufacturing overhead costs flows through the inventory accounts on the balance sheet before being recorded as part of cost of goods sold on the income statement. T/F
True.
When the units produced are greater than the units sold, absorption costing income will be greater than variable costing income because absorption costing defers some fixed manufacturing overhead cost in ending inventory whereas variable costing expenses each period’s fixed manufacturing overhead on the income statement. T/F
True.
When the units produced are less than the units sold, absorption costing income will be less than variable costing income because absorption costing releases some fixed manufacturing overhead cost from ending inventory whereas variable costing expenses each period’s fixed manufacturing overhead on the income statement. T/F
True.
When the units produced are greater than the units sold, absorption costing income will be greater than variable costing income because absorption costing defers some fixed manufacturing overhead cost in ending inventory whereas variable costing expenses each period’s fixed manufacturing overhead on the income statement. T/F
True.
When the units produced < units sold, which of the following equations explains the difference between absorption costing and variable costing net operating income?
Number of units released from ending inventory × fixed manufacturing overhead cost per unit
Dollar sales for company to break even = (Traceable fixed expenses + Common fixed expenses) ÷ Overall contribution margin (CM) ratio. T/F
True.
