Quiz 2 Review Session Flashcards
How is Factory Rent and Depreciation accounted for under variable costing
JE
since it is a fixed cost it will be expensed as a below-the-line cost
rent expense
depreciation exp
cash
A.D
How is Factory Rent and Depreciation accounted for under absorption costing
JE
*you would capitalize it and allocate it to units produced with a job cost sheet
MOH/WIP/FG.
cash
A.D
what do you do with FOH in a job cost sheet
you allocate it to units produced because all job cost sheets include units produced
T/F and Explain: the difference in operating income between variable costing and absorption costing is due solely to accounting for fixed costs
No, it is solely due to accounting for fixed PRODUCT costs. Fixed period costs are treated the same and Sales Revenue is treated the same
Why is direct costing a misnomer (wrong and inaccurate)
because for variable costing we also include variable overhead
Do companies in either the service sector or the merchandising sector make choices about absorption versus variable costing:?
If you are dealing with a wholesaler/retailer or service company. Variable vs. absorption does not really matter
this is because GM is pretty much equal to CM. The difference between the two comes SOLEY from the treatment of FOH
Explain the main conceptual issue under variable costing and absoption costing regarding timing for release of FIxed MOH
Variable: recognized in time period incurred
Absorption: 100% FOH allocated to units produced and only when they are sold can they be expensed (this could be in different years depending on when they are sold)
The main trouble with variable costing is that it ignores the increasing importance of fixed costs in manufacturing companies … T/F Explain
F, It dosn’t ignore FOH you just expense it as a period cost
Give an example of how under absorption costing OI could fall even though sales may rise
because under absorption your COGM will be higher if you sell more than you produced because you will dip into the previous year’s inventory so you recognize 100% FOH + a % of last year
whereas if you don’t sell all units then absorption will have a higher OI because the not 100% of fixed income was recognized
*all about the treatment of FOH with matching principal
whats different in IS for absorption and variable costing
COGS, Period Expenses
can you have a negative GM
yes as long as you have a positive CM
Define Relevant Costs and Historical Costs
Relevant costs occur in the future AND differ between alternatives
historical costs are past tense and don’t affect future decisions
All future costs are relevent T/F
no only future costs that differ between decisions are relevent
Distinguish between qualitative and quantitative factors
- qualitative factors stuff that is hard to quantify like staff morale
2 potential problems that should be avoided in relevant cost analysis
assuming variable costs will always be relevent and fixed costs irrelevent
- some var costs are future but don’t change alternatives and vice versa for fixed costs
a component should be purchased when there is a purchase price less than the total manufacturing cost per unit
if the vendor’s offer is less than the variable cost per unit take the offer if you can be assured of the capacity or the quality
Most times the vendors offer is greater than variable cost unit and the company may save some fixed costs if they outsource
Management should always maximize sales of the product with a higher contribution margin T/F
if capacity is not an issue, the unit with the highest CM/unit should be sold first, but if capacity is constrained sell all the product with higher CM then the other product
a branch with negative operating income should be closed T/F
If they have a negative CM then yes, but if not it depends on if it saves costs overall
Cost written off as depreciation on equipment already purchased is always irrelevant
for this course it is correct because we are not accounting for time value of money and taxation is not an issue (DTA)
how are fixed period costs accounted for for var. vs absorption
they both are below the line
What are the 2 reasons why companies should allocate support costs
- to get a gauge of internal demand for size of HRM and IT support departments
- to prevent abuse by operating departments of support department
why do support divisions costs get allocated to operating divisions
because they don’t have external customers and are cost centers and operating departments do have outside customers with the ability to generate profit
where do support allocated costs show up
below line in divisional operating departments income statement
Why can we allocate support costs with budgeted rates and why we should allocate support costs with budgeted rates
because no GAAP for internal reporting (internal income statements)
we recognize HRM and IT
Also use budgeted so if support costs go over budget operating is not penalized
