Week 2 - Reporting Income Flashcards
What is variable costing?
When all variable manufacturing costs (direct and indirect) are included as inventoriable costs. All fixed manufacturing costs (e.g. lighting) are excluded from inventoriable costs and are treated as costs of the period in which they are incurred.
What is absorption costing?
When all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs. That is, inventory ‘absorbs’ all manufacturing costs.
What is a contribution margin?
TOTAL REVENUES minus TOTAL VARIABLE COSTS
What is a gross margin?
TOTAL REVENUES less COGS
The variable costing income system uses which format: the contribution margin format or the gross margin format?
Contribution margin format
The absoroption costing income system uses which format: the contribution margin format or the gross margin format?
Gross margin format
Why do we need to learn variable costing (if regulations require fixed manufacturing costs to be part of product costs)?
- Firms aren’t required to comply with the accounting standards - they can choose AC or VC
- Evidence - even where firms are a reporting entity, some choose VC reports for internal purposes. Why? The benefits of VC outweigh the additional costs of preparing the two sets of records (or of converting from VC to AC).
What is a remedy for income manipulation (when a company increases their inventory despite the lack of demand, to have a positive effect on their operating margin)?
Budget for units. “You can only make 5,000 units” so you don’t make too many and then render them worthless e.g. making too many iPhone 5’s but everyone wants an iPhone 6.
CVP explains the relationship between what?
Cost-volume-profit
What is a break-even point?
The quantity of output sold at which total revenues = total costs, which mean profit will be $0.
What is the margin of safety?
Is the amount by which budgeted (or actual) revenues exceed break-even revenues.
