Septemeber 27th Notes
Septemeber 27th Notes Acct 2210- 001
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Acct 2210- 001
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This 3 page Class Notes was uploaded by Callisa Ruschmeyer on Thursday September 29, 2016. The Class Notes belongs to Acct 2210- 001 at Auburn University taught by Mr. Fetsch in Fall 2016. Since its upload, it has received 6 views. For similar materials see Managerial Accounting in Accounting at Auburn University.
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Date Created: 09/29/16
September 27 Notes All Notes for Chapter 6 Overview of Variable and Absorption Costing Variable Costing Absorption Costing Product Costs Direct Materials Direct Materials Direct Labor Direct Labor Variable MOH Variable MOH Fixed MOH Period Costs Fixed MOH Variable S and Adm. Variable S and Adm. Expenses Expenses Fixed S and Adm. Expenses Fixed S and Adm. Expenses Absorption Costing Absorption costing is the method that will produce the highest values for work in process and finished goods inventories Under absorption costing, all product costs variable and fixed, are included when determining unit product cost. Under variable costing, only the variable production costs are included in product costs Under the absorption costing, every unit produced absorbs some of the fixed MOH (product cost) o If some of the units produced are not sold in that period, some current costs are held in inventory rather than being expensed o If more units are sold than are produced, the deferred costs will finally be expensed Relation between production Effect on Relation between variable and and sales inventory absorption income Units produced = units sold No change in Absorption = Variable inventory Units produced > units sold Inventory Absorption > Variable increases Units produced < units sold Inventory Absorption < Variable decreases Enabling CVP Analysis Variable costing categorizes costs as fixed and variable, so it is much easier to use this income statement format for CVP analysis Because absorption costing assigns fixed manufacturing overhead costs to units produced, a portion of fixed manufacturing overhead resides in inventory when units remain unsold o The potential result is positive operating income when the number of units sold is less than the break-even point September 27 Notes All Notes for Chapter 6 Explaining Changes in Net Operating Income Variable costing income is only affected by changes in unit sales. o It is not affected by the number of units produced o As a general rule, when sales go up, net operating income goes up, and vice versa Absorption costing income is influenced by changes in unit sales and units of production o Net operating income can be increased simply by producing more units even if those units are not sold Supporting Decision Making Variable costing correctly identifies the additional variable costs incurred to make one more unit. o It also emphasizes the impact of total fixed costs on profits If you only use absorption costing, production managers can manipulate operating income by overproducing or under producing Decentralization and Segment Reporting A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data Keys to segmented income statements 1. A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin 2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin Identifying Traceable Fixed Costs and Common Fixed Costs Traceable fixed costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared o Example- no computer division = no computer division manager Common fixed costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated o Example- no computer division = still have a company president Realize that the traceable fixed costs of one segment may be a common fixed cost of another segment Segment Margin Computed by subtracting the traceable fixed costs of a segment from its contribution margin It is the best gauge of the long-run profitability of a segment On an income statement o Contribution margin is computed by taking sales minus variable costs o Segment margin is a division's contribution to profits o Break-even analysis- computed by dividing the sum of the company's traceable fixed costs and common fixed costs by the company's overall contribution margin ratio A business segment's break-even point is computed by dividing its traceable fixed costs by its contribution margin ratio September 27 Notes All Notes for Chapter 6 Omission of Costs- costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain Common Costs and Segments Common costs should not be arbitrarily allocated to segments based on the rationale that "someone has to cover the common costs" for two reasons 1. This practice may make a profitable business segment appear to be unprofitable 2. Allocating common fixed costs forces managers to be held accountable for costs they cannot control