bg management accounting chapter 6 384

CHAPTER VARIABLE COSTING AND SEGMENT REPORTING 6.1 Overview of Absorption and Variable Costing Variable costing (also called direct/marginal costing) is a method that charges products with only the variable manufacturing costs The cost of a unit of product consists of the three variable manufacturing costs — direct material, direct labor, and variable manufacturing overhead 6.1 Overview of Absorption and Variable Costing Absorption costing (also called full costing) is a method that charges products with all manufacturing costs, regardless of whether the costs are fixed or variable The cost of a unit of product consists of all four types of manufacturing costs — direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead 6.1 Overview of Absorption and Variable Costing Direct Materials Product Costs Direct Labor Variable Manufacturing Overhead Product Costs Fixed Manufacturing Overhead Period Costs Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Period Costs 6.2 Income Comparison of Absorption and Variable Costing Let’s assume the following additional information for Harvey Company – 20,000 units were sold during the year at a price of $30 each – There were no units in beginning inventory Now, let’s compute net operating income using both absorption and variable costing Unit Cost Computations Harvey Company produces a single product with the following information available: 6.2 Income Comparison of Absorption and Variable Costing Income Statement of Absorption Costing 6.2 Income Comparison of Absorption and Variable Costing Income Statement of Variable Costing 6.2 Income Comparison of Absorption and Variable Costing The diffirence from Income of methods 6.2 Income Comparison of Absorption and Variable Costing Opponents of absorption costing argue that shifting fixed manufacturing overhead costs between periods can lead to misinterpretations and faulty decisions Those who favor variable costing argue that the income statements are easier to understand because net operating income is only affected by changes in unit sales The resulting income amounts are more consistent with managers’ expectations 6.3 Segment income statement A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data A segment can be 6.3.1 Segment income statement Traceable and Common Fixed Costs and the Segment Margin A traceable fixed cost of a segment is a fixed cost that is incurred because of the existence of the segment— if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear 6.3.1 Segment income statement Traceable and Common Fixed Costs and the Segment Margin A common fixed cost is a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment Even if a segment were entirely eliminated, there would be no change in a true common fixed cost 6.3.1 Segment income statement The segment margin is obtained by deducting the traceable fixed costs of a segment from the segment’s contribution margin It represents the margin available after a segment has covered all of its own costs 6.3.2 Segment break - even point and decision making There are two keys to building segmented income statements: A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin  ... 6. 2 Income Comparison of Absorption and Variable Costing Income Statement of Absorption Costing 6. 2 Income Comparison of Absorption and Variable Costing Income Statement of Variable Costing 6. 2... managers’ expectations 6. 3 Segment income statement A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data A segment can be 6. 3.1 Segment income... direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead 6. 1 Overview of Absorption and Variable Costing Direct Materials Product Costs Direct Labor Variable