This document contains discussion questions and answers about costing methods in accounting. It compares absorption costing and variable costing, explaining that absorption costing includes all manufacturing costs as product costs, while variable costing only includes variable costs. It discusses how fixed manufacturing overhead costs are treated differently between the two methods and how profits can be increased under absorption costing by producing more units than are sold. The document also defines traceable costs and common costs, and explains how segment margin differs from contribution margin in measuring segment performance.
This document contains discussion questions and answers about costing methods in accounting. It compares absorption costing and variable costing, explaining that absorption costing includes all manufacturing costs as product costs, while variable costing only includes variable costs. It discusses how fixed manufacturing overhead costs are treated differently between the two methods and how profits can be increased under absorption costing by producing more units than are sold. The document also defines traceable costs and common costs, and explains how segment margin differs from contribution margin in measuring segment performance.
This document contains discussion questions and answers about costing methods in accounting. It compares absorption costing and variable costing, explaining that absorption costing includes all manufacturing costs as product costs, while variable costing only includes variable costs. It discusses how fixed manufacturing overhead costs are treated differently between the two methods and how profits can be increased under absorption costing by producing more units than are sold. The document also defines traceable costs and common costs, and explains how segment margin differs from contribution margin in measuring segment performance.
ACCT 203 1. What is the difference between absorption and variable costing? Absorption costing is a method that includes all manufacturing costs (direct materials, direct labor, and variable and fixed manufacturing overhead) in unit product costs. Variable costing is a costing method that includes only variable manufacturing costs (direct material, direct labor, and variable manufacturing overhead) in product costs. 2. Are selling and administration expenses treated as product costs or as period costs under variable costing? They are treated as period costs. 3. Explain how fixed manufacturing overhead costs are shifted from one period to another under absorption costing. Costs are included as part of the costs to Work in Process inventories, only when the units are sold do these costs flow through to the income statement as part of cost of goods sold. 4. What are the arguments in favor of treating fixed manufacturing overhead costs as product costs? All manufacturing costs have to be assigned to products in order to properly match the costs of producing units of product with their revenues when they are sold. 5. What are the arguments in favor of treating fixed manufacturing overhead costs as period costs? Fixed manufacturing costs are not really the costs of the unit, but that they are costs incurred to have the capacity to make products during a certain period. These will be incurred even if nothing is made during the period. If a unit is made or not the fixed costs will be the same and since the fixed costs are not part of producing that particular unit they should be charged to the current period. 6. If the units produced and the unit sales are equal, which method would you expect to show the higher net operating income, variable or absorption costing? Net operating income should be the same under both because inventory will remain the same so MOH costs cant be released in inventory under absorption costing. 8. If fixed MOH costs are released from inventory under absorption costing, what does that tell you about the level of production in relation to the level of sales?
This says that inventories have decreased which means that units produced were greater than units sold.
9. Under absorption costing, how is it possible to increase NI without
increasing sales? This is accomplished by increasing the numbers of units produced. When units produced is greater than units sold, inventories increase and so will NI. 13. Distinguish between traceable cost and a common cost. Common costs are a fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments. Traceable cost is a cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated. Traceable Cost: Product Managers Salary Common Cost: Heating cost of a grocery store 14. Explain how the segment margin differs from the contribution margin. The segment margin is more useful in determining capacity for example if a segment should be dropped or not. Contribution margin is more useful in making short run changes in volume. 15. Why arent common costs allocated to segments under the contribution approach? Common cost will continue whether the segment exists or not. If common costs are allocated to segments this will reduce the value of the segment margin as a measure of long run segment profitability and segment performance.
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