Principles of Accounting: Chapter Twenty-Three

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Chapter 23 compares variable (direct) costing to absorption costing. Absorption costing is required under generally accepted accounting principles, but may not be as useful. Under absorption costing, product costs include all costs of production. Under variable costing, product costs include only the variable manufacturing components. Income reporting under variable costing helps identify the variable manufacturing margin and overall contribution margin.

Segment reporting results in various measures for each business unit, such as the contribution margin, controllable contribution margin, and segment margin. Selected segment data may also be presented on an external basis, and facilitate evaluations of residual income. Residual income adjusts operating income for the cost of capital associated with deployed assets.

Some business units, like janitorial services, are not direct producers of output, but instead exist only to support other units. Allocation methods like the direct and step approaches can be used to assign the costs of such units to productive business units. The chapter concludes by examining how an information system can be used to sort, classify, and present data in ways that may prove beneficial to management.

Exercises

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Problems
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Multiple Choice
Objectives
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Fill in the Blanks: Chapter Twenty-Three

1. With variable costing all fixed production costs are subtracted from current period revenues; whereas, with absorption costing fixed overhead may be allocated between ____________ cost of goods sold and ____________ inventory .Correct

2. The contribution margin under variable costing corresponds to sales minus ____________variable costs, while absorption costing positions ____________gross profit as sales minus cost of goods sold.

3. The cost component that is included in inventory with absorption costing, but not variable costing, is ____________fixed factory overhead.

4. A ____________contribution income statement provides top management with an understanding of how individual responsibility centers affect total firm profitability.

5. The ____________controllable contribution margin is computed by subtracting fixed costs that are both controllable by the segment's management and directly traceable to the segment from the contribution margin.

6. A controllable contribution margin minus uncontrollable ____________fixed costs yields the segment margin.

7. ____________ Residual incomeis a concept whereby operating income is reduced for the cost of capital associated with operating assets.

8. The ____________step method allocates the cost of selected service departments partially to other service departments.

9. Reframing line item income statement information to reflect the specific nature of costs is sometimes termed ____________objective of expenditure information.