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
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms

Goals Achievement: Chapter Twenty-Three

Which of the following costing methods is the more traditional method?

absorption costing Correct or variable costingIncorrect

Which cost element represents the key difference between absorption costing and variable costing?

fixed manufacturing overhead Correct or variable manufacturing overheadIncorrect

Gross profit would appear in a variable costing income statement.

true Incorrect or falseCorrect

With both variable costing and absorption costing, all selling and administrative costs, whether they be fixed or variable, are expensed in the period incurred.

true Correct or falseIncorrect

If the level of inventory increases during a period, then which method will produce the higher income?

absorption costing Correct or variable costingIncorrect

The determination of business segments is driven by:

SIC codes Incorrect or the evaluative units judged by operating decision makersCorrect

Which of the following costs would not be considered in assessing segment margin in a contribution income statement?

uncontrollable fixed costs Incorrect or nontraceable costsCorrect

In a contribution income statement, the contribution margin is the result of subtracting what amount from net sales?

variable cost of goods sold Incorrect or variable cost of goods sold and variable selling and administrative expensesCorrect

The controllable contribution margin is computed by subtracting fixed costs (that are both controllable by a segment and directly traceable to the segment) from the contribution margin.

true Correct or falseIncorrect

The controllable contribution margin minus uncontrollable fixed costs yields the:

segment margin Correct or net incomeIncorrect

The controllable contribution margin would be useful in judging management performance.

true Correct or falseIncorrect

Segment data cannot be presented for external reporting purposes.

true Incorrect or falseCorrect

The calculation of residual income reduces operating income by:

operating assets times the cost of capital Correct or research and development expendituresIncorrect

The allocation of service department costs to productive departments, without involving any allocations of costs between service departments, is called:

the direct method Correct or the step methodIncorrect

A business dashboard is a modern information system that delivers real time information to managers in a format that can best be described as a:

customizable layout Correct or standardized layoutIncorrect