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

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms

Problems: Chapter Twenty-Three

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Basic		Problem	Worksheet	Combined	Objective

	B-23.01				Concepts in variable and absorption costing

	B-23.02				Income and inventory - variable v. absorption costing

	B-23.03				Critical thinking about costing techniques

	B-23.04				Concepts in contribution income measurement

	B-23.05				Preparing and evaluating a contribution income statement

	B-23.06				External reporting of segment information

	B-23.07				Residual income

	B-23.08				Allocating service department costs



Involved		Problem	Worksheet	Combined	Objective

	I-23.01				Variable and absorption costing

	I-23.02				Contribution income reporting and evaluation

	I-23.03				Evaluating the elimination of a segment

	I-23.04				Team-based allocation of service department costs

	I-23.05				Line item v. object of expenditure analysis

The preceding table includes links to "Basic" and "Involved" problems. Each link will download the file containing a spreadsheet for the problem and a template worksheet on which you can prepare the solution electronically. If you see a light bulb icon on a worksheet, just mouse over above the icon and a comment box will appear. The comments include useful suggestions for improving your spreadsheet skills.

Solutions to these problems may be obtained from your instructor, however you may not post or redistribute, electronically or otherwise, any such solution material. Solution material may be provided to you for your sole use only, at the discretion of your individual instructor. Violation of this policy constitutes a copyright violation. Alternative problems, with solutions, may be found under the "Exercises" tab within each chapter. Video solutions to selected problems are available to students enrolling in the online course.