ch19 - Chapter 19 The Navigator Scan Study Objectives Read...

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Chapter 19 The Navigator Scan Study Objectives Read Read Chapter Review Work Demonstration Problem Answer True-False Statements Answer Multiple-Choice Questions Match Terms and Definitions Solve Exercises V ARIABLE COSTING: A DECISION-MAKING PERSPECITIVE CHAPTER STUDY OBJECTIVES After studying this chapter, you should be able to: 1. Explain the difference between absorption costing and variable costing. 2. Discuss the effect that changes in production level and sales level have on net income measured under absorption costing versus variable costing. 3. Discuss the relative merits of absorption costing versus variable costing for management decision making. 4. Explain the term sales mix and its effect on break-even sales. 5. Understand how operating leverage affects profitability. The Navigator PREVIEW OF CHAPTER 19 In order to better track and understand the impact of cost structure on corporate profitability, some companies use an approach called variable costing. The purpose of this chapter is to show how variable costing can be helpful in making sound business decisions. The content and organization of this chapter are as follows: Effect on contribution Operating Leverage margin ratio Degree of operating VARIABLE COSTING: A DECISION-MAKING PERSPECTIVE Break-even sales in units Sales Mix Break-even sales in dollars Variable Costing Comparing absorption and variable costing Extended example Effect on break-even Effect on margin of point The Navigator leverage safety ratio Decision-making concerns Potential advantages of variable costing
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19-2 Kimmel Accounting: Tools for Business Decision Making _____________________________________________________________________________ CHAPTER REVIEW Variable Costing vs. Absorption Costing 1. (S.O. 1) There are two approaches to product costing. a. Under full or absorption costing all manufacturing costs are charged to the product. This is also the approach required under generally accepted accounting principles. b. Under variable costing only direct materials, direct labor, and variable manufacturing overhead costs are treated as product costs; fixed manufacturing overhead costs are recognized as period costs (expenses) when incurred. 2. The primary difference between variable and absorption costing is that under variable costing the fixed manufacturing overhead is charged as an expense in the current period. The result is that absorption costing will show a higher net income number than variable costing whenever units produced exceed units sold. The reason: the cost of the ending inventory is higher under absorption costing than under variable costing. 3. (S.O. 2) The effects of the alternative costing methods on income from operations are: Effects on Income Circumstance From Operations Units produced exceed units sold Income under absorption costing is higher than under variable costing Units produced are less than units sold Income under absorption costing Is lower than under variable costing Units produced equal units sold
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This note was uploaded on 08/02/2009 for the course BUAD 305 taught by Professor Davila during the Fall '07 term at USC.

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ch19 - Chapter 19 The Navigator Scan Study Objectives Read...

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