Cost analysis - CHAPTER10COST ANALYSIS FOR MANAGEMENT DECISION MAKING Review Summary 1 Absorption costing or full costing assigns direct materials

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CHAPTER 10 COST ANALYSIS FOR MANAGEMENT DECISION MAKING Review Summary 1. Absorption costing or full costing assigns direct materials and direct labor costs and a share of both fixed and variable factory overhead costs to units of production. In variable costing also known as direct costing , only direct materials, direct labor, and variable factory overhead are charged to the product, while fixed manufacturing costs are expensed totally in the period incurred. If the number of units produced differs from the number of units sold, reported net income under absorption costing will differ from reported net income under variable costing. This difference is caused by the elimination of fixed manufacturing expenses from inventories in variable costing. Generally, when production exceeds sales, absorption costing shows a higher profit than does variable costing, and when sales exceed production, the reverse occurs. Managers prefer income statements prepared on a variable costing basis because the variable cost of goods sold fluctuates directly with sales volume, and the influence of production levels on profit is eliminated. The use of variable costing for financial reporting is not accepted by the American Institute of Certified Public Accountants, the Internal Revenue Service, the Securities and Exchange Commission, or the Financial Accounting Standards Board. The position of these groups generally is based on their opposition to excluding fixed costs from inventories. Companies using variable costing internally adjust to absorption costing when preparing income tax returns and when reporting externally. 2. Segment reporting provides data that can be used by management to evaluate the operations and profitability of individual divisions, product lines, sales territories, etc. Segment profitability analysis requires that all costs be classified as either direct costs , which can be traced to a specific segment, or indirect costs , which are common to all segments. The variable costs and direct fixed costs are subtracted from sales to obtain the segment margin , which measures the ability of the segment to recover both the assigned variable costs and direct fixed costs necessary to keep the company solvent. Segment profitability analysis is useful for making long-run decisions such as product pricing policies, decisions to retain or eliminate specific segments and analysis of segment managers’ performance. 3. Cost-volume-profit analysis is a technique that uses the degrees of cost variability to measure the effects of changes in volume on resulting profits. The break-even point is defined as the point at which sales revenue is adequate to manufacture and sell a product, but not enough to generate a profit. The contribution margin ratio is determined by dividing the contribution margin (sales minus variable costs) by sales revenue. The contribution margin per unit is the difference between the sales price per unit and the variable costs per unit. Formulas for break-
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This note was uploaded on 10/05/2010 for the course ACC ACC561 taught by Professor David during the Spring '10 term at University of Phoenix.

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Cost analysis - CHAPTER10COST ANALYSIS FOR MANAGEMENT DECISION MAKING Review Summary 1 Absorption costing or full costing assigns direct materials

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