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Warren SMChap20(05)

Warren SMChap20(05) - CHAPTER 20(FIN MAN CHAPTER 5(MAN...

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CHAPTER 20 (FIN MAN); CHAPTER 5 (MAN) VARIABLE COSTING FOR MANAGEMENT ANALYSIS EYE OPENERS 1. a. Under absorption costing, both variable and fixed manufacturing costs are in- cluded as a part of the cost of the product manufactured. b. Under variable costing, only the variable manufacturing costs are included as a part of the cost of the product manufac- tured. The fixed manufacturing costs are treated as an expense of the period in which they are incurred. 2. Fixed factory overhead. 3. Included as part of the cost of product man- ufactured: (b), (d), (g). 4. a. Variable cost of goods sold. b. Variable selling and administrative ex- penses. c. Fixed costs. 5. In the variable costing income statement, the fixed manufacturing costs and the fixed selling and administrative expenses are re- ported in a special section for fixed costs and are deducted from the contribution mar- gin. 6. The amount of income from operations determined by absorption costing will be more than the amount determined by vari- able costing. This effect on the magnitude of income is caused by the difference between the two methods in treating fixed factory overhead costs. Absorption costing alloc- ates the fixed overhead costs to all goods produced during the period, while variable costing treats all the fixed overhead costs as an expense of the period. Thus, if the quant- ity of inventory at the end of the period is more than that at the beginning of the peri- od, a portion of the fixed overhead costs for the period would be included in the ending inventory, with a corresponding effect on the amount of income. 7. All costs are controllable by someone within the business but not necessarily by the same level of management. For a specific level of management, noncontrollable costs are costs for which another level of manage- ment is responsible. 8. In the short run, income from operations is maximized if the revenue from the sale of the product exceeds the variable cost of making and selling the product. Under vari- able costing, these relevant costs are readily available. 9. Management might develop a contribution margin by sales territory report. Such a re- port can be used by management to identify profitable sales territories for directing sales efforts. Fixed costs, which may not be influ- enced by territory-related decisions, should be removed from the analysis. 10. Product profitability analysis can be used by management to set product prices, to em- phasize promotional activity toward more profitable products or away from less profit- able products, and to make decisions about keeping products or eliminating products from the product line. 11. Rewarding sales personnel on the basis of total sales will normally motivate the sales staff to expend their efforts promoting high- volume products, which will produce a large total amount of sales dollars. In some cases, more profit may be earned by pro- moting specialty products with lower sales volume but which have higher profit margins on each product sold. For example, grocery
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