6 absorption costing variable costing would recognize

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Unformatted text preview: Absorption costing. Variable costing would recognize only the period’s fixed overhead as an expense. The additional fixed overhead expense must have come from inventory. 13. Margin = Operating income/Sales, and Turnover = Sales/Average operating assets. By breaking ROI into margin and turnover, more information is available to assess performance. Knowledge of margin and turnover gives more insight into why the ROI may change from one period to the next. 7. Variable costing does not distort product performance by allocating common fixed costs. It allows managers to identify the contributions individual segments are making toward coverage of fixed costs. 8. Variable costing allows managers to identify what the costs ought to be for various levels of activity. By knowing what the costs ought to be for the actual level of activity, meaningful comparisons can be made to the costs that actually occurred. 14. ROI (1) encourages managers to pay attention to the relationships among sales, expenses, and investment, (2) encourages cost efficiency, and (3) discourages excessive investment in operating assets. Increased profitability can be achieved (all else being equal) by increasing revenues, decreasing expenses, or lowering investment. 9. A direct fixed cost is traceable to a particular cost object. A common fixed cost is common 15. ROI may discourage managers from investing in projects that would increase the profitability of the firm but decrease the division’s 321 ROI. It also may encourage myopic behavior by encouraging managers to make decisions that are profitable in the short run but harmful in the long run (e.g., cutting research and development costs). 16. 21. 18. 24. Transfer prices impact the revenues of the transferring division and the costs of the buying division and, thus, the profits of both divisions. A transfer price can affect the profits of the firm because it can affect the output decision of the buying division. If the price is set too high (low), then the output of the buying division may be too low (high). Since th...
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