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).
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