Study Guide for Final Exam

16 Pages

Business Administration
Course Code
BUS 254
Masood Kamlani

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CHAPTER 8ABSORPTION AND VARIABLE COSTINGLO 1explain the accounting treatment of fixed MAN OH under absorption and variable costing ABSORPTION COSTING Both fixed and variable production costs are included in the product cost VARIABLE COSTING Only the variable costs of production are included in the product cost LO5 explain the implications of absorption and variable costing for costvolumeprofitanalysis Absorption costing is inconsistent with CVP analysis because FIXED overhead is applied to goods as a product cost on a per unit basis In CVP analysis the fixed OH needs to be applied as a lump sumLO6 Evaluates absorption and variable costingPricing Decisions Managers prefer absorption costing data in costbased pricing decisions because fixed MAN OH is a necessary cost incurred in the production process Proponents of variable costing argue that any price above a products variable cots makes a positive contribution to covering fixed cost contribution marginDefinition of an asset under each costing method Absorption Costingsince fixed costs are part of production inventory an asset should be valued at the full cost of production Variable Costingthe fixed cost component of a products absorption costing value has no future service value the fixed manufacturing OH costs during current period will not prevent these costs from having to be incurred again next periodGAAP requires income reporting to be based on absorption costing method In a JIT inventory environment the income differences between absorption and variable costing are minimal because production tends to equal salesLO7 Explain the rationale behind throughput costingThroughput costing assigns ONLY the UNIT LEVEL SPENDING for direct costs as the cost of products or services In an automated process direct material may be the only unitlevel cost so it is the only product costUnit Level Cost incurred every time a unit of product is manufactured and that will NOT be incurred if another unit is not manufactured CHAPTER 9 PROFIT PLANNINGACTIVITY BASED BUDGETINGLO1 5 Purposes of budgeting systems1 Planning2 Facilitating communication and coordination3 Allocating resources 4 Controlling profit and operations 5 Evaluating performanceLO2 Describe the similarities and differences in the operational budgets prepared by manufacturers service industry firms merchandisers and nonprofit organizationsManufacturing firms develops a production budget use production budget to develop DM DL and MAN OH budgets also develops sellingadmin budgetMerchandising Firms instead of a production budget develops a budget for merchandise purchasesalso develops budgets for labor overhead and sellingadmin expenseService Industry Firms develops a set of budgets that show how the demand for services will be met based on the sales budget for these servicesNonProfit Firms many nonprofit firms dont charge feesno sales budget Prepare budgets showing their anticipated fundingLO3explain the concept of Activity Based Budgeting and the benefits it brings to the budgeting processUnder ABB 1 Specify the productsservices to be producedoffered to customers 2 Determine activities to produce these productsservices 3 Quantify resources needed to perform activities specified in step 2LO5 Discuss the role of assumptions and predictions in budgetingy Master budget is based on MANY assumptionsestimates y Some are accurate others are not y One way to mitigate the uncertainty of these assumptions is by using aFinancial planning modela set of mathematical relationships used to express the interactions among operational financial and other ventsthe unknown assumption is substituted for a variable so you can see what happens as the variable changes
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