Under absorption costing when inventory decreases the fixed manufacturing overhead is

variable costing income statements (aka direct costing or marginal costing)

-contribution format for internal decision making purposes. -variable costs are reported separately than fixed. -only those manufacturing costs that vary with output are treated as product costs. like direct materials, direct labor and the variable portion of manufacturing overhead. -fixed manufacturing overhead is treated as a period cost and like selling and admin is expensed in its entirety each period.

absorption costing income statements (aka full cost method) 

generally used for external reports. variable and absorption produce different net operating figures and the differences can be quite large -ignore variable and fixed cost distinctions -treat all manufacturing costs as product costs regardless of whether they are variable or fixed. -cost of a unit of product under this costing method consists of direct materials, direct labor and both variable and manufacturing overhead.

-managers need to measure the profitability of individual segments of their organizations. -a part or activity of an organization about which managers would like cost, revenue or profit data.

variable vs. absorption income statements

-account for fixed manufacturing overhead differently. 

selling and administrativeexpenses

-never treated as product costs regardless of the costing method. -always period costs and always expensed as occurred.

if inventories increase during a period

-under absoroption costing some of the fixed manufacturing overhead of the current period will be deferred in ending inventories. 

in general, when the units produced exceed unit sales and hence inventories increase...

net operating income is higher under absorption costing than under variable. this occurs because some of the fixed manufacturing overhead of the period is deferred in inventories under absorption costing.

when unit sales exceed the units produced and hence inventories decrease...

net operating income is lower under absorption costing than under variable costing. this occurs because some of the fixed manufacturing overhead of previous periods is released from inventories under absorption costing. 

when the units produced and unit sales are equal...

no change in inventories occurs and absorption costing and variable costing net operating incomes are the same. 

changes in inventories...

affect absorption costing net operating income, but not variable costing net operating income providing that variable manufacturing costs per unit are stable. 

when the units produced exceed the units sold...

-absorption costing net operating income will exceed variable costing net operating income. this occurs because inventories have increased; therefore, under absorption costing some of the fixed manufacturing overhead incurred in the current period is deferred in ending inventories on the balance sheet.

under variable costing all of the fixed manufacturing overhead incurred in the current period...

-flows through to the income statement. 

when the units produced are less than the units sold absorption costing...

-absorption costing net op income will be less than variable because inventories have decreased so under absorption, fixed man. overhead that had been deferred in inventories during a prior period flows through to the current period's income statement together with all o the fixed man. o/h incurred during the current period. 

when the units produced are less than the units sold under variable costing...

-just the fixed manufacturingoverhead of the current period flows through to the income statement. 

in variable costing income statements when sales go up...

-net operating income goes up. when sales go down, net operating income goes down. when sales are constant, net operating income is constant. -the number of units produced doesn't affect net operating income.

** look at inventory levels when looking at absorption costing statements 

-this explains fluctuations

variable vs. absorption and sales v. inventories

variable net op income fluctuates because of sales and absorption fluctuates based on changes in inventories

the variable costing method correctly...

-identifies the additional variable costs that will be incurred to make one more unit. it also emphasizes the impact of fixed costs on profits. 

segmented income statements are useful for...  

analyzing the profitability of segments, making decisions, and measuring the performance of segment managers.

-of a segment is a fixed cost that is incurred because of the existence of the segment, if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear. 

examples of traceable fixed costs

-salary of the fritos product manager (traceable fixed cost of the fritos business segment of pepsi) -maitenance cost for the building(traceable fixed cost of the 747 business segment of boeing) -liability insurance at disney world (disney world business segment of the disney corp.)

-a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. even if a segment were entirely eliminated, there would be no change in a true common fixed cost.

examples of common fixed costs

-salary of a cel of general motors (common fixed cost of the various divisions of GM) -cost of heating a safeway or kroger (fixed cost of store's various departments, groceries, produce, bakery etc.) -cost of receptionists salary at an office shared by a number of doctors (traceable to the office but not the doctors)

segmented income statement and the contribution margin

-tell us what happens to profits as volume changes-holding a segment's capacity and fixed costs constant. -especially useful in decisions involving temporary uses of capacity such as special orders.

-obtained by deducting the traceable fixed costs of a segment from the segment's contribution margin. -represents the margin available after a segment has covered all of its own costs. -it's the best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment -if it can't cover its own costs, it should probably be dropped. common fixed costs not allocated to segments.

from a decision making point of view the segment margin is most useful in major decisions that...

-affect capacity such as dropping a segment. -by contrast contribution margin is most useful in decisions involving short run changes in volume such as pricing special orders that involve temporary use of existing capacity.

treat traceable costs as only those...

-costs that would disappear over time if the segment itself disappeared. if one division were sold or discontinued it would no longer be necessary to pay that division manager's salary. 

can have traceable costs be common too

-landing fee on a flight to paris with first business and coach. this is covered by all of these cabins even if one is empty it still has to be paid. 

When inventory increases fixed manufacturing overhead is deferred in inventory?

How are fixed manufacturing costs treated under absorption costing?

Is fixed manufacturing overhead included in absorption costing?

When fixed manufacturing overheads are under absorbed this means that?