Mgrl Corner 4e_SM AISE_08

1.The only difference between absorption costing and variable costing is the way in which fixed

overhead costs are assigned. Under variable costing, fixed overhead is a period cost; under absorption costing, it is a product cost.

2.Absorption-costing income is greater because some of the period's fixed overhead is placed in

inventory and not recognized as part of Cost of Goods Sold on the absorption-costing income statement.

3. A segment is any subunit of sufficient importance to warrant production of performance reports.

4.Contribution margin is the amount available to cover fixed expenses and provide for profit.

Segment margin is the amount available to cover common fixed expenses and provide for profit. Contribution margin is the difference between revenues and variable expenses. Segment margin is contribution margin less direct fixed expenses.

5.Ordering costs are the costs of placing and receiving an order. Examples include clerical costs,

documents, insurance, and unloading. Carrying costs are the costs of carrying inventory.

Examples include insurance, taxes, handling costs, and the opportunity cost of capital tied up in inventory.

6.Stockout costs are the costs of insufficient inventory (e.g., lost sales and interrupted production).

7.No, the purchase price is not part of the fundamental EOQ formula. However, the potential for

quantity discounts may be considered by management in deciding whether or not to order the EOQ amount. For example, the company may order more than the EOQ amount if the quantity discount is larger than the additional carrying cost.

8.Reasons for carrying inventory include the following:

(a) to balance setup and carrying costs

(b) to satisfy customer demand

(c) to avoid shutting down manufacturing facilities

(d) to take advantage of discounts

(e) to hedge against future price increases

9.If carrying costs increase, that implies that fewer orders are placed. However, the company

still needs the annual demand for the part. So fewer orders imply a larger number of parts ordered. This increases carrying costs.





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