Course title: Cost & Management Accounting

Course code: ACT 201

Part A.2:
Part B

Total East West

$ $ $
Revenue 2600000 1500000 1100000
Variable Expenses (1290000) (1200000) (90000)
Contribution margin 1310000 300000 1010000
Traceable Fixed (900000) (200000) (700000)
Expenses
Segment margin (410000) 100000 310000
Common Fixed (310000)
Expenses
Net operating income (100000)

The decision was wrong. Because the segment margin is higher than east.

Part C:
2. A segment is a part or activity of an organization about which managers would like cost,
revenue or profit data.
-Firstly, total variable expenses of segments are deducted from sales of segment to yield
contribution margin.
-Secondly, from the contribution margin traceable fixed costs of segments are deducted to yield
segment margin.
The segment margin is the best measure of the long run profitability of the segment i.e. if a
segment cannot cover its own costs then it should be dropped.
The contribution margin helps to separate out the fixed cost and profit components coming from
product sales and can be used to determine the selling price range of a product, the profit levels
that can be expected from the sales, and structure sales commissions paid to sales team members,
distributors or commission agents.
3.
Variable Costing
1. Costs Variable Costing includes
only variable costs directly
incurred in production.
2. Alternative Names Variable costing is also
known as marginal costing or
direct costing.
3. Internal/External Variable costing is generally
Use used for internal reporting
purposes. Managerial
decisions are taken on the
basis of variable costing.
4. Relevance Variable costing is used for
comparing the profitability of
different product lines. The
organization can carry out an
analysis based on costs,
volumes and profits.
5. Reporting Variable costing is based on
internal specification of
reporting and presentation.
6. Inventory Variable costing involves
only variable production
costs to be assigned to
inventory, work-in-progress
and cost of goods sold.
7. Contribution Variable costing calculates
contribution which is the
difference between sales and
variable cost of sales.
8. Profit Profit is much easier to
predict as it is a function of
sales.
Absorption Costing
Absorption costing includes
both variable costs and fixed
costs related to production.
Absorption costing is also
known as full costing.
Absorption costing is used for
reporting to the external
stakeholders as well as for the
purpose of filing taxes. It is in
line with GAAP and IFRS.
Absorption costing is used for
calculating per unit cost
based on all costs including
fixed overhead costs.
Absorption costing is based
on external reporting
standards given by external
agencies.
Absorption costing involves
considering all production
costs and including them in
inventory and work-in-
progress.
Absorption costing is used to
calculate the net profit.
It is much more difficult to
predict the effect of change in
sales on profit.