Power Notes Chapter M4 Profit Reporting for Management Analysis Learning Objectives 1. The Income Statement Under Variable Costing and Absorption Costing 2. Income Analysis Under Variable Costing and Absorption Costing 3. Management’s Use of Variable Costing and Absorption Costing C4

Power Notes Chapter M4 Profit Reporting for Management Analysis Slide # Power Note Topics 3 9 28 Absorption Costing and Variable Costing Income Analysis Under Variable Costing and Absorption Costing Management’s Use of Variable Costing and Absorption Costing Note: To select a topic, type the slide # and press Enter.

Two Costing Methods Absorption Costing Used for external financial reporting Includes direct materials, direct labor, variable factory overhead, and fixed factory overhead as part of total product cost Used for internal planning and decision making Does not include fixed factory overhead as a product cost Variable Costing

Absorption Costing Variable Costing Absorption Costing Compared to Variable Costing Absorption Costing Cost of Goods Manufactured Direct Materials Cost of Goods Manufactured Variable Costing

Absorption Costing Variable Costing Absorption Costing Compared to Variable Costing Absorption Costing Cost of Goods Manufactured Direct Materials Direct Labor Cost of Goods Manufactured Variable Costing

Absorption Costing Variable Costing Absorption Costing Compared to Variable Costing Absorption Costing Cost of Goods Manufactured Direct Materials Direct Labor Variable Factory OH Cost of Goods Manufactured Variable Costing

Absorption Costing Variable Costing Absorption Costing Compared to Variable Costing Absorption Costing Cost of Goods Manufactured Direct Materials Direct Labor Variable Factory OH Fixed Factory OH Cost of Goods Manufactured Variable Costing

Absorption Costing Variable Costing Absorption Costing Compared to Variable Costing Absorption Costing Cost of Goods Manufactured Direct Materials Direct Labor Variable Factory OH Fixed Factory OH Cost of Goods Manufactured Expense Variable Costing

Variable Costing Income Statement Units Manufactured Equal Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold (15,000 x $25) 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000 Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold (15,000 x $35) 525,000 Gross profit $225,000 Selling and admin. expenses ($75,000+$50,000) 125,000 Income from operations $100,000

Variable Costing Income Statement Units Manufactured Equal Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold (15,000 x $25) 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000 Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold (15,000 x $35) 525,000 Gross profit $225,000 Selling and admin. expenses ($75,000+$50,000) 125,000 Income from operations $100,000

Variable Costing Income Statement Units Manufactured Equal Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold (15,000 x $25) 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000 Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold (15,000 x $35) 525,000 Gross profit $225,000 Selling and admin. expenses ($75,000+$50,000) 125,000 Income from operations $100,000

Variable Costing Income Statement Units Manufactured Equal Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold (15,000 x $25) 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000 Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold (15,000 x $35) 525,000 Gross profit $225,000 Selling and admin. expenses ($75,000+$50,000) 125,000 Income from operations $100,000

Variable Costing Income Statement Units Manufactured Exceed Units Sold Variable Costing Income Statement Sales (12,000 x $50) $600,000 Variable cost of goods sold: Variable cost of goods mfg.(15,000 x $25) $375,000 Less ending inventory (3,000 x $25) 75,000 Variable cost of goods sold 300,000 Manufacturing margin $300,000 Variable selling and admin. expenses 60,000 Contribution margin $240,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $ 40,000

Variable Costing Income Statement Units Manufactured Exceed Units Sold Variable Costing Income Statement Sales (12,000 x $50) $600,000 Variable cost of goods sold: Variable cost of goods mfg.(15,000 x $25) $375,000 Less ending inventory (3,000 x $25) 75,000 Variable cost of goods sold 300,000 Manufacturing margin $300,000 Variable selling and admin. expenses 60,000 Contribution margin $240,000 Fixed costs: Fixed manufacturing costs (15,000 x $10) $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $ 40,000

Variable Costing Income Statement Units Manufactured Exceed Units Sold Variable Costing Income Statement Sales (12,000 x $50) $600,000 Variable cost of goods sold: Variable cost of goods mfg.(15,000 x $25) $375,000 Less ending inventory (3,000 x $25) 75,000 Variable cost of goods sold 300,000 Manufacturing margin $300,000 Variable selling and admin. expenses 60,000 Contribution margin $240,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $ 40,000

Absorption Costing Income Statement Units Manufactured Exceed Units Sold Absorption Costing Income Statement Sales (12,000 x $50) $600,000 Cost of goods sold: Cost of goods mfg. (15,000 x $35) $525,000 Less ending inventory (3,000 x $35) 105,000 Cost of goods sold 420,000 Gross profit $180,000 Selling and admin. expenses [(12,000 x$5)+$50,000] 110,000 Income from operations $ 70,000

Absorption Costing Income Statement Units Manufactured Exceed Units Sold Absorption Costing Income Statement Sales (12,000 x $50) $600,000 Cost of goods sold: Cost of goods mfg. (15,000 x $35) $525,000 Less ending inventory (3,000 x $35) 105,000 Cost of goods sold 420,000 Gross profit $180,000 Selling and admin. expenses [(12,000 x$5)+$50,000] 110,000 Income from operations $ 70,000

Absorption Costing Income Statement Units Manufactured Exceed Units Sold Absorption Costing Income Statement Sales (12,000 x $50) $600,000 Cost of goods sold: Cost of goods mfg. (15,000 x $35) $525,000 Less ending inventory (3,000 x $35) 105,000 Cost of goods sold 420,000 Gross profit $180,000 Selling and admin. expenses [(12,000 x$5)+$50,000] 110,000 Income from operations $ 70,000

Units Manufactured Exceed Units Sold Operating Income: Absorption costing $70,000 Variable costing 40,000 Difference $30,000 Analysis: Units manufactured 15,000 Units sold 12,000 Ending inventory units 3,000 Fixed cost per unit x $10 Why is absorption costing income higher when units manufactured exceed units sold?

Variable Costing Income Statement Units Manufactured Are Less Than Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold: Beginning inventory (5,000 x $25) $125,000 Variable cost of goods mfg. (10,000 x $25) 250,000 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000

Variable Costing Income Statement Units Manufactured Are Less Than Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold: Beginning inventory (5,000 x $25) $125,000 Variable cost of goods mfg. (10,000 x $25) 250,000 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs (10,000 x $15) $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000

Variable Costing Income Statement Units Manufactured Are Less Than Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold: Beginning inventory (5,000 x $25) $125,000 Variable cost of goods mfg. (10,000 x $25) 250,000 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000

Absorption Costing Income Statement Units Manufactured Are Less Than Units Sold Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold: Beginning inventory (5,000 x $35) $175,000 Cost of good manufactured (10,000 x $45) 400,000 575,000 Gross profit $175,000 Selling and admin. expenses 125,000 Income from operations $ 50,000

Absorption Costing Income Statement Units Manufactured Are Less Than Units Sold Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold: Beginning inventory (5,000 x $35) $175,000 Cost of good manufactured (10,000 x $45) 400,000 575,000 Gross profit $175,000 Selling and admin. expenses 125,000 Income from operations $ 50,000

Absorption Costing Income Statement Units Manufactured Are Less Than Units Sold Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold: Beginning inventory (5,000 x $35) $175,000 Cost of good manufactured (10,000 x $45) 400,000 575,000 Gross profit $175,000 Selling and admin. expenses 125,000 Income from operations $ 50,000

Units Manufactured Are Less Than Units Sold Operating Income: Variable costing $100,000 Absorption costing 50,000 Difference $ 50,000 Analysis: Units sold 15,000 Units manufactured 10,000 Ending inventory units 5,000 Fixed cost per unit x $10 Difference $50,000 Why is variable costing income higher when units manufactured are less than units sold?

Costing Effects on Operating Income Units manufactured: Equal units sold Exceed units sold Less than units sold Same operating income Variable costing income is less than absorption costing income Variable costing income is more than absorption costing income

Management’s Use of Costing Methods Variable costing reports and absorption costing reports are useful in the following situations: 1. Controlling costs 2. Pricing products 3. Planning production 4. Analyzing market segments 5. Analyzing contribution margins

Sales Territory Profitability Analysis Camelot Fragrance Company Contribution Margin by Sales Territory For the Month Ended March 31, 2003 Northern Southern Territory Territory Sales $80,000 $80,000 Variable cost of goods sold 9,600 9,600 Manufacturing margin $70,400 $70,400 Variable selling expenses: Promotion costs $22,000 $19,000 Sales commissions 14,000 11,000 Total $36,000 $30,000 Contribution margin $34,400 $40,400 Contribution margin ratio 43% 50.5% How can the difference in contribution margin ratio be explained?

Sales Territory Profitability Analysis Camelot Fragrance Company Contribution Margin by Sales Territory For the Month Ended March 31, 2003 Northern Southern Territory Territory Sales $80,000 $80,000 Variable cost of goods sold 9,600 9,600 Manufacturing margin $70,400 $70,400 Variable selling expenses: Promotion costs $22,000 $19,000 Sales commissions 14,000 11,000 Total $36,000 $30,000 Contribution margin $34,400 $40,400 Contribution margin ratio 43% 50.5% How can the difference in contribution margin ratio be explained?

Sales Territory Profitability Analysis Camelot Fragrance Company Contribution Margin by Sales Territory For the Month Ended March 31, 2003 Northern Southern Territory Territory Sales $80,000 $80,000 Variable cost of goods sold 9,600 9,600 Manufacturing margin $70,400 $70,400 Variable selling expenses: Promotion costs $22,000 $19,000 Sales commissions 14,000 11,000 Total $36,000 $30,000 Contribution margin $34,400 $40,400 Contribution margin ratio 43% 50.5% How can the difference in contribution margin ratio be explained?

Sales Territory Profitability Analysis Camelot Fragrance Company Contribution Margin by Sales Territory For the Month Ended March 31, 2003 Northern Southern Territory Territory Sales $80,000 $80,000 Variable cost of goods sold 9,600 9,600 Manufacturing margin $70,400 $70,400 Variable selling expenses: Promotion costs $22,000 $19,000 Sales commissions 14,000 11,000 Total $36,000 $30,000 Contribution margin $34,400 $40,400 Contribution margin ratio 43% 50.5% How can the difference in contribution margin ratio be explained?

Product Profitability Analysis Camelot Fragrance Company Contribution Margin by Product Line For the Month Ended March 31, 2003 Gwenevere Lancelot Sales $90,000 $70,000 Variable cost of goods sold 10,800 8,400 Manufacturing margin $79,200 $61,600 Variable selling expenses: Promotion costs $ 27,000 $14,000 Sales commissions 18,000 7,000 Total $45,000 $21,000 Contribution margin $34,200 $40,600 Contribution margin ratio 38% 58% How can the difference in contribution margin ratio be explained?

Product Profitability Analysis Camelot Fragrance Company Contribution Margin by Product Line For the Month Ended March 31, 2003 Gwenevere Lancelot Sales $90,000 $70,000 Variable cost of goods sold 10,800 8,400 Manufacturing margin $79,200 $61,600 Variable selling expenses: Promotion costs $ 27,000 $14,000 Sales commissions 18,000 7,000 Total $45,000 $21,000 Contribution margin $34,200 $40,600 Contribution margin ratio 38% 58% How can the difference in contribution margin ratio be explained?

Product Profitability Analysis Camelot Fragrance Company Contribution Margin by Product Line For the Month Ended March 31, 2003 Gwenevere Lancelot Sales $90,000 $70,000 Variable cost of goods sold 10,800 8,400 Manufacturing margin $79,200 $61,600 Variable selling expenses: Promotion costs $ 27,000 $14,000 Sales commissions 18,000 7,000 Total $45,000 $21,000 Contribution margin $34,200 $40,600 Contribution margin ratio 38% 58% How can the difference in contribution margin ratio be explained?

Product Profitability Analysis Camelot Fragrance Company Contribution Margin by Product Line For the Month Ended March 31, 2003 Gwenevere Lancelot Sales $90,000 $70,000 Variable cost of goods sold 10,800 8,400 Manufacturing margin $79,200 $61,600 Variable selling expenses: Promotion costs $ 27,000 $14,000 Sales commissions 18,000 7,000 Total $45,000 $21,000 Contribution margin $34,200 $40,600 Contribution margin ratio 38% 58% How can the difference in contribution margin ratio be explained?

Salesperson Profitability Analysis Camelot Fragrance Company Contribution Margin by Salesperson—Northern Territory For the Month Ended March 31, 2003 Inez Tom Beth Rodriquez Ginger Williams Total Sales $20,000 $20,000 $40,000 $80,000 Variable cost of goods sold 2,400 2,400 4,800 9,600 Manufacturing margin $17,600 $17,600 $35,200 $70,400 Variable selling expenses: Promotion costs $ 5,000 $ 5,000 $12,000 $22,000 Sales commissions 3,000 3,000 8,000 14,000 $ 8,000 $ 8,000 $20,000 $36,000 Contribution margin $ 9,600 $ 9,600 $15,200 $34,400 Contribution margin ratio 48% 48% 38% 43% Sales mix (% Lancelot sales) 50% 50% 0% 25%

Salesperson Profitability Analysis Camelot Fragrance Company Contribution Margin by Salesperson—Northern Territory For the Month Ended March 31, 2003 Inez Tom Beth Rodriquez Ginger Williams Total Sales $20,000 $20,000 $40,000 $80,000 Variable cost of goods sold 2,400 2,400 4,800 9,600 Manufacturing margin $17,600 $17,600 $35,200 $70,400 Variable selling expenses: Promotion costs $ 5,000 $ 5,000 $12,000 $22,000 Sales commissions 3,000 3,000 8,000 14,000 $ 8,000 $ 8,000 $20,000 $36,000 Contribution margin $ 9,600 $ 9,600 $15,200 $34,400 Contribution margin ratio 48% 48% 38% 43% Sales mix (% Lancelot sales) 50% 50% 0% 25%

Salesperson Profitability Analysis Camelot Fragrance Company Contribution Margin by Salesperson—Northern Territory For the Month Ended March 31, 2003 Inez Tom Beth Rodriquez Ginger Williams Total Sales $20,000 $20,000 $40,000 $80,000 Variable cost of goods sold 2,400 2,400 4,800 9,600 Manufacturing margin $17,600 $17,600 $35,200 $70,400 Variable selling expenses: Promotion costs $ 5,000 $ 5,000 $12,000 $22,000 Sales commissions 3,000 3,000 8,000 14,000 $ 8,000 $ 8,000 $20,000 $36,000 Contribution margin $ 9,600 $ 9,600 $15,200 $34,400 Contribution margin ratio 48% 48% 38% 43% Sales mix (% Lancelot sales) 50% 50% 0% 25%

Salesperson Profitability Analysis Camelot Fragrance Company Contribution Margin by Salesperson—Northern Territory For the Month Ended March 31, 2003 Inez Tom Beth Rodriquez Ginger Williams Total Sales $20,000 $20,000 $40,000 $80,000 Variable cost of goods sold 2,400 2,400 4,800 9,600 Manufacturing margin $17,600 $17,600 $35,200 $70,400 Variable selling expenses: Promotion costs $ 5,000 $ 5,000 $12,000 $22,000 Sales commissions 3,000 3,000 8,000 14,000 $ 8,000 $ 8,000 $20,000 $36,000 Contribution margin $ 9,600 $ 9,600 $15,200 $34,400 Contribution margin ratio 48% 48% 38% 43% Sales mix (% Lancelot sales) 50% 50% 0% 25%

Analyzing Contribution Margins Quantity factor The difference between the actual quantity sold and the planned quantity sold, multiplied by the planned unit sales price or unit cost. The difference between the actual unit price or unit cost and the planned unit price or unit cost, multiplied by the actual quantity sold. Unit price or unit cost factor

Profit Reporting for Management Analysis Power Notes Chapter M4 Profit Reporting for Management Analysis This is the last slide in Chapter M4. Note: To see the first slide, type 1 and press Enter.