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Presentation transcript:

GLENCOE / McGraw-Hill

Cost-Revenue Analysis for Decision Making Change chapter 9 to 32.

The Decision Process Section Objectives Explain the basic steps in the decision-making process. Prepare income statements using the absorption costing and direct costing methods. Using the contribution approach, analyze the profits of segments of a business. Determine relevant cost and revenue data for decision-making purposes.

The Decision-Making Process Define the problem. Identify workable alternatives. Determine relevant cost and revenue data. Evaluate the cost and revenue data. Consider appropriate nonfinancial factors. Make a decision. Page 1124

Absorption Costing All manufacturing costs are included in the cost of goods manufactured. The value of ending inventory includes fixed costs. Page 1124

Income Statement Using Absorption Costing Davis Manufacturing Corporation Income Statement Year Ended December 31, 20-- Sales (8,000 units sold @ $35) 280,000.00 Cost of Goods Sold Variable Manufacturing Costs (10,000 x $15) 150,000.00 Fixed Manufacturing Costs 60,000.00 Total Cost of Goods Mfgd. ($210,000/10,000 = $21/unit) 210,000.00 Less Finished Goods Inventory, Dec. 31 (2,000 x $21) 42,000.00 Costs of Goods Sold 168,000.00 Gross Profit on Sales 112,000.00 Selling and Administrative Expenses Variable Expenses (8,000 units @ $3) 24,000.00 Fixed Expenses 60,000.00 Total Selling and Administrative Expenses 84,000.00 Net Income 28,000.00 Page 1125 Fixed and variable manufacturing costs are included

Direct Costing (also called Variable Costing) Only variable costs are included in the cost of goods manufactured. Fixed manufacturing costs are charged to expense during the period. Fixed manufacturing costs are not included in: Cost of goods sold Ending inventories Direct costing is not acceptable for GAAP financial reporting purposes. Page 1124

Direct Costing Manufacturing Margin: Marginal Income on Sales: Sales minus the variable cost of goods sold Marginal Income on Sales: Manufacturing margin minus variable operating expenses Net Income: Marginal income on sales minus fixed manufacturing costs and fixed selling and administrative expenses Page 1125

Income Statement Using Direct Costing Davis Manufacturing Corporation Income Statement Year Ended December 31, 20-- Sales (8,000 units @ $35) 280,000.00 Cost of Goods Sold Variable Manufacturing Costs (10,000 units @ $15) 150,000.00 Less Finished Goods Inventory, Dec. 31 (2,000 @ $15) 30,000.00 Costs of Goods Sold 120,000.00 Manufacturing Margin 160,000.00 Variable Selling and Administrative Expenses (8000 units @ $3) 24,000.00 Marginal Income on Sales 136,000.00 Fixed Costs and Expenses Fixed Manufacturing Costs 60,000.00 Fixed Selling and Administrative Expenses 60,000.00 120,000.00 Net Income 16,000.00 Page 1125 Only variable manufacturing costs are included

Contribution Margin Contribution margin is the excess of revenues over variable costs of the business segment. Profitability of a business segment is judged by its contribution toward covering common costs. Controllable fixed costs of each segment are deducted to determine the segment’s contribution to the overall profit. Common costs are not considered when computing the contribution margin. Page 1126

What are controllable fixed costs? QUESTION: What are controllable fixed costs? Controllable fixed costs are costs that the segment manager can control. ANSWER: Page 1127

QUESTION: What are common costs? Common costs are costs not directly traceable to a specific segment of the business. ANSWER: Page 1126

When making decisions, sunk costs are irrelevant. Types of Costs Relevant Cost: Future or expected cost that will change as a result of a decision. Sunk Cost: A cost that has already been incurred. When making decisions, sunk costs are irrelevant. Differential Cost: The difference between one alternative and another. Opportunity Cost: The potential earnings or benefits that are given up because a certain course of action is taken. Page 1128

Opportunity Cost Dilemma Decision Opportunity Cost To purchase equipment or invest in securities Purchase equipment Amount of interest or dividends received on securities if they had been purchased Page 1128

Complete the following sentences: R E V I W Complete the following sentences: Under __________ costing, all manufacturing costs, including fixed costs, are included in the cost of goods manufactured. absorption Under _____ costing, fixed manufacturing costs are written off as expenses in the period in which they are incurred. direct Direct _____ costing is not acceptable for GAAP financial reporting purposes.

Complete the following sentences: variable cost of goods sold Manufacturing margin is _____ minus ________________________. sales variable cost of goods sold The ____ step in the decision-making process is to define the problem. first The potential earnings or benefits given up as a result of a certain course of action is a(n) __________ cost. opportunity

College Accounting, Tenth Edition Thank You for using College Accounting, Tenth Edition Price • Haddock • Brock