PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Adapted by Cynthia Fortin, CPA, CMA Introduction to Managerial Accounting, Brewer, Garrison,Noreen

6-2 Pricing: Zappos case  /2011/01/07/pricing/ /2011/01/07/pricing/

6-3 Variable Costing vs Absorption Costing Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing Absorption Costing Product Costs Period Costs Product Costs Period Costs

6-4 Direct materials (DM) Direct Labor (DL) Variable Mfg Overhead ( V OH) Fixed Mfg OH # units produced = Unit product Cost Total

6-5 Direct materials Direct Labor Variable Mfg OH # units produced = Unit product Cost Variable costing Total

6-6 Unit Cost Computations Harvey Company produces a single product with the following information available:

6-7 Unit Cost Computations Unit product cost is determined as follows:

6-8 Income Statements Assume the following additional information 20,000 units were sold during the year at a price of $30 each. There is no beginning inventory.

6-9 Contribution margin = Sales – Variable expenses. Variable Costing Contribution Format Income Statement

6-10 Absorption Costing Income Statement Fixed manufacturing overhead deferred in inventory is 5,000 units × $6 = $30,000. Gross margin is not Contribution margin

6-11 Comparing the Two Methods 5000*$105000*$6

6-12 Variable CostingAbsorption Costing Income Statement Format Contribution margin Gross margin Net IncomeF Mfg O/H not included in ending inventory. Included in period expense. Portion F Mfg O/H included in ending inventory units.

6-13 Summary of Key Insights

6-14

6-15 Decentralization and Segment Reporting egment S egment part of an organization about which management seeks cost, revenue, or profit data. Quick Mart An Individual Store A Sales Territory A Service Center

6-16 Segmented Income Statement Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin. Contribution format Separates Variable From Fixed expenses

6-17 Identifying Traceable Fixed Costs Traceable fixed costs Disappear if the segment itself disappeared. No computer division means... No computer division manager.

6-18 Common fixed costs overall operation would not disappear if any particular segment were eliminated. No computer division but... Dazong Wang, former CEO of one of China’s largest automakers We still had the CEO

6-19 Heating a Carrefour store is common to all departments

6-20 landing fee traceable to flight not classes First class business economy

6-21 Segment Margin = Contribution margin - traceable fixed costs of a segment best gauge of the long- run profitability of a segment.

6-22 Traceable and Common Costs Fixed Costs TraceableCommon Don’t allocate common costs to segments.

6-23 Levels of Segmented Statements Webber, Inc., has two divisions.

6-24 Levels of Segmented Statements Cost of goods sold consists of variable mfg costs. Cost of goods sold consists of variable mfg costs. Fixed and variable costs are listed in separate sections. Fixed and variable costs are listed in separate sections. Our approach to segment reporting uses the contribution format.

6-25 Levels of Segmented Statements

6-26 Levels of Segmented Statements Common costs should not be allocated to the divisions. These costs would remain even if one of the divisions were eliminated.

6-27 Omission of Costs value chain Costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain. Product Customer R&D Design Manufacturing Marketing Distribution Service Business Functions Making Up The Value Chain

6-28 Inappropriate Methods of Allocating Costs Among Segments Segment 1 Segment 3 Segment 4 Inappropriate allocation base Segment 2 Failure to trace costs directly

6-29 Common Costs Segment 3 Segment 4 Segment 2 should not be arbitrarily allocated to segments 1.May make a profitable business segment appear to be unprofitable. 2.Allocating common fixed costs forces managers to be held accountable for costs they cannot control.

6-30 Companywide Income Statements Both U.S. GAAP and IFRS require absorption costing for external reports.

6-31 Variable Costing Variable versus Absorption Costing Absorption Costing Fixed manufacturing costs must be assigned to products to properly match revenues and costs. Fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced.

6-32 Segmented Financial Information Both U.S. GAAP and IFRS require publically traded companies to include segmented financial data in their annual reports. Global View

6-33 But Companies must report segmented results to shareholders using the same methods that are used for internal segmented reports.

6-34 This requirement motivates managers to avoid using the contribution approach for internal reporting purposes.

6-35 because if they did they would be required to: a.Share this sensitive data with the public. b. Reconcile these reports with applicable rules for consolidated reporting purposes.