1. 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

2. 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
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3. 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

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

5. 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

6. 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

7. 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

8. 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

9. 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
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

10. 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
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

11. 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
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

12. 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
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

13. 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
Income from operations $ 40,000

14. 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
Income from operations $ 40,000

15. 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
Income from operations $ 40,000

16. 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

17. 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] ,000
Income from operations $ 70,000

18. 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] ,000
Income from operations $ 70,000

19. 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?

20. 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
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
Income from operations $100,000

21. 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
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
Income from operations $100,000

22. 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
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
Income from operations $100,000

23. 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
Gross profit $175,000
Selling and admin. expenses 125,000
Income from operations $ 50,000

24. 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
Gross profit $175,000
Selling and admin. expenses 125,000
Income from operations $ 50,000

25. 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
Gross profit $175,000
Selling and admin. expenses 125,000
Income from operations $ 50,000

26. 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?

27. 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

28. 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

29. 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?

30. 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?

31. 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?

32. 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?

33. 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?

34. 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?

35. 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?

36. 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?

37. 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%

38. 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%

39. 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%

40. 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%

41. 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

42. Profit Reporting for Management Analysis
Power Notes
Chapter M4
Profit Reporting for Management Analysis
This is the last slide in Chapter M4.
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