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Click to edit Master title style
5 Click to edit Master title style Click to edit Master text styles Second level Third level Fourth level Fifth level Variable Costing for Management Analysis Student Version 5/28/2018 1
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1 Describe and illustrate reporting income from operations under absorption and variable costing. 5-2 2
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1 Absorption Costing Absorption costing is required under generally accepted accounting principles for financial statements distributed to external users.
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1 Variable Costing For internal use in decision making, managers often use variable costing.
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Assume that 15,000 units are manufactured and sold at a price $50.
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1 Exhibit 1 Absorption Costing Income Statement
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1 Contribution Margin Note in Exhibit 2 that the variable selling and administrative expenses are deducted from the manufacturing margin to yield the contribution margin.
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1 Exhibit 2 Variable Costing Income Statement
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Income from Operations When Units Manufactured Exceed Units Sold
1 Income from Operations When Units Manufactured Exceed Units Sold Assume that in the preceding example only 12,000 units of the 15,000 units manufactured were sold. Examine Exhibit 3 and you will see that income from operations using variable costing is $40,000 while absorption costing provides an income of $70,000.
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1 Exhibit 5 Units Manufactured Exceed Units Sold Exhibit 3 (continued)
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1 Exhibit 5 Units Manufactured Exceed Units Sold Exhibit 3
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1 Income from Operations When Units Manufactured Are Less than Units Sold Assume that 5,000 units of inventory were on hand at the beginning of a period, 10,000 units were manufactured during the period, and 15,000 units were sold at $50 per unit.
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1 Exhibit 5 Units Manufactured Are Less Than Units Sold Exhibit 4
Exhibit 5 Units Manufactured Are Less Than Units Sold Exhibit 4 (continued)
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1 Exhibit 5 Units Manufactured Are Less Than Units Sold Exhibit 4
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2 Describe and illustrate the effects of absorption and variable costing on analyzing income from operations. 5-16
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Frand Manufacturing Company
2 Frand Manufacturing Company Frand Manufacturing Company has no beginning inventory and sales are estimated to be 20,000 units at $75 per unit, regardless of production levels.
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2 Proposal 1: 20,000 Units to be Manufactured and Sold
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2 Proposal 2: 25,000 Units to be Manufactured and 20,000 Units to be Sold
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2 Exhibit 5 Absorption Costing Income Statements for Two Production Levels Exhibit 5
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Frand Manufacturing Company
2 Frand Manufacturing Company Now, assume that Frand Manufacturing uses variable costing and has sales of 20,000 units. Exhibit 6 illustrates that net income remains a constant $200,000 at the three levels of production.
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2 Variable Income Statements for Three Production Levels Exhibit 6
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3 Describe management’s use of absorption and variable costing. 5-23
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3 Pricing Products Many factors enter into determining the selling price of a product. However, the cost of making the product is significant in all pricing decisions. In the short run, fixed costs cannot be avoided.
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3 Pricing Products In the long run, a company must set its selling price high enough to cover all costs and expenses (variable and fixed) and generate income.
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Analyzing Market Segments
3 Analyzing Market Segments A market segment is a portion of a business that can be analyzed using sales, costs, and expenses to determine its profitability.
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4 Use variable costing for analyzing market segments, including product, territories, and salespersons segments. 5-27
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Analyzing Market Segments
4 Analyzing Market Segments Camelot Fragrance Company manufactures and sells the Gwenevere perfume for women and the Lancelot cologne line for men. The inventories are negligible.
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Sales Territory Profitability Analysis
4 Sales Territory Profitability Analysis Sales territory profitability analysis may lead management to: Reduce costs in lower-profit sales territories Increase sales efforts in higher-profit territories
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Sales Territory Profitability Analysis
4 Sales Territory Profitability Analysis To illustrate the analysis of profit differences by sales territory, Exhibit 8 shows the variable costing income statements by sales territories for Camelot Fragrance Company.
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4 Contribution Margin by Sales Territory Report Exhibit 8
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Sales Territory Profitability Analysis
4 Sales Territory Profitability Analysis Contribution Margin Ratio Contribution Margin Sales = Northern territory: 43% ($34,400/$80,000) Southern territory: 50.5% ($40,400/$80,000)
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4 Sales mix, sometimes referred to as product mix, is defined as the relative distribution of sales among the various products sold.
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4 Contribution Margin by Product Line Report Exhibit 9
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4 Contribution Margin by Salesperson Report Exhibit 10
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5 Use variable costing for analyzing and explaining changes in contribution margin as a result of quantity and price factors. 5-36
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Variable Cost Quantity Factor
5 Quantity factor is the effect of a difference in the number of units sold, assuming no change in unit sales price or unit cost. Sales Quantity Factor Actual Units Sold Planned Units of Sales Planned Sales Price = – × Variable Cost Quantity Factor Planned Units of Sales Actual Units Sold Planned Unit Cost = – ×
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5 Unit price factor or unit cost factor is the effect of a difference in unit sales price or unit cost on the number of units sold. Unit Price Factor Actual Selling Price per Unit Planned Selling Price per Unit Actual Units Sold = – × Unit Cost Factor Planned Cost per Unit Actual Cost per Unit Actual Units Sold = – ×
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Contribution Margin Analysis
5 Contribution Margin Analysis
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5 Exhibit 12 Contribution Margin Analysis Report
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Describe and illustrate the use of variable costing for service firms.
6 Describe and illustrate the use of variable costing for service firms. 5-41
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6 Exhibit 14 Variable Costing Income Statement
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6 Blue Skies Airlines
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6 Contribution Margin by Segment Report—Service Firm Exhibit 15
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6 Contribution Margin Analysis Report—Service Company Exhibit 16 — —
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