1. GLENCOE / McGraw-Hill

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

3. 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.

4. 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.
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1124

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

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

7. 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.
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1124

8. 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
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1125

9. Income Statement Using Direct Costing
Davis Manufacturing Corporation
Income Statement
Year Ended December 31, 20--
Sales (8,000 $35) ,000.00
Cost of Goods Sold
Variable Manufacturing Costs (10,000 $15) ,000.00
Less Finished Goods Inventory, Dec. 31 $15) ,000.00
Costs of Goods Sold ,000.00
Manufacturing Margin ,000.00
Variable Selling and Administrative Expenses
(8000 $3) ,000.00
Marginal Income on Sales ,000.00
Fixed Costs and Expenses
Fixed Manufacturing Costs ,000.00
Fixed Selling and Administrative Expenses , ,000.00
Net Income ,000.00
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1125
Only variable manufacturing costs are included

10. 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.
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1126

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

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

13. 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.
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14. 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
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1128

15. 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.

16. 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

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