1. Segment Reporting and Performance Evaluation
CHAPTER
Segment Reporting and Performance Evaluation

2. After studying this chapter, you should be able to:
Objectives
1. Discuss the differences between variable and absorption costing.
2. Explain how variable costing is useful in evaluating the performance of a manager.
3. Prepare a segmented income statement based on a variable-costing approach, and demonstrate how to use this format with activity-based costing to assess customer profitability.
After studying this chapter, you should be able to:

3. Objectives
4. Show how variable costing can be used in planning and control.

4. Variable costing assigns only variable manufacturing costs to the product.
Direct materials
Direct labor
Variable overhead

5. Absorption costing assigns all manufacturing costs to the product; this adds fixed overhead to the formula.
Direct materials
Direct labor
Variable overhead
Fixed overhead

6. Inventory Valuation Units in beginning inventory ---
Units produced 10,000
Units sold ($300 each) 8,000
Normal volume 10,000
Fixed costs:
Fixed overhead $250,000
Fixed selling and administrative 100,000
Variable cost per unit:
Direct materials $ 50
Direct labor 100
Variable overhead 50
Variable selling and administrative 10

7. Unit Cost Variable Absorption costing costing
Direct materials $ 50 $ 50
Direct labor
Variable overhead 50 50
Fixed overhead 25
$250,000
10,000

8. Unit Cost Variable Absorption costing costing
Direct materials $ 50 $ 50
Direct labor
Variable overhead 50 50
Fixed overhead 25
Total $200 $225

9. Variable-Costing Income Statement
Fairchild Company
Variable-Costing Income Statement
Sales $2,400,000
Less variable expenses:
Variable cost of goods sold $1,600,000
Variable selling and admin , ,680,000
Contribution margin $ 720,000
Less fixed expenses:
Fixed overhead $ 250,000
Fixed selling and admin , ,000
Net income $ 370,000

10. Absorption-Costing Income Statement
Fairchild Company
Absorption-Costing Income Statement
Sales $2,400,000
Less: Cost of goods sold 1,800,000
Gross margin $ 600,000
Less: Selling and administrative exp ,000
Net income $ 420,000
Variable costing net income $370,000
Fixed portion of ending inventory (2,000 units x $25) ,000
Absorption costing net income $420,000

11. Production, Sales, and Income RelationshipsIf
Then
Production > Sales Absorption NI > Variable NI
Production < Sales Absorption NI < Variable NI
Production = Sales Absorption NI = Variable NI 8 8

12. Data for Belnip, Inc., for years 2002, 2003, and 2004 follows:
Example
Data for Belnip, Inc., for years 2002, 2003, and 2004 follows:
Variable cost pr unit:
Direct materials $4.00
Direct labor 1.50
Variable overhead (estimated and actual) 0.50
Variable selling and administrative 0.25
Estimated fixed overhead was $150,000 each year. Normal production was 150,000 units and the sales price was $10. Fixed selling and administrative expenses were $50,000.

13. Variable-Costing Income Statement
Sales
Less variable expenses:
Variable cost of goods sold
Variable selling and admin.
Contribution margin
Less fixed expenses:
Fixed overhead
Fixed selling and admin.
Net income
$1,500.00
-87.50 $
-0.50 $
$1,000
-600
-25
$ 375
-150
-50
$ 367
$2,000
-1,200
-50
$ 750
-150
$ 550
BI $ 300
Cost of GM
GAFS $1,200
Less: EI
VCof GS $1,200
BI $ 0
Cost of GM 900
GAFS $900
Less: EI 0
VCof GS $900
BI $ 0
Cost of GM 900
GAFS $900
Less: EI 300
VCof GS $600

14. Absorption-Costing Income Statement
BI $ 350
Cost of GM 1,050
GAFS $1,400
Less: EI
Cof GS $1,400
Sales
Less: Cost of goods sold
Gross margin
Less: Selling and admin. exp.
Net income
$1,500.00
-1,050.00 $
87.50 $
$1,000
700
$ 300 75
$ 225
$2,000
1,400
$ 600
100
$ 500
BI $
Cost of GM 1,050
GAFS $1,050
Less: EI
Cof GS $1,050
BI $
Cost of GM 1,050
GAFS $1,050
Less: EI
Cof GS $ 700

15. Absorption costing income – Variable costing income = Fixed overhead x (Units produced – Units sold)
2004
$500,000 – $550,000 = $1 x (150,000 – 200,000)

16. If income performance is expected to reflect managerial performance, then managers have the right to expect--
As sales revenue increases from one period to the next, all other things being equal, income should increase.
As sales revenue decreases from one period to the next, all other things being equal, income should decrease.
As sales revenue remains unchanged from one period to the next, all other things being equal, income should remain unchanged.

17. Absorption-Costing Basis
Segment Reporting
Elcom, Inc.
Income Statement, 2004
Absorption-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less: Cost of goods sold 350, , ,000
Gross margin $ 50,000 $ -10,000 $ 40,000
Less: Selling and
administrative exp , , ,000
Net income or loss $ 20,000 $ -30,000 $ -10,000

18. Variable-Costing Basis
Elcom, Inc.
Income Statement, 2004
Variable-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less variable expenses:
Variable C of GS -300, , ,000
Variable S & A , , ,000
Contribution margin $ 95,000 $ 80,000 $175,000
Less direct fixed exp.:
Direct fixed overhead -30, , ,000
Direct S & A , , ,000
Segment margin $ 55,000 $ 55,000 $110,000
Less common fixed exp.:
Common fixed OH ,000
Common S & A ,000
Net income or loss $-10,000

19. Barton, Inc. Profit for Chain Stores Sales $4,725,000
Less: Discounts ,750
Net sales $4,331,250
Less: Cost of goods sold 2,520,000
Gross profit $1,811,250
Less: Shelf space -112,500
Shipping -157,500
EDI ,000
Profit $1,441,250

20. Barton, Inc. Independent Toy Stores Profit for Sales $2,625,000
Less: Cost of goods sold 1,400,000
Gross profit $1,225,000
Less: Commissions -131,250
Special packaging ,000
Profit $1,058,750

21. Barton, Inc. Profit for Fairs Sales $150,000
Less: Cost of goods sold ,000
Gross profit $ 70,000
Less: Fair expense -75,000
Design time -2,100
Setup ,000
Loss $ -8,100

22. Chapter Fifteen
The End