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Variable Costing and Segment Reporting: Tools for Management – Chapter 6

Variable Costing and Segment Reporting: Tools for Management – Chapter 6. Introduction to Managerial Accounting , Brewer , Garrison,Noreen Power Points from website - a dapted by Cynthia Fortin, CPA, CMA. http://highered.mheducation.com/sites/0078025419/student_view0/chapter12/index.html.

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Variable Costing and Segment Reporting: Tools for Management – Chapter 6

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  1. Variable Costing and Segment Reporting: Tools for Management – Chapter 6 Introduction to ManagerialAccounting, Brewer, Garrison,Noreen Power Points fromwebsite - adapted by Cynthia Fortin, CPA, CMA http://highered.mheducation.com/sites/0078025419/student_view0/chapter12/index.html

  2. ProductCosts Direct Materials ProductCosts Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead PeriodCosts PeriodCosts Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing vs Absorption Costing VariableCosting AbsorptionCosting

  3. Absorption costing DM+DL+ V OH+ FOH units produced = Unit product Cost Variable costing DM+DL+ V OH units produced = Unit product Cost

  4. Unit Cost Computations Harvey Company produces a single product with the following information available:

  5. Unit Cost Computations Unit product cost is determined as follows:

  6. 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.

  7. Contribution margin = Sales – Variable expenses. Variable Costing Contribution Format Income Statement

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

  9. Comparing the Two Methods 5000*$10 5000*$6

  10. Summary of Key Insights

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

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

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

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

  15. Heating a Carrefour store is common to all departments

  16. First class business landing fee traceable to flight not classes economy

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

  18. Don’t allocate common costs to segments. Traceable Common Traceable and Common Costs Fixed Costs

  19. Levels of Segmented Statements Webber, Inc., has two divisions.

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

  21. Levels of Segmented Statements

  22. 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.

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

  24. Inappropriate allocation base Failure to trace costs directly Segment 1 Inappropriate Methods of Allocating Costs Among Segments Segment 2 Segment 3 Segment 4

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

  26. Companywide Income Statements Both U.S. GAAP andIFRS require absorption costingfor external reports.

  27. Fixed manufacturingcosts must be assignedto products to properlymatch revenues andcosts. Fixed manufacturing costs are capacity costsand will be incurredeven if nothing isproduced. VariableCosting AbsorptionCosting Variable versus Absorption Costing

  28. Segmented Financial Information Both U.S. GAAP and IFRS require publically traded companies to includesegmented financial data in their annual reports.

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

  30. This requirement motivates managers to avoid using the contribution approach for internal reporting purposes.

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

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