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Learning Objectives

Power Notes. Chapter M4. Profit Reporting for Management Analysis. 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. Learning Objectives.

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Learning Objectives

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  1. Power Notes ChapterM4 Profit Reporting for Management Analysis 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 Learning Objectives 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 Note: To select a topic, type the slide # and press Enter.

  3. Two Costing Methods Absorption Costing • Used for external financial reporting • Includes direct materials, direct labor, variable factory overhead, and fixed factoryoverhead as part of total product cost • Used for internal planning and decision making • Does not include fixed factory overheadas a product cost Variable Costing

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

  5. 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 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 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 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. 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 50,000 200,000 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. 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 50,000 200,000 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. 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 50,000 200,000 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. 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 50,000 200,000 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. 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 50,000 200,000 Income from operations $ 40,000

  14. 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 50,000 200,000 Income from operations $ 40,000

  15. 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 50,000 200,000 Income from operations $ 40,000

  16. 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. 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

  18. 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

  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 Difference $30,000 Why is absorption costing income higher when units manufactured exceed units sold?

  20. 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) 250,000 375,000 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 50,000 200,000 Income from operations $100,000

  21. 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) 250,000 375,000 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 50,000 200,000 Income from operations $100,000

  22. 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) 250,000 375,000 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 50,000 200,000 Income from operations $100,000

  23. 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) 400,000 575,000 Gross profit $175,000 Selling and admin. expenses 125,000 Income from operations $ 50,000

  24. 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) 400,000 575,000 Gross profit $175,000 Selling and admin. expenses 125,000 Income from operations $ 50,000

  25. 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) 400,000 575,000 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 costingreports and absorption costingreports 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 CompanyContribution Margin by Sales TerritoryFor 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 CompanyContribution Margin by Sales TerritoryFor 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 CompanyContribution Margin by Sales TerritoryFor 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 CompanyContribution Margin by Sales TerritoryFor 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 CompanyContribution Margin by Product LineFor 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 CompanyContribution Margin by Product LineFor 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 CompanyContribution Margin by Product LineFor 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 CompanyContribution Margin by Product LineFor 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 CompanyContribution Margin by Salesperson—Northern TerritoryFor 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 CompanyContribution Margin by Salesperson—Northern TerritoryFor 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 CompanyContribution Margin by Salesperson—Northern TerritoryFor 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 CompanyContribution Margin by Salesperson—Northern TerritoryFor 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 quantitysoldand the planned quantity sold, multiplied by the planned unit sales priceor unit cost. The difference between the actual unit priceor unit cost and the planned unit priceor unit cost, multiplied by the actual quantity sold. Unit price or unit cost factor

  42. Note: To see the first slide, type 1 and press Enter. Power Notes Chapter M4 Profit Reporting for Management Analysis This is the last slide in Chapter M4.

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