1 variable costing for management analysis 20. 2 absorption costing under absorption costing, all...
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Variable Variable Costing for Costing for
Management Management AnalysisAnalysis
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Absorption Costing
Under absorption costing, all manufacturing costs are
included in finished goods and remain there as an asset until
the goods are sold.
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Absorption costing is necessary in determining
historical costs for financial reporting to external users
and for tax reporting.
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Variable costing (also called direct costing) may be more
useful to management in making decisions. In variable
costing, the cost of goods manufactured is composed only of variable manufacturing costs.
Variable Costing 20-1
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Variable Costing
Absorption Costing
Cost of Goods ManufacturedCost of Goods Manufactured
Cost of Goods ManufacturedCost of Goods Manufactured
DirectDirectMaterialsMaterials
DirectDirectLaborLabor
VariableVariableFactory OHFactory OH
FixedFixedFactory OHFactory OH
Period ExpensePeriod Expense
Costs of Goods Manufactured Comparison
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Variable Costing Income Statement Compared to Absorption Costing Income Statement
Assume that Belling Co. manufactured 15,000 units at the following costs:
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20-1Variable Costing Income Statement
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20-1Absorption Costing Income Statement
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The absorption costing income statement does not distinguish between
variable and fixed costs. All manufacturing costs are included in the
cost of good sold. Deducting cost of goods sold from sales yields gross
profit. Deducting selling and administrative expenses then yields
income from operations.
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Example Exercise 20-1
Leone Company has the following information for March:
Determine the March (a) manufacturing margin, (b) contribution margin, and (c) income from operations for Leone Company.
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Sales $450,000Variable cost of goods sold 220,000Fixed manufacturing costs 80,000Variable selling and administrative expenses 50,000Fixed selling and administrative expenses 35,000
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Follow My Example 20-1
For Practice: PE 20-1A, PE 20-1B
(a) $230,000 ($450,000 – $220,000)
(b)$180,000 ($230,000 – $50,000)
(c) $65,000 ($180,000 – $80,000 – $35,000)
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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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Proposal 1: 20,000 Units to be Manufactured and Sold
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Proposal 2: 25,000 Units to be Manufactured; 20,000 Units to be Sold
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20-2Absorption Costing Income Statements for Two Production Levels
$35V 20F$55
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20-2Absorption Costing Income Statements for Two Production Levels
$35V 16F$51
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20-2
The $80,000 increase in income from operations would
be caused by allocating the fixed manufacturing costs of
$400,000 over a greater number of units of production.
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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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20-2Variable Costing Income Statements for Two Production Levels
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Example Exercise 20-4
Variable costs are $100 per unit, and fixed costs are $50,000. Sales are estimated to be 4,000 units. (a) How much would absorption costing income from operations differ between a plan to produce 4,000 units and a plan to produce 5,000 units? (b) How much would variable costing income from operations differ between the two production plans?
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Follow My Example 20-4
For Practice: PE 20-4A, PE 20-4B
(a) $10,000 greater in producing 5,000 units 4,000 units x ($12.50 – $10.00), or [1,000 units x ($50,000/5,000 units)].
(b) There would be no difference in variable costing income from operations between the two plans.
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Describe and illustrate management’s use of variable
costing and absorption costing for controlling costs, pricing products,
planning production, analyzing contribution margins, and
analyzing market segments.
Objective 3Objective 3Objective 3Objective 3
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Controllable and Noncontrollable Costs
For a specific level of management, controllable costs are costs that can be influenced
by management at that level, and noncontrollable costs are
costs that another level of management controls.
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Pricing Products
Many factors enter into determining the selling price of a product. The cost of making the product is clearly significant. In the short run, pricing decisions
should be based upon making the best use of existing manufacturing
facilities.
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In the long run, plant capacity can be increased or decreased. If a
business is to continue operating, the selling prices of its products
must cover all costs and provide a reasonable income.
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Analyzing Contribution Margins
Managers can plan and control operations by
evaluating the differences between planned and actual
contribution margin.
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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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Use variable costing for analyzing market
segments including product, territories, and salespersons segments.
Objective 4Objective 4Objective 4Objective 4
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Camelot Fragrance Company manufactures and sells the
Gwenevere perfume for women and the Lancelot cologne line for men.
The inventories are negligible.
Analyzing Market Segments 20-4
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20-4Camelot Fragrance Company
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20-4Contribution Margin by Sales Territory Report
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Sales mix, sometimes referred to as product mix, is defined as the relative distribution of
sales among the various products sold.
Sales Mix 20-4
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Product Profitability Analysis
Some products are more profitable than others due to differences with respect to
pricing, manufacturing costs, advertising support, or salesperson
support. Exhibit 9 shows the contribution margin by product for
Camelot Fragrance Company.
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20-4Contribution Margin by Product Line Report
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Salesperson Profitability Analysis
Sales managers may wish to evaluate the performance of salespersons.
This may be done with a report that shows contribution margin by
salesperson. Such a report is shown in Exhibit 10 for the Northern
Territory salespersons.
20-4
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20-4Contribution Margin by Salesperson Report
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Example Exercise 20-5
The following data are for Moss Creek Apparel:
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East WestSales volume (units):
Shirts 6,000 5,000Shorts 4,000 8,000
Sales price:Shirts $ 12 $ 13Shorts $ 16 $ 18
Variable cost per unit:Shirts $ 7 $ 7Shorts $ 10 $ 10
Determine the contribution margin for (a) Shorts and (b) the West Region.
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Follow My Example 20-5
For Practice: PE 20-5A, PE 20-5B
(a) $88,000 [4,000 units x ($16 – $10)] + [8,000 units x ($18 – $10)]
(b) $94,000 [5,000 units x ($13 – $7)] + [8,000 units x ($18 – $10)]
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20-4