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

Chapter M4
Power Notes
Profit Reporting for Management Analysis
Learning Objectives
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
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Chapter M4
Power Notes
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.
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Two Costing Methods
Absorption Costing

Used for external financial reporting
 Includes direct materials, direct labor,
variable factory overhead, and fixed factory
overhead as part of total product cost
Variable Costing

Used for internal planning and decision
making
 Does not include fixed factory overhead as a
product cost
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Absorption Costing Compared to Variable Costing
Absorption Costing
Cost of Goods Manufactured
Direct
Materials
Cost of Goods Manufactured
Variable Costing
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Absorption Costing Compared to Variable Costing
Absorption Costing
Cost of Goods Manufactured
Direct
Materials
Direct
Labor
Cost of Goods Manufactured
Variable Costing
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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
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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
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Absorption Costing Compared to Variable Costing
Absorption Costing
Cost of Goods Manufactured
Direct
Materials
Direct
Labor
Variable
Factory OH
Cost of Goods Manufactured
Fixed
Factory OH
Expense
Variable Costing
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Units Manufactured Equal Units Sold
Variable Costing Income Statement
Sales (15,000 x $50)
Variable cost of goods sold (15,000 x $25)
Manufacturing margin
Variable selling and admin. expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
$150,000
Fixed selling and admin. expenses
50,000
Income from operations
$750,000
375,000
$375,000
75,000
$300,000
200,000
$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
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Units Manufactured Equal Units Sold
Variable Costing Income Statement
Sales (15,000 x $50)
Variable cost of goods sold (15,000 x $25)
Manufacturing margin
Variable selling and admin. expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
$150,000
Fixed selling and admin. expenses
50,000
Income from operations
$750,000
375,000
$375,000
75,000
$300,000
200,000
$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
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Units Manufactured Equal Units Sold
Variable Costing Income Statement
Sales (15,000 x $50)
Variable cost of goods sold (15,000 x $25)
Manufacturing margin
Variable selling and admin. expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
$150,000
Fixed selling and admin. expenses
50,000
Income from operations
$750,000
375,000
$375,000
75,000
$300,000
200,000
$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
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Units Manufactured Equal Units Sold
Variable Costing Income Statement
Sales (15,000 x $50)
Variable cost of goods sold (15,000 x $25)
Manufacturing margin
Variable selling and admin. expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
$150,000
Fixed selling and admin. expenses
50,000
Income from operations
$750,000
375,000
$375,000
75,000
$300,000
200,000
$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
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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
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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
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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
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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
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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
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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
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Units Manufactured Exceed Units Sold
Operating Income:
Absorption costing
Variable costing
Difference
$70,000
40,000
$30,000
Analysis:
Units manufactured
Units sold
Ending inventory units
Fixed cost per unit
Difference
15,000
12,000
3,000
x $10
$30,000
Why is absorption costing income higher
when units manufactured exceed units sold?
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Units Manufactured Are Less Than Units Sold
Variable Costing Income Statement
Sales (15,000 x $50)
Variable cost of goods sold:
Beginning inventory (5,000 x $25)
Variable cost of goods mfg. (10,000 x $25)
Manufacturing margin
Variable selling and admin. expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and admin. expenses
Income from operations
$750,000
$125,000
250,000
$150,000
50,000
375,000
$375,000
75,000
$300,000
200,000
$100,000
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Units Manufactured Are Less Than Units Sold
Variable Costing Income Statement
Sales (15,000 x $50)
Variable cost of goods sold:
Beginning inventory (5,000 x $25)
Variable cost of goods mfg. (10,000 x $25)
Manufacturing margin
Variable selling and admin. expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs (10,000 x $15)
Fixed selling and admin. expenses
Income from operations
$750,000
$125,000
250,000
$150,000
50,000
375,000
$375,000
75,000
$300,000
200,000
$100,000
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Units Manufactured Are Less Than Units Sold
Variable Costing Income Statement
Sales (15,000 x $50)
Variable cost of goods sold:
Beginning inventory (5,000 x $25)
Variable cost of goods mfg. (10,000 x $25)
Manufacturing margin
Variable selling and admin. expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and admin. expenses
Income from operations
$750,000
$125,000
250,000
$150,000
50,000
375,000
$375,000
75,000
$300,000
200,000
$100,000
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Units Manufactured Are Less Than Units Sold
Absorption Costing Income Statement
Sales (15,000 x $50)
Cost of goods sold:
Beginning inventory (5,000 x $35)
Cost of good manufactured (10,000 x $45)
Gross profit
Selling and admin. expenses
Income from operations
$750,000
$175,000
400,000
575,000
$175,000
125,000
$ 50,000
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Units Manufactured Are Less Than Units Sold
Absorption Costing Income Statement
Sales (15,000 x $50)
Cost of goods sold:
Beginning inventory (5,000 x $35)
Cost of good manufactured (10,000 x $45)
Gross profit
Selling and admin. expenses
Income from operations
$750,000
$175,000
400,000
575,000
$175,000
125,000
$ 50,000
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Units Manufactured Are Less Than Units Sold
Absorption Costing Income Statement
Sales (15,000 x $50)
Cost of goods sold:
Beginning inventory (5,000 x $35)
Cost of good manufactured (10,000 x $45)
Gross profit
Selling and admin. expenses
Income from operations
$750,000
$175,000
400,000
575,000
$175,000
125,000
$ 50,000
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Units Manufactured Are Less Than Units Sold
Operating Income:
Variable costing
Absorption costing
Difference
Analysis:
Units sold
Units manufactured
Ending inventory units
Fixed cost per unit
Difference
$100,000
50,000
$ 50,000
15,000
10,000
5,000
x $10
$50,000
Why is variable costing income higher when
units manufactured are less than units sold?
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Costing Effects on Operating Income
Units manufactured:
Equal units sold
Same operating income
Exceed units sold
Variable costing income
is less than absorption
costing income
Less than units sold
Variable costing income
is more than absorption
costing income
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Management’s Use of Costing Methods
Variable costing reports and absorption costing
reports are useful in the following situations:
1. Controlling costs
2. Pricing products
3. Planning production
4. Analyzing market segments
5. Analyzing contribution margins
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Sales Territory Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Sales Territory
For the Month Ended March 31, 2003
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Total
Contribution margin
Contribution margin ratio
Northern
Territory
$80,000
9,600
$70,400
Southern
Territory
$80,000
9,600
$70,400
$22,000
14,000
$36,000
$34,400
$19,000
11,000
$30,000
$40,400
43%
50.5%
How can the difference in contribution margin ratio be explained?
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Sales Territory Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Sales Territory
For the Month Ended March 31, 2003
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Total
Contribution margin
Contribution margin ratio
Northern
Territory
$80,000
9,600
$70,400
Southern
Territory
$80,000
9,600
$70,400
$22,000
14,000
$36,000
$34,400
$19,000
11,000
$30,000
$40,400
43%
50.5%
How can the difference in contribution margin ratio be explained?
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Sales Territory Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Sales Territory
For the Month Ended March 31, 2003
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Total
Contribution margin
Contribution margin ratio
Northern
Territory
$80,000
9,600
$70,400
Southern
Territory
$80,000
9,600
$70,400
$22,000
14,000
$36,000
$34,400
$19,000
11,000
$30,000
$40,400
43%
50.5%
How can the difference in contribution margin ratio be explained?
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Sales Territory Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Sales Territory
For the Month Ended March 31, 2003
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Total
Contribution margin
Contribution margin ratio
Northern
Territory
$80,000
9,600
$70,400
Southern
Territory
$80,000
9,600
$70,400
$22,000
14,000
$36,000
$34,400
$19,000
11,000
$30,000
$40,400
43%
50.5%
How can the difference in contribution margin ratio be explained?
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Product Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Product Line
For the Month Ended March 31, 2003
Gwenevere
Sales
$90,000
Variable cost of goods sold
10,800
Manufacturing margin
$79,200
Variable selling expenses:
Promotion costs
$ 27,000
Sales commissions
18,000
Total
$45,000
Contribution margin
$34,200
Contribution margin ratio
38%
Lancelot
$70,000
8,400
$61,600
$14,000
7,000
$21,000
$40,600
58%
How can the difference in contribution margin ratio be explained?
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Product Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Product Line
For the Month Ended March 31, 2003
Gwenevere
Sales
$90,000
Variable cost of goods sold
10,800
Manufacturing margin
$79,200
Variable selling expenses:
Promotion costs
$ 27,000
Sales commissions
18,000
Total
$45,000
Contribution margin
$34,200
Contribution margin ratio
38%
Lancelot
$70,000
8,400
$61,600
$14,000
7,000
$21,000
$40,600
58%
How can the difference in contribution margin ratio be explained?
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Product Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Product Line
For the Month Ended March 31, 2003
Gwenevere
Sales
$90,000
Variable cost of goods sold
10,800
Manufacturing margin
$79,200
Variable selling expenses:
Promotion costs
$ 27,000
Sales commissions
18,000
Total
$45,000
Contribution margin
$34,200
Contribution margin ratio
38%
Lancelot
$70,000
8,400
$61,600
$14,000
7,000
$21,000
$40,600
58%
How can the difference in contribution margin ratio be explained?
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Product Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Product Line
For the Month Ended March 31, 2003
Gwenevere
Sales
$90,000
Variable cost of goods sold
10,800
Manufacturing margin
$79,200
Variable selling expenses:
Promotion costs
$ 27,000
Sales commissions
18,000
Total
$45,000
Contribution margin
$34,200
Contribution margin ratio
38%
Lancelot
$70,000
8,400
$61,600
$14,000
7,000
$21,000
$40,600
58%
How can the difference in contribution margin ratio be explained?
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Salesperson Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Salesperson—Northern Territory
For the Month Ended March 31, 2003
Inez
Rodriquez
Tom
Ginger
Beth
Williams
$20,000
2,400
$17,600
$20,000
2,400
$17,600
$40,000 $80,000
4,800
9,600
$35,200 $70,400
$ 5,000
3,000
$ 8,000
$ 9,600
$ 5,000
3,000
$ 8,000
$ 9,600
$12,000 $22,000
8,000 14,000
$20,000 $36,000
$15,200 $34,400
Contribution margin ratio
48%
48%
38%
43%
Sales mix (% Lancelot sales)
50%
50%
0%
25%
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Contribution margin
Total
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Salesperson Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Salesperson—Northern Territory
For the Month Ended March 31, 2003
Inez
Rodriquez
Tom
Ginger
Beth
Williams
$20,000
2,400
$17,600
$20,000
2,400
$17,600
$40,000 $80,000
4,800
9,600
$35,200 $70,400
$ 5,000
3,000
$ 8,000
$ 9,600
$ 5,000
3,000
$ 8,000
$ 9,600
$12,000 $22,000
8,000 14,000
$20,000 $36,000
$15,200 $34,400
Contribution margin ratio
48%
48%
38%
43%
Sales mix (% Lancelot sales)
50%
50%
0%
25%
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Contribution margin
Total
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Salesperson Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Salesperson—Northern Territory
For the Month Ended March 31, 2003
Inez
Rodriquez
Tom
Ginger
Beth
Williams
$20,000
2,400
$17,600
$20,000
2,400
$17,600
$40,000 $80,000
4,800
9,600
$35,200 $70,400
$ 5,000
3,000
$ 8,000
$ 9,600
$ 5,000
3,000
$ 8,000
$ 9,600
$12,000 $22,000
8,000 14,000
$20,000 $36,000
$15,200 $34,400
Contribution margin ratio
48%
48%
38%
43%
Sales mix (% Lancelot sales)
50%
50%
0%
25%
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Contribution margin
Total
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Salesperson Profitability Analysis
Camelot Fragrance Company
Contribution Margin by Salesperson—Northern Territory
For the Month Ended March 31, 2003
Inez
Rodriquez
Tom
Ginger
Beth
Williams
$20,000
2,400
$17,600
$20,000
2,400
$17,600
$40,000 $80,000
4,800
9,600
$35,200 $70,400
$ 5,000
3,000
$ 8,000
$ 9,600
$ 5,000
3,000
$ 8,000
$ 9,600
$12,000 $22,000
8,000 14,000
$20,000 $36,000
$15,200 $34,400
Contribution margin ratio
48%
48%
38%
43%
Sales mix (% Lancelot sales)
50%
50%
0%
25%
Sales
Variable cost of goods sold
Manufacturing margin
Variable selling expenses:
Promotion costs
Sales commissions
Contribution margin
Total
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Analyzing Contribution Margins
Quantity factor
The difference between the actual quantity
sold and the planned quantity sold, multiplied
by the planned unit sales price or unit cost.
Unit price or unit cost factor
The difference between the actual unit price or
unit cost and the planned unit price or unit
cost, multiplied by the actual quantity sold.
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Chapter M4
Power Notes
Profit Reporting for Management Analysis
This is the last slide in Chapter M4.
Note: To see the first slide, type 1 and press Enter.
C4 - 42