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Objectives
1. Describe and illustrate income reporting After studying absorption costing. this under variable costing and chapter, you should 2. Describe and illustrate income analysis under variable costing be able to: and absorption costing. 3. Describe and illustrate managements use of variable costing and absorption costing for controlling costs, pricing products, planning production, analyzing market segments, and analyzing contribution margins.
Objectives
4. Illustrate contribution margin reporting for products, territories, and salespersons. 5. Explain changes in contribution margin as a result of quantity and price factors. 6. Describe and illustrate contribution margin reporting and analysis for service firms.
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
Used for internal planning and decision making Does not include fixed factory overhead as a product cost
Variable Costing
$150,000
50,000 200,000 $100,000
$525,000 0
525,000 $225,000 125,000 $100,000
When the number of units manufactured equals the number of units sold, income from operations will be the same under both methods.
Why is absorption costing income higher when units manufactured exceed units sold?
$150,000 50,000
200,000 $100,000
$150,000 50,000
200,000 $100,000
Why is variable costing income higher when units manufactured are less than units sold?
Analysis: Units sold Units manufactured Ending inventory units Fixed cost per unit Difference
IF THEN
IF THEN
Total Cost Manufacturing costs: Variable $ 875,000 Fixed 400,000 Total costs $1,275,000 Selling and administrative exp. Variable ($5 per unit sold) $ 100,000 Fixed 100,000 Total expenses $ 200,000
Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units 25,000 Units Manufactured Manufactured $1,500,000 $1,500,000
Sales Cost of goods sold: Cost of goods manufactured (20,000 units x $55)
$1,100,000
Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units 25,000 Units Manufactured Manufactured $1,500,000 $1,500,000
Sales Cost of goods sold: Cost of goods manufactured (20,000 units x $55) (25,000 units x $51)
$1,100,000
$1,275,000
Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units 25,000 Units Manufactured Manufactured $1,500,000 $1,500,000
Sales Cost of goods sold: Cost of goods manufactured (20,000 units x $55) (25,000 units x $51) Less ending inventory: (5,000 units x $51) Cost of goods sold Gross profit Selling and administrative expenses ($100,000 + $100,000) Income from operations
$1,100,000
$1,275,000
255,000 $1,020,000 $ 480,000 200,000 $ 280,000
Frand Manufacturing Company Variable Costing Income Statements 20,000 Units 25,000 Units Manufactured Manufactured $1,500,000 $1,500,000
Sales Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units x $35) $ 700,000 (25,000 units x $35)
$ 875,000
Frand Manufacturing Company Variable Costing Income Statements 20,000 Units 25,000 Units Manufactured Manufactured $1,500,000 $1,500,000
Sales Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units x $35) $ 700,000 (25,000 units x $35) Less ending inventory: (0 units x $35) 0 (5,000 units x $35) Variable cost of goods sold $ 700,000 Manufacturing margin $ 800,000
Continued
$ 875,000
Frand Manufacturing Company Variable Costing Income Statements 20,000 Units 25,000 Units Manufactured Manufactured
Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Total fixed costs Income from operations
$ 800,000
100,000 $ 700,000 $ 400,000 100,000 $ 500,000 $ 200,000
$ 800,000
100,000 $ 700,000 $ 400,000 100,000 $ 500,000 $ 200,000
What would be the income from operations if the firm manufactured 30,000 units?
Frand Manufacturing Company Variable Costing Income Statements 30,000 Units Manufactured
Sales Variable cost of goods sold: Variable cost of goods manufactured: (30,000 units x $35) Less ending inventory: (10,000 units x $35) Variable cost of goods sold Manufacturing margin
Continued
$1,500,000
Frand Manufacturing Company Variable Costing Income Statements 30,000 Units Manufactured
Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Total fixed costs Income from operations
$ 800,000
100,000 $ 700,000 $ 400,000
MANAGEMENT
MANAGEMENT
DECISIONS
Controlling Costs
Pricing
Planning Production
Pricing Products
Pricing Products
That is correct. The pricing decision should be based upon making the best use of our existing capacity.
Pricing Products
Even in the long-run where plant capacity can be changed, the selling prices of our products must cover all costs and provide a reasonable income.
Northern Southern Territory Territory Sales: Gwenevere Lancelot Total territory sales Variable production costs: Gwenevere (12% of sales) Lancelot (12% of sales) Total variable production cost by territory $60,000 20,000 $80,000 $ 7,200 2,400 $ 9,600 $30,000 50,000 $80,000 $ 3,600 6,000 $ 9,600
Continued
Northern Southern Territory Territory Promotion costs: Gwenevere (30% of sales) Lancelot(20% of sales) Total variable production cost by territory Sales commissions: Gwenevere (20% of sales) Lancelot (12% of sales) Total sales commission by territory $18,000 4,000 $22,000 $12,000 2,000 $14,000 $ 9,000 10,000 $19,000 $ 6,000 5,000 $11,000
Camelot Fragrance Company Contribution Margin by Sales Territory For the Month Ended March 31, 2006
Northern Territory Southern Territory
Sales Variable cost of goods sold Manufacturing margin Variable selling expenses: Promotion costs Sales commissions Total Contribution margin
Contribution margin ratio
Camelot Fragrance Company Contribution Margin by Product Line For the Month Ended March 31, 2006 Gwenevere Lancelot
Sales Variable cost of goods sold Manufacturing margin Variable selling expenses: Promotion costs Sales commissions Total Contribution margin
Contribution margin ratio
Camelot Fragrance Company Contribution Margin by SalespersonNorthern Territory For the Month Ended March 31, 2003
Inez Rodriquez Sales Variable cost of goods sold Manufacturing margin Variable selling expenses: Promotion costs Sales commissions Contribution margin Contribution margin ratio Sales mix (% Lancelot sales) $20,000 2,400 $17,600 $ 5,000 3,000 $ 8,000 $ 9,600 48% 50% Tom Ginger $20,000 2,400 $17,600 $ 5,000 3,000 $ 8,000 $ 9,600 48% 50% Beth Williams $40,000 4,800 $35,200 $12,000 8,000 $20,000 $15,200 38% 0% Total $80,000 9,600 $70,400 $22,000 14,000 $36,000 $34,400 43% 25%
Sales
$937,500 $800,000 $137,500 $425,000 $350,000 $ 75,000 162,500 125,000 37,500 $587,500 $475,000 $112,500 $350,000 $325,000 $ 25,000
Continued
Planned
100,000 $8.00 $3.50 $1.25
Blue Skies Airlines Inc. Contribution Margin and Income from Operations Report for the Month Ended April 30, 2006
Revenue Variable costs: Fuel expense Wages expense Food and beverage service exp. Selling expenses Contribution margin Fixed costs: Depreciation expense Rental expense Income from operations
13,900,000 $ 5,338,000
$3,600,000 800,000
4,400,000 $ 938,000
Blue Skies Airlines Inc. Contribution Margin by Route ReportChicago/Atlanta for the Month Ended April 30, 2006
Revenue Variable costs: Fuel expense Wages expense Food and beverage service exp. Selling expenses Contribution margin
4,800,000 $1,600,000
Blue Skies Airlines Inc. Contribution Margin by Route ReportAtlanta/Los Angeles for the Month Ended April 30, 2006
Revenue Variable costs: Fuel expense Wages expense Food and beverage service exp. Selling expenses Contribution margin
5,275,000 $2,250,000
Blue Skies Airlines Inc. Contribution Margin by Route ReportLos Angeles/Chicago for the Month Ended April 30, 2006
Revenue Variable costs: Fuel expense Wages expense Food and beverage service exp. Selling expenses Contribution margin
3,825,000 $1,488,000
Blue Skies Airlines Inc. Contribution MarginChicago/Atlanta ActualMay PlannedMay Revenue Less variable expenses: Fuel expense Wages expense Food and beverage service exp. Selling expenses and commiss. Total Contribution margin Contribution Margin Ratio
Continued
Blue Skies Airlines Inc. Contribution MarginChicago/Atlanta ActualMay PlannedMay Number of miles flown Number of passengers flown Per unit: Ticket price Fuel expense Wages expense Food and beverage service exp. Selling expenses 56,000 20,000 $380 22 30 15 110 56,000 16,000 $400 20 30 15 110
Increase in revenue attributed to: Quantity factor: Increase in the number of tickets sold in May (4,000 x $400) $1,600,000 Price factor: Decrease in the ticket price in May ($20 x 20,000) (400,000) Net increase in revenue $1,200,000
Continued
Increase in fuel costs attributed to: Unit cost factor: Increase in unit cost in May times number of miles flown ($2 x 56,000)
$112,000
Continued
Increase in food and beverage service costs attributed to: Quantity factor: Increase in number of tickets sold in May times planned unit cost in May (4,000 x $15.00)
Continued
$60,000
Increase in selling costs and commissions attributed to: Quantity factor: Increase in number of tickets sold in May times planned unit cost in May (4,000 x $110)
Continued
$440,000
Summary: Net increase in revenue Net increase in fuel cost Net increase in food and beverage service costs Net increase in selling costs Increase in contribution margin
Chapter 19
The End