1 / 64

Chapter 19

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. . Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 19. Profit Reporting for Management Analysis.

matty
Download Presentation

Chapter 19

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 19 Profit Reporting for Management Analysis Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

  2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

  3. Objectives 1.Describe and illustrate income reporting under variable costing and absorption costing. 2.Describe and illustrate income analysis under variable costing and absorption costing. 3.Describe and illustrate management’s use of variable costing and absorption costing for controlling costs, pricing products, planning production, analyzing market segments, and analyzing contribution margins. After studying this chapter, you should be able to:

  4. 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.

  5. 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

  6. Two Costing Methods Variable Costing • Used for internalplanning and decision making • Does not include fixed factory overheadas a product cost

  7. Direct Materials Direct Labor Variable Factory OH Fixed Factory OH Period Expense Absorption Costing Compared to Variable Costing Absorption Costing Cost of Goods Manufactured Cost of Goods Manufactured Variable Costing

  8. Units Manufactured Equal Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold: Variable cost of goods mfg. (15,000 x $25) $375,000 Less ending inventory 0 Variable cost of goods sold 375,000 Manufacturing margin $375,000 Variable selling and administrative expenses (15,000 x $5) 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and administrative expenses 50,000 200,000 Income from operations $100,000

  9. Units Manufactured Equal Units Sold Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold: Cost of goods manufactured (15,000 x $35) $525,000 Less ending inventory 0 Cost of goods sold 525,000 Gross profit $225,000 Selling and administrative expenses ($75,000 + $50,000) 125,000 Income from operations $100,000 Income from operations $100,000 When the number of units manufactured equals the number of units sold, income from operations will be the same under both methods.

  10. 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 manufactured (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

  11. Absorption Costing Income Statement Units Manufactured Exceed Units Sold Sales (12,000 x $50) $600,000 Cost of goods sold: Cost of goods manufactured (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 administrative expenses [(12,000 x $5) + $50,000] 110,000 Income from operations $ 70,000

  12. Units Manufactured Exceed Units Sold Operating Income: Absorption costing $70,000 Variable costing 40,000 Difference $30,000 Why is absorption costing income higher when units manufactured exceed units sold?

  13. 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

  14. 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 manufactured (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

  15. 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 manufactured (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

  16. 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 Cost of goods sold 575,000 Gross profit $175,000 Selling and administrative expenses ($75,000 + $50,000) 125,000 Income from operations $ 50,000

  17. Units Manufactured Are Less Than Units Sold Operating Income: Variable costing $100,000 Absorption costing 50,000 Difference $ 50,000 Why is variable costing income higher when units manufactured are less than units sold?

  18. Operating Income: Variable costing $100,000 Absorption costing 50,000 Difference $ 50,000 Units Manufactured Are Less Than Units Sold Analysis: Units sold 15,000 Units manufactured 10,000 Ending inventory units 5,000 Fixed cost per unit x $10 Difference $50,000

  19. IF Units Sold <Units produced THEN Variable Costing <Absorption Costing Income Income

  20. IF Units Sold >Units produced THEN Variable Costing >Absorption Costing Income Income

  21. Income Analysis Under Variable Costing and Absorption Costing Frand Manufacturing Company has no beginning inventory and sales are estimated to be 20,000 units at $75 per unit, regardless of production levels.

  22. Total Cost Unit Cost Manufacturing costs: Variable $ 700,000 $35 Fixed 400,000 20 Total costs $1,100,000 $55 Selling and administrative exp. Variable ($5 per unit sold) $ 100,000 Fixed 100,000 Total expenses $ 200,000 Income Analysis Under Variable Costing and Absorption Costing Proposal 1: 20,000 Units to Be Manufactured and Sold

  23. Total Cost Unit Cost Manufacturing costs: Variable $ 875,000 $35 Fixed 400,000 16 Total costs $1,275,000 $51 Selling and administrative exp. Variable ($5 per unit sold) $ 100,000 Fixed 100,000 Total expenses $ 200,000 Income Analysis Under Variable Costing and Absorption Costing Proposal 2: 25,000 Units to Be Manufactured; 20,000 Units to Be Sold

  24. $35 + ($400,000 ÷ 20,000) Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Cost of goods sold: Cost of goods manufactured (20,000 units x $55) $1,100,000

  25. $35 + ($400,000 ÷ 25,000) Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Cost of goods sold: Cost of goods manufactured (20,000 units x $55) $1,100,000 (25,000 units x $51) $1,275,000

  26. Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Cost of goods sold: Cost of goods manufactured (20,000 units x $55) $1,100,000 (25,000 units x $51) $1,275,000 Less ending inventory: (5,000 units x $51) 255,000 Cost of goods sold $1,100,000$1,020,000 Gross profit $ 400,000 $ 480,000 Selling and administrative expenses ($100,000 + $100,000) 200,000 200,000 Income from operations $ 200,000 $ 280,000

  27. Now, assume that Frand Manufacturing uses variable costing.

  28. Direct materials, direct labor, and variable manufacturing overhead only. Frand Manufacturing Company Variable Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units x $35) $ 700,000 (25,000 units x $35) $ 875,000

  29. Frand Manufacturing Company Variable Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units x $35) $ 700,000 (25,000 units x $35) $ 875,000 Less ending inventory: (0 units x $35) 0 (5,000 units x $35) 175,000 Variable cost of goods sold $ 700,000$ 700,000 Manufacturing margin $ 800,000 $ 800,000 Continued

  30. Frand Manufacturing Company Variable Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Manufacturing margin $ 800,000 $ 800,000 Variable selling and administrative expenses 100,000 100,000 Contribution margin $ 700,000$ 700,000 Fixed costs: Fixed manufacturing costs $ 400,000 $ 400,000 Fixed selling and administrative expenses 100,000 100,000 Total fixed costs $ 500,000$ 500,000 Income from operations $ 200,000 $ 200,000

  31. What would be the income from operations if the firm manufactured 30,000 units?

  32. Frand Manufacturing Company Variable Costing Income Statements 30,000 Units Manufactured Sales $1,500,000 Variable cost of goods sold: Variable cost of goods manufactured: (30,000 units x $35) $1,050,000 Less ending inventory: (10,000 units x $35) 350,000 Variable cost of goods sold $ 700,000 Manufacturing margin $ 800,000 Continued

  33. Frand Manufacturing Company Variable Costing Income Statements 30,000 Units Manufactured Manufacturing margin $ 800,000 Variable selling and administrative expenses 100,000 Contribution margin $ 700,000 Fixed costs: Fixed manufacturing costs $ 400,000 Fixed selling and administrative expenses 100,000 Total fixed costs $ 500,000 Income from operations $ 200,000

  34. 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

  35. Absorption Costing and Variable Costing MANAGEMENT Accounting Reports and Management Decisions ACCOUNTING REPORTS

  36. DECISIONS Controlling Costs Pricing Planning Production Analyzing Market Segments Analyzing Contribution Margins ACTUAL PLANNED MANAGEMENT

  37. Pricing Products In the short run, we are committed to our existing manufacturing facilities.

  38. Pricing Products That is correct. The pricing decision should be based upon making the best use of our existing capacity.

  39. 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.

  40. Analyzing Market Segment A market segment is a portion of business that can be assigned to a manager for profit responsibility.

  41. Contribution Margin Reporting for Market Segments Camelot Fragrance Company manufactures and sells the Gwenevere perfume for women and the Lancelot cologne line for men. The inventories are negligible.

  42. Sales: Gwenevere $60,000 $30,000 $ 90,000 Lancelot 20,000 50,000 70,000 Total territory sales $80,000 $80,000 $160,000 Variable production costs: Gwenevere (12% of sales) $ 7,200 $ 3,600 $ 10,800 Lancelot (12% of sales) 2,400 6,000 8,400 Total variable production cost by territory $ 9,600 $ 9,600 $ 19,200 Northern Southern Territory Territory Total Continued

  43. Promotion costs: Gwenevere (30% of sales) $18,000 $ 9,000 $ 27,000 Lancelot(20% of sales) 4,000 10,000 14,000 Total variable production cost by territory $22,000 $19,000 $ 41,000 Sales commissions: Gwenevere (20% of sales) $12,000 $ 6,000 $ 18,000 Lancelot (12% of sales) 2,000 5,000 7,000 Total sales commission by territory $14,000 $11,000 $ 25,000 Northern Southern Territory Territory Total

  44. Camelot Fragrance CompanyContribution Margin by Sales TerritoryFor the Month Ended March 31, 2006 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%

  45. Camelot Fragrance CompanyContribution Margin by Product Line For the Month Ended March 31, 2006 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%

  46. 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%

  47. Actual Contribution Margin Planned Contribution Margin – Sales Variable Cost of Goods Sold Variable Selling and Administrative Expenses Contribution Margin Analysis Continued

  48. Quantity Factor Quantity Factor Quantity Factor +/– +/– +/– Sales Variable Cost of Goods Sold Variable Selling and Administrative Expenses Price Factor Unit Cost Factor Unit Cost Factor Contribution Margin Analysis

  49. Changes in Contribution Margin as a Result of Quantity and Price Factors Quantity factor The difference between the actual quantitysoldand the planned quantity sold, multiplied by the planned unit sales priceor unit cost. Unit price or unit cost factor The difference between the actual unit priceor unit cost and the planned unit priceor unit cost, multiplied by the actual quantity sold.

  50. Noble Inc. for Year Ended December 31, 2006 Increase or (Decrease) Actual Planned Sales $937,500$800,000$137,500 Less: Variable cost of goods sold $425,000 $350,000 $ 75,000 Variable selling and administrative exp. 162,500 125,000 37,500 Total $587,500$475,000$112,500 Contribution margin $350,000 $325,000 $ 25,000 Continued

More Related