Variable Costing for Management Analysis

1. These slides should be viewed using the presentation mode (left click your mouse on the icon). Variable Costing for Management Analysis Chapter 20 Student Version

2. Learning Objective 1 Describe and illustrate reporting income from operations under absorption and variable costing.

3. LO 1 0 Absorption and Variable Costing • Absorption costing is required under generally accepted accounting principles for financial statements distributed to external users. • For internal use in decision making, managers often use variable costing, sometimes called direct costing. • Under variable costing, the cost of goods manufactured includes only variable manufacturing costs.

4. LO 1 Variable Costing • Manufacturing marginis sales less variable cost of goods sold. • Variable cost of goods sold consists of direct materials, direct labor, and variable factory overhead for the units sold. • Contribution margin is manufacturing margin less variable selling and administrative expenses.

5. LO 1 Comparing Variable and Absorption Costing Assume that 15,000 units are manufactured and sold at a price $50. (continued)

6. LO 1 0 Units Manufactured Equal Units Sold

7. LO 1 0 Units Manufactured Less Than Units Sold Assume that 5,000 units of inventory were on hand at the beginning of a period, 10,000 units were manufactured during the period, and 15,000 units were sold at $50 per unit. (continued)

8. LO 1 0 Units Manufactured Less Than Units Sold

9. LO 1 0 Units Manufactured Less Than Units Sold (continued)

10. LO 1 0 Units Manufactured Less Than Units Sold

11. 0 Learning Objective 2 Describe and illustrate the effects of absorption and variable costing on analyzing income from operations.

12. FRAND LO 2 0 Frand Manufacturing Company Frand Manufacturing Company has no beginning inventory, and sales are estimated to be 20,000 units at $75 per unit, regardless of production levels. The management of Frand Manufacturing Company is evaluating whether to manufacture 20,000 units (Proposal 1) or 25,000 units (Proposal 2).

13. FRAND LO 2 0 Proposal 1

14. FRAND LO 2 Proposal 2

15. FRAND LO 2 0 Income Analysis Under Absorption and Variable Costing

16. 0 Learning Objective 3 Describe management’s use of absorption and variable costing.

17. LO 3 0 Controlling Costs • For a specific level of management, controllable costs are costs that can be influenced by management at that level. • Noncontrollable costs are costs that another level of management controls.

18. LO 3 0 Pricing Products • Many factors enter into determining the selling price of a product. • The cost of making the product is significant in all pricing decisions. • In the short run, fixed costs cannot be avoided. • In the long run, a company must set its selling price high enough to cover all costs and expenses and generate income.

19. LO 3 Planning Production • In the short run, planning production is limited to existing capacity. • In the long run, planning production can consider expanding capacity. • Managers often plan and control operations by evaluating the differences between planned and actual contribution margins.

20. LO 3 0 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.

21. 0 Learning Objective 4 Use variable costing for analyzing market segments, including product, territories, and salespersons segments.

22. Camelot Fragrance Company LO 4 0 Analyzing Market Segments Camelot Fragrance Company manufactures and sells Gwenevere perfume for women and the Lancelot cologne line for men. The company’s data for the month ended March 31, 2012, is shown in the next slide.

23. Camelot Fragrance Company LO 4 Analyzing Market Segments

24. Camelot Fragrance Company LO 4 0 Sales Territory Profitability Analysis Camelot Fragrance Company analyzes its profit differences by sales territory. Contribution Margin Ratio Contribution Margin Sales = Northern Territory: 43% ($34,400/$80,000) Southern Territory: 50.5% ($40,400/$80,000)

25. Camelot Fragrance Company LO 4 Sales Territory Profitability Analysis • Sales mix, sometimes referred to as product mix, is the relative amount of sales among the various products.

26. 0 Learning Objective 5 Use variable costing for analyzing and explaining changes in contribution margin as a result of quantity and price factors.

27. LO 5 0 Contribution Margin Analysis • Contribution margin analysis focuses on explaining the differences between planned and actual contribution margins. • A difference between the planned and actual contribution margin may be caused by an increase or a decrease in: • Sales • Variable costs

28. Planned Sales Price Actual Units Sold Planned Units of Sales Sales Quantity Factor = – × Planned Unit Cost Planned Units of Sales Actual Units Sold Variable Cost Quantity Factor = – × LO 5 Contribution Margin Analysis • Quantity factor is the effect of a difference in the number of units sold, assuming no change in unit sales price or unit cost.

29. Actual Selling Price per Unit Planned Selling Price per Unit Actual Units Sold Unit Price Factor – × = Actual Units Sold Planned Cost per Unit Actual Cost per Unit Unit Cost Factor – × = LO 5 Contribution Margin Analysis • Unit price factor or unit cost factor is the effect of a difference in unit sales price or unit cost on the number of units sold.

30. 0 Learning Objective 6 Describe and illustrate the use of variable costing for service firms.

31. LO 6 0 Variable Costing for Service Firms • Unlike a manufacturing company, a service company does not make or sell a product. • As a result, service companies do not have inventory and, thus, do not allocate fixed costs to inventory using absorption costing concepts.

32. Blue Skies LO 6 0 Variable Costing for Service Firms Service firms can report and analyze contribution margin as the difference between revenues and variable costs. To analyze a service firm, we will use Blues Skies Airlines. The fixed and variable costs associated with operating Blue Skies are shown in Exhibit 13(next slide).

33. Blue Skies LO 6 0 Variable Costing for Service Firms

34. Blue Skies LO 6 0 Variable Costing for Service Firms The variable costing income statement for Blue Skies Airlines is shown in Exhibit 14(next slide). Blue Skies Airlines uses the activity base number of passengersfor food and beverage service and selling expenses. The company uses number of miles flown for fuel and wages expenses.

35. Blue Skies LO 6 0 Variable Costing for Service Firms

36. LO 6 0 Market Segment Analysis for Service Companies

37. Blue Skies LO 6 0 Market Segment Analysis for Service Companies Blue Skies Airlines

38. Blue Skies LO 6 Contribution Margin Analysis

39. Variable Costing for Management Analysis The End