7. Profit Reporting for Managerial Analysis

Universidad CuauhtémocCampus Aguascalientes

Profit Reporting for Managerial Analysis

Análisis de Costos

Maestría en Administración

Contents

Absorption Costing Method1

Variable Costing Method2

Analyzing Market Segments3

Contribution Margin Analysis4

Two Costing Methods

Used for external financial reporting

Includes direct materials, direct labor, variable factory overhead, and fixed factory overhead as part of total product cost

Absorption Costing

Two Costing Methods

Variable Costing

Used for internal planning and decision making

Does not include fixed factory overhead as a product cost

Absorption Costing Compared to Variable Costing

Variable Costing

Absorption Costing

Cost of Goods Manufactured

Cost of Goods Manufactured

DirectMaterials

DirectLabor

VariableFactory OH

FixedFactory OH

Period Expense

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.

Frand Manufacturing Company has no beginning

inventory and sales are estimated to be 20,000 units at

$75 per unit, regardless of production levels.



Proposal 1: 20,000 Units to Be Manufactured and Sold

Total Cost Unit CostManufacturing costs:

Variable $ 700,000 $35Fixed 400,000 20 Total costs $1,100,000 $55

Selling and administrative exp.Variable ($5 per unit sold) $ 100,000Fixed 100,000 Total expenses $ 200,000



Total Cost Unit CostManufacturing costs:

Variable $ 875,000 $35Fixed 400,000 16 Total costs $1,275,000 $51

Selling and administrative exp.Variable ($5 per unit sold) $ 100,000Fixed 100,000 Total expenses $ 200,000

Proposal 2: 25,000 Units to Be Manufactured; 20,000 Units to Be Sold

Frand Manufacturing CompanyAbsorption Costing Income Statements

20,000 Units Manufactured


$35 + ($400,000 ÷ 20,000)

Sales $1,500,000 $1,500,000Cost of goods sold:

Cost of goods manufactured(20,000 units x $55) $1,100,000





Cost of goods manufactured(20,000 units x $55) $1,100,000(25,000 units x $51) $1,275,000

$35 + ($400,000 ÷ 25,000)





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 $1,020,000Gross profit $ 400,000 $ 480,000Selling and administrative expenses

($100,000 + $100,000) 200,000 200,000Income from operations $ 200,000 $ 280,000

Now, assume that Frand Manufacturing uses variable costing.

Now, assume that Frand Manufacturing uses variable costing.

Frand Manufacturing CompanyVariable Costing Income Statements



Sales $1,500,000 $1,500,000Variable cost of goods sold:

Variable cost of goods manufactured:(20,000 units x $35) $ 700,000(25,000 units x $35) $ 875,000

Direct materials, direct labor, and variable manufacturing overhead only.




Sales $1,500,000 $1,500,000Variable 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 $ 700,000Manufacturing margin $ 800,000 $ 800,000

ContinuedContinued




Manufacturing margin $ 800,000 $ 800,000Variable selling and administrative

expenses 100,000 100,000Contribution margin $ 700,000 $ 700,000Fixed costs:

Fixed manufacturing costs $ 400,000 $ 400,000Fixed selling and administrative

expenses 100,000 100,000Total fixed costs $ 500,000 $ 500,000

Income from operations $ 200,000 $ 200,000

Accounting Reports and Management Decisions

Accounting Reports and Management Decisions

ACCOUNTING REPORTS

Absorption Costing and Variable Costing

MANAGEMENT

MANAGEMENT

DECISIONS

Controlling Costs

PricingPlanning

Production

Analyzing Market

Segments

Analyzing Contribution

Margins

ACTUAL PLANNED

Analyzing Market SegmentAnalyzing Market Segment

A market segment is a portion of business that

can be assigned to a manager for profit

responsibility.

A market segment is a portion of business that

can be assigned to a manager for profit

responsibility.

Contribution Margin Reporting for Market Segments

Contribution Margin Reporting for Market Segments

Camelot Fragrance Company manufactures and sells the Gwenevere perfume for women

and the Lancelot cologne line for men.

Camelot Fragrance Company manufactures and sells the Gwenevere perfume for women

and the Lancelot cologne line for men.

Northern Southern Territory Territory Total

Sales:Gwenevere $60,000 $30,000 $ 90,000Lancelot 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 $ 10,800Lancelot (12% of sales) 2,400 6,000 8,400

Total variable production cost by territory $ 9,600 $ 9,600 $ 19,200

ContinuedContinued

Promotion costs:Gwenevere (30% of sales) $18,000 $ 9,000 $ 27,000Lancelot(20% of sales) 4,000 10,000 14,000

Total promotion cost by territory $22,000 $19,000 $ 41,000

Sales commissions:Gwenevere (20% of sales) $12,000 $ 6,000 $ 18,000Lancelot (12% of sales) 2,000 5,000 7,000

Total sales commissionby territory $14,000 $11,000 $ 25,000

Northern Southern Territory Territory Total

Sales $80,000 $80,000Variable cost of goods sold 9,600 9,600Manufacturing margin $70,400 $70,400Variable selling expenses:

Promotion costs $22,000 $19,000Sales commissions 14,000 11,000 Total $36,000 $30,000

Contribution margin $34,400 $40,400

Contribution margin ratio 43% 50.5%

Camelot Fragrance CompanyContribution Margin by Sales Territory

For the Month Ended December 31, 2009Northern SouthernTerritory Territory

Sales $90,000 $70,000Variable cost of goods sold 10,800 8,400Manufacturing margin $79,200 $61,600Variable selling expenses:

Promotion costs $ 27,000 $14,000Sales commissions 18,000 7,000 Total $45,000 $21,000

Contribution margin $34,200 $40,600

Contribution margin ratio 38% 58%

Gwenevere Lancelot

Camelot Fragrance CompanyContribution Margin by Product Line

For the Month Ended December 31, 2009

Sales $20,000 $20,000 $40,000 $80,000Variable cost of goods sold 2,400 2,400 4,800 9,600Manufacturing margin $17,600 $17,600 $35,200 $70,400Variable selling expenses:

Promotion costs $ 5,000 $ 5,000 $12,000 $22,000Sales commissions 3,000 3,000 8,000 14,000

$ 8,000 $ 8,000 $20,000 $36,000Contribution margin $ 9,600 $ 9,600 $15,200 $34,400

Contribution margin ratio 48% 48% 38% 43%

Sales mix (% Lancelot sales) 50% 50% 0% 25%

Camelot Fragrance CompanyContribution Margin by Salesperson—Northern Territory

For the Month Ended December 31, 2009

Eduardo Hector PaulaMacías Martinez Arellano Total

Contribution Margin AnalysisContribution Margin Analysis

Planned Contribution

Margin

Actual Contribution

Margin–

Sales Variable Cost of Goods Sold

Variable Selling and

Administrative Expenses

ContinuedContinued

Contribution Margin AnalysisContribution Margin Analysis

Sales Variable Cost of Goods Sold

Variable Selling and

Administrative Expenses

Quantity Factor

+/–Price Factor

Quantity Factor

+/–Unit Cost

Factor

Quantity Factor

+/–Unit Cost

Factor

Changes in Contribution Margin as a Result of Quantity and Price Factors

Changes in Contribution Margin as a Result of Quantity and Price Factors

The difference between the actual quantity sold and the planned quantity sold, multiplied by the planned unit sales price or unit cost.

Quantity factor

Unit price or unit cost factor

The difference between the actual unit cost and the planned unit cost, multiplied by the actual quantity sold.

Noble Inc. for Year Ended December 31, 2009


Actual PlannedIncrease or (Decrease)

Sales $937,500 $800,000 $137,500Less: Variable cost of

goods sold $425,000 $350,000 $ 75,000Variable selling and

administrative exp. 162,500 125,000 37,500 Total $587,500 $475,000 $112,500

Contribution margin $350,000 $325,000 $ 25,000ContinuedContinued



Actual Planned

Number of units sold 125,000 100,000Per unit:

Sales price $7.50 $8.00Variable cost of goods sold$3.40 $3.50Variable selling and

administrative exp.$1.30 $1.25

Contribution Margin ReportContribution Margin Report

Blue Skies Airlines Inc. operates a small commercial airline.

Blue Skies Airlines Inc. operates a small commercial airline.

Blue Skies Airlines Inc.Contribution Margin and Income from Operations Report

for the Month Ended April 30, 2009

Revenue$19,238,000

Variable costs:Fuel expense $4,080,000Wages expense 6,120,000Food and beverage service exp. 444,000Selling expenses 3,256,000 13,900,000

Contribution margin$ 5,338,000

Fixed costs:Depreciation expense $3,600,000Rental expense 800,000 4,400,000

Income from operations$ 938,000

Blue Skies Airlines Inc.Contribution Margin by Route Report - Chicago/Atlanta


Revenue$6,400,000

Variable costs:Fuel expense $1,120,000Wages expense 1,680,000Food and beverage service exp. 240,000Selling expenses 1,760,000 4,800,000

Contribution margin$1,600,000

Contribution Margin Ratio = 0.25Contribution Margin Ratio = 0.25

Blue Skies Airlines Inc.Contribution Margin by Route Report—Atlanta/Los Angeles


Revenue $7,525,000Variable costs:

Fuel expense $1,760,000Wages expense 2,640,000Food and beverage service exp. 105,000Selling expenses 770,000 5,275,000

Contribution margin $2,250,000


Blue Skies Airlines Inc.Contribution Margin by Route Report—Los Angeles/Chicago


Revenue $5,313,000Variable costs:

Fuel expense $1,200,000Wages expense 1,800,000Food and beverage service exp. 99,000Selling expenses 726,000 3,825,000

Contribution margin $1,488,000


Blue Skies Airlines Inc.Contribution Margin—Chicago/Atlanta

Revenue $7,600,000 $6,400,000Less variable expenses:

Fuel expense $1,232,000 $1,120,000Wages expense 1,680,000 1,680,000Food and beverage service exp. 300,000 240,000Selling expenses and commiss. 2,200,000 1,760,000

Total $5,412,000 $4,800,000Contribution margin $2,188,000 $1,600,000

Contribution Margin Ratio 0.290.25

Contribution Margin Ratio 0.290.25

Actual—May Planned—May

ContinuedContinued

Blue Skies Airlines Inc.Contribution Margin—Chicago/Atlanta

Number of miles flown 56,000 56,000Number of passengers flown 20,000 16,000Per unit:

Ticket price $380 $400Fuel expense 22 20Wages expense 30 30Food and beverage service exp. 15 15Selling expenses 110 110

Actual—May Planned—May

Contribution Margin Analysis Report—Service Company


Blue Skies Airlines Inc.Contribution Margin Analysis

For the Month Ended May 31, 2009

Increase in revenue attributed to:Quantity factor:

Increase in the number of tickets soldin 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

ContinuedContinued





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

ContinuedContinued





Increase in food and beverage servicecosts attributed to:

Quantity factor:Increase in number of tickets sold in May times planned unit cost in May (4,000 x $15.00) $60,000

ContinuedContinued





Increase in selling costs and commissionsattributed to:

Quantity factor:Increase in number of tickets sold in May times planned unit cost in May (4,000 x $110) $440,000

ContinuedContinued





Summary:Net increase in revenue $1,200,000Net increase in fuel cost (112,000)Net increase in food and beverage service costs (60,000)Net increase in selling costs (440,000)

Increase in contribution margin $ 588,000

Análisis de Costos

Maestría en Administración

Universidad CuauhtémocCampus Aguascalientes

7. Profit Reporting for Managerial Analysis

Business

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