8-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Variable Costing: Segmented...
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8-1 pyright © 2004 by Nelson, a division of Thomson Canada Limited. Variable Variable Costing: Costing: Segmented Segmented Reporting and Reporting and Performance Performance Evaluation Evaluation 8 8 PowerPresentation® prepared by PowerPresentation® prepared by David J. McConomy, Queen’s David J. McConomy, Queen’s University University
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Transcript of 8-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Variable Costing: Segmented...
8-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Variable Costing: Variable Costing: Segmented Segmented Reporting and Reporting and Performance Performance EvaluationEvaluation
88
PowerPresentation® prepared by PowerPresentation® prepared by
David J. McConomy, Queen’s UniversityDavid J. McConomy, Queen’s University
8-2Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning ObjectivesLearning Objectives
Explain the differences between variable and absorption costing.
Explain how variable costing is useful in evaluating the performance of managers.
8-3Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning ObjectivesLearning Objectives
Prepare a segmented income statement based on a variable-costing approach and explain how this format can be used with activity-based costing and customer profitability analysis.
Explain how variable costing can be used in planning and control.
8-4Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Classification of Costs Classification of Costs Under Absorption and Variable CostingUnder Absorption and Variable Costing
Absorption Variable
Costing Costing
Product Costs Direct Materials Direct Materials
Direct Labour Direct Labour
Variable Overhead Variable Overhead
Fixed Overhead
Period Costs Selling Expenses Fixed Overhead
Admin Expenses Selling Expenses
Admin Expenses
8-5Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Absorption and VariableAbsorption and VariableCosting ExampleCosting Example
Estimated and Actual Costs:Manufacturing:
Direct labour $1,000,000Direct materials 500,000Variable overhead 500,000Fixed overhead 250,000Total manufacturing cost $2,250,000
=======Nonmanufacturing:
Variable selling $ 100,000Fixed selling & administrative 100,000Total nonmanufacturing $200,000
=======
8-6Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Absorption and Variable Absorption and Variable Costing Example (continued)Costing Example (continued)
Estimated and actual production 10,000 unitsSales 8,000 unitsNormal volume 10,000 units Price $300 per unitBeginning finished goods 0
8-7Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Absorption and Variable Absorption and Variable Costing Example (continued)Costing Example (continued)
Unit Cost: Variable Absorption
Direct labour $100 $100
Direct material 50 50
Variable overhead 50 50
Fixed overhead 0.00 25*
Total $200 $225==== ====
* $250,000 / 10,000 = $25
Value of ending finished goods inventory:
Variable costing: $200 x 2,000 = $400,000
Absorption costing: $225 x 2,000 = $450,000
8-8Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Income Statement: Income Statement: Absorption CostingAbsorption Costing
Sales ($300 x 8,000)$2,400,000
Less: COGS ($225 x 8,000) 1,800,000
Gross margin$600,000
Less: S & A expenses 180,000*
Net income$420,000========
* Fixed + variable S& A Expenses
$100,000 + ($100,000 / 10,000) * 8,000 = $180,000
8-9Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Income Statement: Income Statement: Variable CostingVariable Costing
Sales ($300 x 8,000) $2,400,000
Less variable expenses:
Variable COGS: ($200 x 8,000) $1,600,000
Variable selling 80,000 1,680,000
Contribution margin $720,000
Less fixed expenses:
Fixed overhead $ 250,000
Fixed administrative 100,000 350,000
Net income $370,000========
8-10Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Production, Sales, andProduction, Sales, andIncome RelationshipsIncome Relationships
If Then
Production > Sales Absorption NI > Variable NI
Production < Sales Absorption NI < Variable NI
Production = Sales Absorption NI = Variable NI
8-11Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Income Statements: Income Statements: Analysis and ComparisonAnalysis and Comparison
Difference:
Absorption income $420,000
Variable income 370,000
$ 50,000=======
Explained:
Production (in units) 10,000
Sales (in units) 8,000
Increase in inventory (in units) 2,000
Fixed overhead rate x $25
$ 50,000=======
8-12Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution to Exercise 8-2
1. Fixed overhead rate (FOH) = $48,000/15,000
FOH rate = $3.20 per unit
The difference given is as follows:
FOH rate x (Units produced - Units sold)
$3.20 x (15,000 - 13,800) = $3,840
Absorption costing is larger by $3,840.
8-13Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution to Exercise 8-2 Solution to Exercise 8-2 (continued)(continued)
Morina, Inc.Variable-Costing Income Statement
For the Year Ended December 31, 2004Sales $414,000Less variable expenses:
Variable COGS (13,800 x $14.50) $200,100Variable selling and adm. (13,800 x $3.50) 48,300 248,400
Contribution margin $165,600Less fixed expenses:
Fixed overhead $ 48,000Fixed selling and adm. 22,000 70,000
Net income $ 95,600
====
8-14Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution to Exercise 8-2 Solution to Exercise 8-2 (continued)(continued)
Morina, Inc.Absorption-Costing Income StatementFor the Year Ended December 31, 2004
Sales $414,000Less: COGS (13,800 x $17.70) 244,260Gross margin $169,740Less: Selling and adm. exp. 70,300Net Income $ 99,440
======
8-15Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Advantages of Variable CostingAdvantages of Variable Costing
Does not bury fixed costs in the cost of goods sold calculation.
Enables one to focus on fixed costs.
Enables one to perform incremental analysis and assists in decision making.
Enables one to perform segmented reporting.
Net income under variable costing is highly correlated with changes in sales and production.
8-16Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Disadvantages of Variable Disadvantages of Variable CostingCosting
Too much focus on the short-run.
May ignore the impact of fixed costs on decisions.
Very expensive to install.
8-17Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution To Exercise 8-3Solution To Exercise 8-31. Irvine Company
Absorption-Costing Income Statement
Year 1 Year 2Sales $384,000 $480,000Less: Cost of goods sold* 208,000 284,000Gross margin $176,000 $196,000Less: Selling and administrative expenses 24,300 24,300Net income $151,700 $171,700
======= =======
*Cost of goods sold: Year 1 Year 2Beginning inventory $ 0 $ 52,000Cost of goods manufactured 260,000 232,000Goods available for sale $260,000 $284,000Less: Ending inventory 52,000 0Cost of good sold $208,000 $284,000
======= =======
Firm performance, as measured by income, has increased from Year 1 to Year 2
8-18Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution To Exercise 8-3 Solution To Exercise 8-3 (continued)(continued)
2. Irvine CompanyVariable-Costing Income Statement
Year 1 Year 2
Sales $384,000 $480,000Less: Variable COGS* 112,000 140,000Contribution margin $272,000 $340,000Less: Fixed expenses: Fixed overhead 120,000 120,000 Selling and administrative 24,300 24,300Net income (loss) $127,700 $195,700
====== ======*Variable cost of goods sold Year 1 Year 2Beginning inventory $ 0 $ 28,000Variable cost of goods manufactured 140,000 112,000Goods available for sale $140,000 $140,000Less: Ending inventory 28,000 0Variable cost of goods sold $112,000 $140,000
======= =======
Firm performance, as measured by income, has improved from Year 1 to Year 2.
8-19Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution To Exercise 8-6Solution To Exercise 8-6
Cocino Company
Segmented Income Statement
1. Coffee Blenders Makers Total
Sales $2,200,000 $1,125,000 $3,325,000
Less: Variable expenses 2,000,000 1,075,000 3,075,000
Contribution margin $ 200,000 $ 50,000 $ 250,000
Less: Direct fixed expenses 90,000 45,000 135,000
Segment margin $ 110,000 $ 5,000 $ 115,000
Less: Common fixed exp. 115,000
Net income (loss) $ 0========
8-20Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution To Exercise 8-6 Solution To Exercise 8-6 (continued)(continued)
2. If the coffee maker line is dropped, profits will decrease by $5,000 (the segment margin). If the blender line is dropped, profits will decrease by $110,000.
8-21Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Solution To Exercise 8-6 Solution To Exercise 8-6 (continued)(continued)
Cocino CompanySegmented Income Statement
3. Coffee Blenders Makers Total
Sales $2,405,000 $1,125,000 $3,530,000
Less: Variable expenses 2,200,000 1,075,000 3,275,000
Contribution margin $ 205,000 $ 50,000 $ 255,000
Less: Direct fixed expenses 90,000 45,000 135,000
Segment margin $ 115,000 $ 5,000 $ 120,000
Less: Common fixed exp. 115,000
Net income (loss) $ 5,000
========
