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8-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Variable Costing: Segmented Reporting and Performance Evaluation 8 PowerPresentation®

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Presentation on theme: "8-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Variable Costing: Segmented Reporting and Performance Evaluation 8 PowerPresentation®"— Presentation transcript:

1 8-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Variable Costing: Segmented Reporting and Performance Evaluation 8 PowerPresentation® prepared by David J. McConomy, Queen’s University

2 8-2 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Learning Objectives Explain the differences between variable and absorption costing. Explain how variable costing is useful in evaluating the performance of managers.

3 8-3 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Learning 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.

4 8-4 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Classification of Costs Under 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

5 8-5 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Absorption and Variable Costing Example Estimated and Actual Costs: Manufacturing: Direct labour $1,000,000 Direct materials500,000 Variable overhead500,000 Fixed overhead250,000 Total manufacturing cost $2,250,000 ======= Nonmanufacturing: Variable selling $ 100,000 Fixed selling & administrative 100,000 Total nonmanufacturing $200,000 =======

6 8-6 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Absorption and Variable Costing Example (continued) Estimated and actual production10,000units Sales8,000units Normal volume 10,000units Price$300per unit Beginning finished goods0

7 8-7 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Absorption and Variable Costing Example (continued) Unit Cost:VariableAbsorption Direct labour$100$100 Direct material5050 Variable overhead5050 Fixed overhead * 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 8-8 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Income Statement: Absorption 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

9 8-9 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Income Statement: Variable 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 Net income$370,000 ========

10 8-10 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Production, Sales, and Income Relationships If Then Production > Sales Absorption NI > Variable NI Production < Sales Absorption NI < Variable NI Production = Sales Absorption NI = Variable NI

11 8-11 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Income Statements: Analysis 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 =======

12 8-12 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution to Exercise 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, ,800) = $3,840 Absorption costing is larger by $3,840.

13 8-13 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution to Exercise 8-2 (continued) Morina, Inc. Variable-Costing Income Statement For the Year Ended December 31, 2004 Sales$414,000 Less variable expenses: Variable COGS (13,800 x $14.50)$200,100 Variable selling and adm. (13,800 x $3.50) 48, ,400 Contribution margin$165,600 Less fixed expenses: Fixed overhead$ 48,000 Fixed selling and adm. 22,000 70,000 Net income$ 95,600 ====

14 8-14 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution to Exercise 8-2 (continued) Morina, Inc. Absorption-Costing Income Statement For the Year Ended December 31, 2004 Sales$414,000 Less: COGS (13,800 x $17.70) 244,260 Gross margin$169,740 Less: Selling and adm. exp. 70,300 Net Income$ 99,440 ======

15 8-15 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Advantages 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.

16 8-16 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Disadvantages of Variable Costing Too much focus on the short-run. May ignore the impact of fixed costs on decisions. Very expensive to install.

17 8-17 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution To Exercise Irvine Company Absorption-Costing Income Statement Year 1Year 2 Sales$384,000$480,000 Less: Cost of goods sold* 208, ,000 Gross margin$176,000$196,000 Less: Selling and administrative expenses 24,300 24,300 Net income$151,700$171,700======= *Cost of goods sold:Year 1Year 2 Beginning inventory$ 0$ 52,000 Cost of goods manufactured 260, ,000 Goods available for sale$260,000$284,000 Less: Ending inventory 52,000 0 Cost of good sold$208,000$284,000======= Firm performance, as measured by income, has increased from Year 1 to Year 2

18 8-18 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution To Exercise 8-3 (continued) 2.Irvine Company Variable-Costing Income Statement Year 1Year 2 Sales$384,000$480,000 Less: Variable COGS* 112, ,000 Contribution margin$272,000$340,000 Less: Fixed expenses: Fixed overhead120,000120,000 Selling and administrative 24,300 24,300 Net income (loss)$127,700$195,700====== *Variable cost of goods soldYear 1Year 2 Beginning inventory$ 0 $ 28,000 Variable cost of goods manufactured 140, ,000 Goods available for sale$140,000$140,000 Less: Ending inventory 28,000 0 Variable cost of goods sold$112,000$140,000======= Firm performance, as measured by income, has improved from Year 1 to Year 2.

19 8-19 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution To Exercise 8-6 Cocino Company Segmented Income Statement 1.CoffeeBlendersMakersTotal 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 Segment margin$ 110,000$ 5,000$ 115,000 Less: Common fixed exp. 115,000 Net income (loss)$ 0 ========

20 8-20 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution To Exercise 8-6 (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.

21 8-21 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Solution To Exercise 8-6 (continued) Cocino Company Segmented Income Statement 3.CoffeeBlendersMakersTotal 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 Segment margin$ 115,000$ 5,000$ 120,000 Less: Common fixed exp. 115,000 Net income (loss)$ 5,000 ========


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