1. Chapter 5 Variable Costing for Management Analysis Student Version
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Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University 1
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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

3. Absorption and Variable Costing
LO 1
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 margin is 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. Comparing Variable and Absorption Costing
LO 1
Comparing Variable and Absorption Costing
Assume that 15,000 units are manufactured and sold at a price $50.

6. Units Manufactured Equal Units Sold
LO 1
Units Manufactured Equal Units Sold

7. Units Manufactured Less Than Units Sold
LO 1
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.

8. Units Manufactured Less Than Units Sold
LO 1
Units Manufactured Less Than Units Sold

9. Units Manufactured Less Than Units Sold
LO 1
Units Manufactured Less Than Units Sold

10. Units Manufactured Less Than Units Sold
LO 1
Units Manufactured Less Than Units Sold

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

12. Frand Manufacturing Company
LO 2
Frand Manufacturing Company
FRAND
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. LO 2
Proposal 1
FRAND

14. LO 2
Proposal 2
FRAND

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

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

17. LO 3
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
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. Analyzing Market Segments
LO 3
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. Learning Objective 4
Use variable costing for analyzing market segments, including product, territories, and salespersons segments.

22. Analyzing Market Segments
LO 4
Analyzing Market Segments
Camelot
Fragrance
Company
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. Analyzing Market Segments
LO 4
Analyzing Market Segments
Camelot
Fragrance
Company

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

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

27. Contribution Margin Analysis
LO 5
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 in:
Sales
Variable costs

28. 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.
Sales Quantity Factor
Actual Units Sold
Planned Units of Sales
Planned Sales Price = – ×
Variable Cost Quantity Factor
Planned Units of Sales
Actual Units Sold
Planned Unit Cost = – ×

29. Contribution Margin Analysis
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.
Unit Price Factor
Actual Selling Price per Unit
Planned Selling Price per Unit
Actual Units Sold = – ×
Unit Cost Factor
Planned Cost per Unit
Actual Cost per Unit
Actual Units Sold = – ×

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

31. Variable Costing for Service Firms
LO 6
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. Variable Costing for Service Firms
LO 6
Variable Costing for Service Firms
Blue
Skies
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. Variable Costing for Service Firms
LO 6
Variable Costing for Service Firms
Blue
Skies

34. Variable Costing for Service Firms
LO 6
Variable Costing for Service Firms
Blue
Skies
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 passengers for food and beverage service and selling expenses. The company uses number of miles flown for fuel and wages expenses.

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

36. Market Segment Analysis for Service Companies
LO 6
Market Segment Analysis for Service Companies

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

38. Contribution Margin Analysis
LO 6
Blue
Skies
Contribution Margin Analysis

39. The End Variable Costing for Management Analysis
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.