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Segment Segment Reporting and Reporting and Performance Performance EvaluationEvaluation

CHAPTERCHAPTER

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1. Discuss the differences between variable and absorption costing.

2. Explain how variable costing is useful in evaluating the performance of a manager.

3. Prepare a segmented income statement based on a variable-costing approach, and demonstrate how to use this format with activity-based costing to assess customer profitability.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

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4. Show how variable costing can be used in planning and control.

ObjectivesObjectivesObjectivesObjectives

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Direct materials

Direct labor

Variable overhead

Variable costing assigns only variable

manufacturing costs to the product.

Variable costing assigns only variable

manufacturing costs to the product.

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Absorption costing assigns all manufacturing costs to

the product; this adds fixed overhead to the formula.

Absorption costing assigns all manufacturing costs to

the product; this adds fixed overhead to the formula.

Direct materials

Direct labor

Variable overhead

Fixed overhead

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Units in beginning inventory ---

Units produced 10,000

Units sold ($300 each) 8,000

Normal volume 10,000

Inventory Valuation

Variable cost per unit:

Direct materials

$ 50Direct labor

100Variable overhead

50Variable selling and administrative

10

Fixed costs:

Fixed overhead

$250,000Fixed selling and administrative

100,000

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Direct materials $ 50 $ 50

Direct labor 100 100

Variable overhead 50 50

Fixed overhead 25

Unit CostUnit CostUnit CostUnit Cost

Variable Absorption costing costing

$250,00010,000

$250,00010,000

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Direct materials $ 50 $ 50

Direct labor 100 100

Variable overhead 50 50

Fixed overhead 25

Total $200 $225

Unit CostUnit CostUnit CostUnit Cost

Variable Absorption costing costing

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Fairchild CompanyFairchild CompanyVariable-Costing Income StatementVariable-Costing Income Statement

Sales $2,400,000

Less variable expenses:

Variable cost of goods sold $1,600,000

Variable selling and admin. 80,000 1,680,000

Contribution margin $ 720,000

Less fixed expenses:

Fixed overhead $ 250,000

Fixed selling and admin. 150,000 350,000

Net income $ 370,000

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Fairchild CompanyFairchild CompanyAbsorption-Costing Income StatementAbsorption-Costing Income Statement

Sales $2,400,000

Less: Cost of goods sold 1,800,000

Gross margin $ 600,000

Less: Selling and administrative exp. 180,000

Net income $ 420,000

Variable costing net income $370,000Fixed portion of ending inventory

(2,000 units x $25) 50,000Absorption costing net income $420,000

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Production, Sales, andProduction, Sales, andIncome RelationshipsIncome Relationships

Production, Sales, andProduction, Sales, andIncome RelationshipsIncome Relationships

Production > Sales Absorption NI > Variable NI

Production < Sales Absorption NI < Variable NI

Production = Sales Absorption NI = Variable NI

If Then

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Example

Data for Belnip, Inc., for years 2002, 2003, and 2004 follows:

Variable cost pr unit:Direct materials

$4.00Direct labor

1.50Variable overhead (estimated and

actual)0.50

Variable selling and administrative0.25

Estimated fixed overhead was $150,000 each year. Normal production was 150,000 units and the sales price was $10. Fixed selling and administrative expenses were $50,000.

Estimated fixed overhead was $150,000 each year. Normal production was 150,000 units and the sales price was $10. Fixed selling and administrative expenses were $50,000.

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Variable-Costing Income StatementVariable-Costing Income StatementVariable-Costing Income StatementVariable-Costing Income Statement

2002 2003 20042002 2003 2004SalesLess variable expenses:

Variable cost of goods soldVariable selling and admin.

Contribution marginLess fixed expenses:

Fixed overheadFixed selling and admin.

Net income

$1,500.00 -900.00

-87.50 $ 562.50

-150.00

-0.50$ 367.50

$1,000

-600 -25$ 375

-150 -50$ 367

$2,000

-1,200 -50$ 750

-150 -50$ 550

BIBI $ 0$ 0Cost of GMCost of GM 900900GAFSGAFS $900$900Less: EILess: EI 0 0VCof GSVCof GS $900$900

BIBI $ 0$ 0Cost of GMCost of GM 900900GAFSGAFS $900$900Less: EILess: EI 300 300VCof GSVCof GS $600$600

BIBI $ 300$ 300Cost of GMCost of GM 900 900GAFSGAFS $1,200$1,200Less: EILess: EI 0 0VCof GSVCof GS $1,200$1,200

BIBI $ 300$ 300Cost of GMCost of GM 900 900GAFSGAFS $1,200$1,200Less: EILess: EI 0 0VCof GSVCof GS $1,200$1,200

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Absorption-Costing Income StatementAbsorption-Costing Income StatementAbsorption-Costing Income StatementAbsorption-Costing Income Statement

2002 2003 20042002 2003 2004SalesLess: Cost of goods soldGross marginLess: Selling and admin. exp.Net income

$1,500.00-1,050.00$ 450.00 87.50

$ 362.50

$1,000 700

$ 300 75

$ 225

$2,000 1,400$ 600 100$ 500BIBI $ 0$ 0

Cost of GMCost of GM 1,0501,050GAFSGAFS $1,050$1,050Less: EILess: EI 0 0Cof GSCof GS $1,050$1,050

BIBI $ 0$ 0Cost of GMCost of GM 1,050 1,050GAFSGAFS $1,050$1,050Less: EILess: EI 350 350Cof GSCof GS $ 700$ 700

BIBI $ 350$ 350Cost of GMCost of GM 1,050 1,050GAFSGAFS $1,400$1,400Less: EILess: EI 0 0Cof GSCof GS $1,400$1,400

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Absorption costing income – Variable costing income = Fixed overhead x (Units

produced – Units sold)

Absorption costing income – Variable costing income = Fixed overhead x (Units

produced – Units sold)

$500,000 – $550,000 = $1 x (150,000 – 200,000)

$500,000 – $550,000 = $1 x (150,000 – 200,000)

2004200420042004

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If income performance is expected to reflect managerial performance, then managers have the right to expect--

1. As sales revenue increases from one period to the next, all other things being equal, income should increase.

2. As sales revenue decreases from one period to the next, all other things being equal, income should decrease.

3. As sales revenue remains unchanged from one period to the next, all other things being equal, income should remain unchanged.

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Segment ReportingSegment ReportingSegment ReportingSegment Reporting

Elcom, Inc.Income Statement, 2004

Absorption-Costing Basis

Sales $400,000 $290,000 $690,000Less: Cost of goods sold 350,000 300,000 650,000Gross margin $ 50,000 $ -10,000 $ 40,000Less: Selling and administrative exp. 30,000 20,000 50,000Net income or loss $ 20,000 $ -30,000 $ -10,000

Stereos Video Recorders Total Stereos Video Recorders Total

15 -18 Elcom, Inc.Income Statement, 2004Variable-Costing Basis

Sales $400,000 $290,000 $690,000Less variable expenses:

Variable C of GS -300,000 -200,000 -500,000Variable S & A -5,000 -10,000 -15,000

Contribution margin $ 95,000 $ 80,000 $175,000Less direct fixed exp.:

Direct fixed overhead -30,000 -20,000 -50,000Direct S & A -10,000 -5,000 -15,000

Segment margin $ 55,000 $ 55,000 $110,000Less common fixed exp.:

Common fixed OH -100,000Common S & A -20,000

Net income or loss $-10,000

Stereos Video Recorders Total Stereos Video Recorders Total

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Barton, Inc.Barton, Inc.Barton, Inc.Barton, Inc.

Profit forProfit for Chain Stores Chain Stores

Sales$4,725,000

Less: Discounts 393,750

Net sales$4,331,250

Less: Cost of goods sold 2,520,000

Gross profit$1,811,250

Less: Shelf space-112,500

Shipping-157,500

EDI -100,000

Profit$1,441,250

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Barton, Inc.Barton, Inc.Barton, Inc.Barton, Inc. Profit forProfit for Independent Toy Stores Independent Toy Stores

Sales $2,625,000

Less: Cost of goods sold 1,400,000

Gross profit $1,225,000

Less: Commissions -131,250

Special packaging -35,000

Profit $1,058,750

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Barton, Inc.Barton, Inc.Barton, Inc.Barton, Inc.

Profit for FairsProfit for Fairs Sales $150,000

Less: Cost of goods sold 80,000

Gross profit $ 70,000

Less: Fair expense -75,000

Design time -2,100

Setup -1,000

Loss $ -8,100

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The EndThe EndThe EndThe End

Chapter FifteenChapter Fifteen

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