profit reporting for management analysis chapter m 4
TRANSCRIPT
Profit Reporting for Management Analysis
Chapter M 4
Determination of Net Income
Absorption costingAll manufacturing costs included in finished
goods and remain an asset until the good is sold
Used in financial reportingSales minus cost of goods sold = Gross
profit
Determination of Net Income
Variable costingCost of goods manufactured is composed
only of variable manufacturing costsDirect materialsDirect laborVariable factory overhead
Fixed manufacturing costs are treated as expense
Example 1
Manufacturing costs
Total Cost Per unit costs
Variable $375,000 $25
Fixed $150,000 $10
Total $525,000 $35
Company manufactures 15,000 units which it sells all of Them at $50 per unit
Selling and administrative Variable selling expense is $75,000 Fixed selling expenses is $50,000
Example 1: Absorption Costing Income Statement
Sales
'15,000 units @ $35 750,000.00$
Cost of goods sold
15,000 @ $35 525,000.00$
Gross profit 225,000.00$
Selling and Administrative 125,000.00$
Operating income 100,000.00$
Variable Costing Income Statement
SalesMinus variable cost of goods soldManufacturing marginManufacturing marginMinus variable selling expensesContribution marginContribution marginMinus fixed costsOperating income
Example 1: Variable CostingSales
15,000@ $50 750,000.00$
Variable cost of goods sold
15,000 *$25 375,000.00$
Manufacturing margin 375,000.00$
Variable selling expenses
'15,000 @$5 75,000.00$
Contribution margin 300,000.00$
Fixed costs
Fixed manufacturing 150,000.00$
50,000.00$ 200,000.00$
Operating income 100,000.00$
Variable and Absorption yield the same operating incomeBecause no inventories exist.
Example 2
Same information as example 1 but
Manufactures 15,000 units
Sells 12,000 unitsSales price is $50 per
unit
Example 2: Absorption CostingSales
'12,000 units @ $50 600,000.00$
Cost of goods sold
Manufactured 15,000 @$35 525,000.00$
Ending inventory 3,000@$35 105,000.00$ 420,000.00$
Gross profit 180,000.00$
Selling and Administrative
Variable 12,000 @ $5 60,000.00$
Fixed 50,000.00$ 110,000.00$
Operating income 70,000.00$
Example 2: Variable CostingSales
'12,000 units @ $50 600,000.00$
Variable cost of goods sold
Manufacturing 15000@$25 375,000.00$
Ending inventory 3,000@$25 75,000.00$ 300,000.00$
Manufacturing margin 300,000.00$
Variable selling expenses
12,000@$5 60,000.00$
Contribution margin 240,000.00$
Fixed costs
Fixed manufacturing 150,000.00$
50,000.00$ 200,000.00$
Operating income 40,000.00$
Difference
Absorption income is $70,000
Variable costing is $40,000
Difference is $30,000
Which is the difference in cost of goods sold per unit
Absorp $35Variable$25Times the number of
units in inventory 3,000
Example with Beginning Inventory
Suppose that the same example as 1 but we have beginning inventory
If manufactured units are 10,000, beg inv is 5,000 and sold 15, 000 units at $50 per unit
Example 3Manufacturing Costs Total Cost Per UnitVariable 250,000.00$ 25.00$ Fixed 150,000.00$ 15.00$ Total 400,000.00$ 40.00$ Beginning inventory Manufacturing costs Variable 125,000.00$ 25.00$ Fixed 50,000.00$ 10.00$ Total 175,000.00$ 35.00$
Selling and Administrative Variable selling 75,000.00$ $5 per unit Fixed 50,000.00$ Total 125,000.00$
Example 3: Absorption Costing
Sales (15,000 units @ $50) $750,000Cost of goods sold Beg Inv (5,000 units @$35) $175,000 Manufactured (10,000 units @ $40) $400,000 $575,000Gross profit $175,000Selling and Administrative Variable (15,000 @ $5 per unit) $75,000 Fixed $50,000 $125,000Operating income $50,000
Example 3: Variable Costing
Sales (15,000 units @ $50) $750,000Variable cost of goods sold Beg Inv (5,000 units @$25) $125,000 Manufactured (10,000 units @ $25) $250,000 $375,000Manufacturing margin $375,000 Variable Selling(15,000 @ $5) $75,000Contribution margin $300,000Fixed costs Fixed manufacturing $150,000 Fixed selling $50,000 $200,000Operating income $100,000
Example 3: Difference
If manufactured units are less than sales then difference in income of $50,000 comes from the difference in cost of goods sold of $10 per unit times 5,000 units.
Income Analysis
Since absorption costing, inventories fixed cost for the period, the company may show higher income if it produces more than it sells. Thus, inflating operating income.
Income Analysis
20,000 units 25,000 units
Sales 20,000 @ $75 $1,500,000 $1,500,000
COGS
20,000 @ $55 1,100,000
25,000 @ 51 1,275,000
Less ending inventory 5,000 @ 51
(255,000)
Gross profit 400,000 480,000
Selling and adm 200,000 280,000
Operating income 200,000 200,000
Controlling Costs
All costs are controllable in long run by someone in the business but not all controllable at the same level of management
ControllableInfluenced by
management at that level
NoncontrollableAnother level of
management has control
Used to fix responsibility
Pricing Products
Variable costs are used in setting prices because it gives better control over costs
Analyzing market segments
Market analysis is performed by sales and marketing department in order to determined the profit contribute by market segments
Is a portion of the business that can be assigned to a manager for profitability responsibility
ExampleNorthern Southern Total
Sales Froem $60,000 $30,000 $90,000 Sern $20,000 $50,000 $70,000Total $80,000 $80,000 $160,000Var. prod costs Froem 12% $7,200 $3,600 $10,800 Sern 12% $2,400 $6,000 $8,400Total variable $9,600 $9,600 $19,200Promotion costs $0 Froem 30% $18,000 $9,000 $27,000 Sern 30% $4,000 $10,000 $14,000Total $22,000 $19,000 $41,000Sales commission $0 Froem 20% $12,000 $6,000 $18,000 Sern 10% $2,000 $5,000 $7,000Total $14,000 $11,000 $25,000
Product Profitability Analysis
Froem SernSales $90,000 $70,000Variable COGS $10,800 $8,400Manufacturing margin $79,200 $61,600Var selling expense Promotion costs $27,000 $14,000 Sales commissions $18,000 $7,000Contribution margin $34,200 $40,600Ratio 38% 58%
Sales Territory AnalysisNorthern Southern
Sales $80,000 $80,000Variable COGS $9,600 $9,600Manufacturing margin $70,400 $70,400Var selling expense Promotion costs $22,000 $19,000 Sales commissions $14,000 $11,000Contribution margin $34,400 $40,400Ratio 43% 51%