Chapter # 6 (Variable costing and segment reporting - Managerial Accounting 17th edition).pptx

This PowerPoint presentation on variable costing and segment reporting provides a comprehensive overview of these important concepts in managerial accounting. It covers the principles of variable costing, including its advantages and disadvantages, and delves into how variable costing differs from absorption costing. Additionally, the presentation explains the importance of segment reporting in evaluating the financial performance of different business segments within an organization. It includes examples, case studies, and visual aids to enhance understanding and engagement.

1. Managerial Accounting Chapter #06 Variable Costing and segment Reporting: Tools For Management Edition 17 th By:Saima Rajput Instructor: Nadia Anjum 1

2. Table of Contents Explain How Variable Costing Differ from Absorption Costing and Compute Unit product cost Prepare Income Statement using Both variable and absorption Costing Reconcile Variable Costing and Absorption Costing Net operating Income. Prepare a segmented Income Statement That differentiate Traceable Fixed Cost From Common Cost and Use itTo mae dicision . Commute Companywide and Segmented Breakeven Point For a Company with Traceable Fixed Cost. 2

3. Overview of Variable and Absorption Costing Variable Costing Under variable costing, only those manufacturing costs that vary with output are treated as product costs. This would usually include direct materials, direct labor, and the variable portion of manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under this method. Absorption Costing Absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead 3

4. Selling and Administrative Expenses 3 4

5. Variable and Absorption Costing—An Example 5

6. Variable Costing Contribution Format Income Statement 6

7. The Variable costing cost of goods sold for all three method can be computed as follows 7

8. Variable Costing Income Statement 8

9. how Weber Light Aircraft computed its variable costing net operating income for each month is to focus on the contribution margin per aircraft sold, which is computed as follows: 9

10. The variable costing net operating income for each period can always be computed by multiplying the number of units sold by the contribution margin per unit and then subtracting total fixed expenses. For Weber Light Aircraft these computations would appear as follows: 10

11. Absorption Costing Income Statement The first step in preparing Weber’s absorption costing income statements for January, February, and March is to determine the company’s unit product costs for each month as follows: 11

12. Absorption Costing Income Statement the company’s absorption costing net operating income in each month would be determined as shown in Exhibit 6–3. 12

13. Reconciliation of Variable Costing with Absorption Costing Income Variable costing and absorption costing net operating incomes can be reconciled by determining how much fixed manufacturing overhead was deferred in, or released from, inventories during the period: 13

14. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes 14

15. Comparative Income Effects Absorption and Variable Costing 15

16. Segmented Income Statements and the Contribution Approach segmented income statements are useful for analyzing the profitability of segments, making decisions, and measuring the performance of segment managers. Segmented Income Statements—An Example 16

17. Prophetmax , Inc.: Examples of Business Segments 17

18. ProphetMax, Inc. Segmented Income Statements in the Contribution Format 18

19. Break-Even Analysis ProphetMax’s total traceable fixed expenses are $171,000 and its total common fixed expenses are $85,500. Furthermore, the company’s overall contribution margin of $270,000 divided by its total sales of $500,000 equals its overall CM ratio of 0.54. Given this information, ProphetMax’s companywide break-even point is computed as follows: Dollar sales for company to break even = Traceable fixed expenses + Common fixed expenses/ Overall CM ratio = $171,000 + $85,500/ 0.54 =$256,500/0.54 = $475,000 19

20. the Business Products Division’s traceable fixed expenses are $90,000 and its CM ratio is 0.50 ($150,000 ÷ $300,000). Given this information, the Business Products Division’s break-even point is computed as follows: Dollar sales for a segment to break even = Segment traceable fixed expenses/ Segment CM ratio =$90,000/0.50 = $180,000 20

21. the Consumer Products Division’s traceable fixed expenses are $81,000 and its CM ratio is 0.60 ($120,000 ÷ $200,000), its break-even point is computed as follows: Dollar sales for a segment to break even = Segment traceable fixed expenses / Segment CM ratio = $81,000 / 0.60 = $135,000 21

22. the sum of the segment break-even sales figures of $315,000 ($180,000+ $135,000) is less than the companywide break-even point of $475,000. This occurs because the segment break-even calculations do not include the company’s common fixed expenses. The exclusion of the company’s common fixed expenses can be verified by preparing income statements based on each segment’s break-even dollar sales as follows: 22

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