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15 -1

CHAPTER
Segment
Reporting and
Performance
Evaluation
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Objectives
1. Discuss the differences between
After studying this variable and
absorption costing.
chapter, you should
2. Explain how variable costing
be able to: 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.
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Objectives
4. Show how variable costing can be used in
planning and control.
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Variable costing
assigns only variable
manufacturing costs to
the product.
Direct materials
Direct labor
Variable overhead
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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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Inventory Valuation
Units in beginning inventory ---
Units produced 10,000
Units sold ($300 each) 8,000
Normal volume 10,000
Fixed costs:
Variable cost per unit:
Direct overhead
Fixed materials $250,000
$ 50
Direct selling
Fixed labor and administrative 100,000
100
Variable overhead 50
Variable selling and administrative 10
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Unit Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25

$250,000
10,000
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Unit Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25
Total $200 $225
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Fairchild Company
Variable-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 Company
Absorption-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 $370,000


Fixed portion of ending inventory
(2,000 units x $25) 50,000
Absorption costing net income $420,000
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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
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Example

Data for Belnip, Inc., for years 2002, 2003, and 2004
follows:
Variable cost pr unit:
Direct materials $4.00
Direct labor 1.50
Variable overhead (estimated and
actual) 0.50
Variable selling and administrative 0.25
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.
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Variable-Costing Income Statement


2002 2003 2004
Sales $1,500.00 $1,000 $2,000
Less variable expenses: BI
Cost of GM
$ 300
-900.00
900
Variable cost of goods sold
GAFS -87.50
$1,200 -600 -1,200
Variable selling and admin. $ 562.50
Less: EI 0 -25 -50
VCof GS $1,200
Contribution margin -150.00 $ 375 $ 750
Less fixed expenses: BI BI $ 0 $ 0
Cost of GM Cost of900
GM 900
Fixed overhead GAFS
-0.50
GAFS$900
-150 -150
$900
Fixed selling and admin. Less:$ EI367.50
Less: EI0 -50 -50
300
Net income VCof GS $ 367
VCof$900
GS $ $600
550
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Absorption-Costing Income Statement


2002 2003 2004
BI $ 350
Sales Cost of GM 1,050 $1,000 $2,000
$1,500.00
Less: Cost of goods sold GAFS-1,050.00
$1,400 700 1,400
Gross margin Less:$EI 450.00 0 $ 300 $ 600
Cof GS $1,400
Less: Selling and admin. exp. 87.50 75 100
Net income BI $ 362.50 BI$ $0 225 $$ 500
0
Cost of GM Cost
1,050
of GM 1,050
GAFS GAFS
$1,050 $1,050
Less: EI Less: EI
0 350
Cof GS Cof
$1,050
GS $ 700
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Absorption costing income – Variable


costing income = Fixed overhead x (Units
produced – Units sold)

2004

$500,000 – $550,000 = $1 x
(150,000 – 200,000)
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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 Reporting
Elcom, Inc.
Income Statement, 2004
Absorption-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less: Cost of goods sold 350,000 300,000 650,000
Gross margin $ 50,000 $ -10,000 $ 40,000
Less: Selling and
administrative exp. 30,000 20,000 50,000
Net income or loss $ 20,000 $ -30,000 $ -10,000
Elcom, Inc. 15 -18
Income Statement, 2004
Variable-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less variable expenses:
Variable C of GS -300,000 -200,000 -500,000
Variable S & A -5,000 -10,000 -15,000
Contribution margin $ 95,000 $ 80,000 $175,000
Less direct fixed exp.:
Direct fixed overhead -30,000 -20,000 -50,000
Direct S & A -10,000 -5,000 -15,000
Segment margin $ 55,000 $ 55,000 $110,000
Less common fixed exp.:
Common fixed OH -100,000
Common S & A -20,000
Net income or loss $-10,000
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Barton, Inc.
Profit for
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.
Profit for
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.
Profit 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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Chapter Fifteen

The End
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