15 -1
CHAPTER
Segment
Reporting and
Performance
Evaluation
15 -2
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.
15 -3
Objectives
4. Show how variable costing can be used in
planning and control.
15 -4
Variable costing assigns
only variable
manufacturing costs to
the product.
Direct materials
Direct labor
Variable overhead
15 -5
Absorption costing assigns
all manufacturing costs to
the product; this adds fixed
overhead to the formula.
Direct materials
Direct labor
Variable overhead
Fixed overhead
15 -6
Inventory Valuation
Units in beginning inventory
Units produced
Units sold ($300 each)
Normal volume
Fixed costs:
Variable
cost per unit:
Direct overhead
Fixed
materials
Direct selling
Fixed
labor and administrative
Variable overhead
Variable selling and administrative
--10,000
8,000
10,000
$250,000
$ 50
100,000
100
50
10
15 -7
Unit Cost
Direct materials
Direct labor
Variable overhead
Fixed overhead
Variable
costing
$ 50
100
50
Absorption
costing
$ 50
100
50
25
$250,000
10,000
15 -8
Unit Cost
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
Variable
costing
$ 50
100
50
$200
Absorption
costing
$ 50
100
50
25
$225
15 -9
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
15 -10
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
Fixed portion of ending inventory
(2,000 units x $25)
Absorption costing net income
$370,000
50,000
$420,000
Production, Sales, and
Income Relationships
If
Then
Production > Sales
Production < Sales
Production = Sales
Absorption NI > Variable NI
Absorption NI < Variable NI
Absorption NI = Variable NI
15 -11
15 -12
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.
15 -13
Variable-Costing Income Statement
2002
2003
Sales
$1,500.00 $1,000
$ 300
Less variable expenses: BI
-900.00
Cost of GM
900
Variable cost of goods sold
-87.50
-600
GAFS
$1,200
Less: EI
0
Variable selling and admin.
$ 562.50
-25
VCof GS
$1,200
Contribution margin
-150.00 $ 375
BI
BI $ 0
Less fixed expenses:
-0.50
Cost of GM Cost of
900
GM
Fixed overhead
$
367.50
-150
GAFS
GAFS
$900
Fixed selling and admin. Less: EI
Less: EI0 -50
VCof GS
VCof$900
GS
Net income
$ 367
2004
$2,000
-1,200
-50
$ 750
$ 0
900
-150
$900
-50
300
$ $600
550
15 -14
Absorption-Costing Income Statement
2002
2003 2004
BI
$ 350
Sales
$1,500.00
$1,000 $2,000
Cost of GM 1,050
Less: Cost of goods sold GAFS-1,050.00
700 1,400
$1,400
Less:$EI 450.00 0 $ 300 $ 600
Gross margin
Cof GS
$1,400
Less: Selling and admin. exp.
87.50
75
100
BI $ 362.50
BI$ $
0 225 $$ 500
0
Net income
Cost of GM
GAFS
Less: EI
Cof GS
Cost
1,050
of GM
GAFS
$1,050
Less: EI
0
Cof
$1,050
GS
1,050
$1,050
350
$ 700
15 -15
Absorption costing income – Variable
costing income = Fixed overhead x (Units
produced – Units sold)
2004
$500,000 – $550,000 = $1 x
(150,000 – 200,000)
15 -16
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.
15 -17
Segment Reporting
Elcom, Inc.
Income Statement, 2004
Absorption-Costing Basis
Stereos Video Recorders Total
Sales
$400,000
Less: Cost of goods sold 350,000
Gross margin
$ 50,000
Less: Selling and
administrative exp.
30,000
Net income or loss
$ 20,000
$290,000
300,000
$ -10,000
$690,000
650,000
$ 40,000
20,000
$ -30,000
50,000
$ -10,000
Elcom, Inc.
Income Statement, 2004
Variable-Costing Basis
Stereos Video Recorders Total
Sales
$400,000
Less variable expenses:
Variable C of GS
-300,000
Variable S & A
-5,000
Contribution margin
$ 95,000
Less direct fixed exp.:
Direct fixed overhead -30,000
Direct S & A
-10,000
Segment margin
$ 55,000
Less common fixed exp.:
Common fixed OH
Common S & A
Net income or loss
$290,000
$690,000
-200,000
-10,000
$ 80,000
-500,000
-15,000
$175,000
-20,000
-5,000
$ 55,000
-50,000
-15,000
$110,000
-100,000
-20,000
$-10,000
15 -18
15 -19
Barton, Inc.
Profit for
Chain Stores
Sales
Less: Discounts
Net sales
Less: Cost of goods sold
Gross profit
Less: Shelf space
Shipping
EDI
Profit
$4,725,000
393,750
$4,331,250
2,520,000
$1,811,250
-112,500
-157,500
-100,000
$1,441,250
15 -20
Barton, Inc.
Profit for
Independent Toy Stores
Sales
Less: Cost of goods sold
Gross profit
Less: Commissions
Special packaging
Profit
$2,625,000
1,400,000
$1,225,000
-131,250
-35,000
$1,058,750
15 -21
Barton, Inc.
Profit for Fairs
Sales
Less: Cost of goods sold
Gross profit
Less: Fair expense
Design time
Setup
Loss
$150,000
80,000
$ 70,000
-75,000
-2,100
-1,000
$ -8,100
15 -22
Chapter Fifteen
The End
15 -23