University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

300

Pages:

23
Author:

terrytat2ej

Chapter 5 Cost Behavior: Analysis and Use Part 3 Learning Objective LO4 To prepare an income statement using the contribution format. 5-48 The Contribution Format Income Statement Let’s put our knowledge of cost behavior to work by preparing a contribution format income statement. 5-49 The Contribution Format Sales Revenue Less: Variable costs Contribution margin Total $ 100,000 60,000 $ 40,000 Less: Fixed costs Net operating income 30,000 $ 10,000 Unit $ 50 30 $ 20 The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs and provides for income. 5-50 Uses of the Contribution Format The contribution income statement format is used as an internal planning and decision making tool. We will use this approach for: 1. Cost-volume-profit analysis (Chapter 6). 2. Budgeting (Chapter 7). 3. Special decisions such as pricing and make-orbuy analysis (Chapter 11). 5-51 The Contribution Format Used primarily for external reporting. Used primarily by management. 5-52 Learning Objective LO5 To use variable costing to prepare a contribution format income statement and contrast absorption costing and variable costing. (Appendix 5A) 5-53 Overview of Absorption and Variable Costing Absorption Costing Variable Costing Direct Materials Product Costs Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Period Costs Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Product Costs Period Costs 5-55 Quick Check  Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends. 5-57 Unit Cost Computations Harvey Company produces a single product with the following information available: 5-58 Unit Cost Computations Unit product cost is determined as follows: Selling and administrative expenses are always treated as period expenses and deducted from revenue as incurred. 5-59 Income Comparison of Absorption and Variable Costing Let’s assume the following additional information for Harvey Company.   20,000 units were sold during the year at a price of $30 each. There were no units in beginning inventory. Now, let’s compute net operating income using both absorption and variable costing. 5-60 Absorption Costing 5-61 Variable Costing Variable manufacturing Variable Costing costs only. Sales (20,000 × $30) Less variable expenses: Beginning inventory $ Add COGM (25,000 × $10) 250,000 Goods available for sale 250,000 Less ending inventory (5,000 × $10) 50,000 200,000 Variable cost of goods sold Variable selling & administrative expenses (20,000 × $3) 60,000 Contribution margin Less fixed expenses: Manufacturing overhead $ 150,000 Selling & administrative expenses 100,000 Net operating income $ 600,000 All fixed manufacturing overhead is expensed. 260,000 340,000 250,000 $ 90,000 5-62 Income Comparison of Absorption and Variable Costing Let’s compare the methods. 5-63 Comparing the Two Methods We can reconcile the difference between absorption and variable income as follows: Variable costing net operating income $ 90,000 Add: Fixed mfg. overhead costs deferred in inventory (5,000 units × $6 per unit) 30,000 Absorption costing net operating income $ 120,000 Fixed mfg. Overhead $150,000 = = $6.00 per unit Units produced 25,000 units 5-64 Extended Comparison of Income Data Here is information about the operation of Harvey Company for the second year. 5-65 Unit Cost Computations Since there was no change in the variable costs per unit, total fixed costs, or the number of units produced, the unit costs remain unchanged. 5-66 Absorption Costing Sales (30,000 × $30) Less cost of goods sold: Beg. inventory (5,000 × $16) Add COGM (25,000 × $16) Goods available for sale Less ending inventory Gross margin Less selling & admin. exp. Variable (30,000 × $3) Fixed Net operating income Absorption Costing $ 900,000 $ 80,000 400,000 480,000 $ 90,000 100,000 480,000 420,000 190,000 $ 230,000 These are the 25,000 units produced in the current period. 5-67 Variable Costing Variable manufacturing costs only. All fixed manufacturing overhead is expensed. 5-68 Comparing the Two Methods We can reconcile the difference between absorption and variable income as follows: Variable costing net operating income $ 260,000 Deduct: Fixed manufacturing overhead costs released from inventory (5,000 units × $6 per unit) 30,000 Absorption costing net operating income $ 230,000 Fixed mfg. Overhead $150,000 = = $6.00 per unit Units produced 25,000 units 5-69 Income Comparison 5-70 Summary of Key Insights 5-71