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Customer Profitability Analysis, Sales Performance Evaluation, and
18-1 18 Customer Profitability Analysis, Sales Performance Evaluation, and Income Reporting Student Tutorial Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-2 Chapter Organization This chapter has been subdivided into three independent sections. Click the section below that you wish to study, or press “Enter” to proceed linearly through the chapter. !Customer Profitability Analysis "Sales Variance Analysis #Income Reporting Effects of Alternative Product-Costing Approaches Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-3 Customer Profitability Analysis Using Using ABC ABC to to determine determine the the activities, activities, costs, costs, and and profit profit associated associated with with serving serving particular particular customers. customers. For Forvarious various reasons, reasons,some some customers customerssimply simply are areless lessprofitable profitable than thanothers. others. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-4 Customer Profitability Analysis For Forvarious various reasons, reasons,some some customers customerssimply simply are areless lessprofitable profitable than thanothers. others. Irwin/McGraw-Hill Ryerson For Example Using Using ABC ABC to to determine determine the the activities, activities, costs, costs, and and profit profit associated associated with with serving serving particular particular customers. customers. Customer makes frequent order changes. Customer needs special parts. Customer is difficult to please. ©McGraw-Hill Ryerson Limited, 2001 18-5 Customer Profitability Analysis Once Once we we know know which which customers customers are are the the least least profitable, profitable, we we can can modify modify our our relationship relationship to to improve improve profitability. profitability. Examples: e w ut ing b , o s i h ue d . t o tin u d o o y n t o i th e c t t a ’ I h can ess w t s in u s j bu Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-6 Customer Profitability Analysis Once Once we we know know which which customers customers are are the the least least profitable, profitable, we we can can modify modify our our relationship relationship to to improve improve profitability. profitability. Examples: Irwin/McGraw-Hill Ryerson We’ll send a team to your plant next week and help you set up an ordering system that gives us more lead time. ©McGraw-Hill Ryerson Limited, 2001 18-7 Customer Profitability Analysis Once Once we we know know which which customers customers are are the the least least profitable, profitable, we we can can modify modify our our relationship relationship to to improve improve profitability. profitability. Examples: If you ask for fewer changes, we can charge you less! Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-8 Customer Profitability Analysis To To determine determine customer customer profitability, profitability, Use Use ABC ABC based based on on the the customer-related customer-related activity activity units units used used by by each each customer customer in in question. question. Typical Customer-Related Activities Include: $ $ $ $ Processing Orders Sales Contacts Sales Visits Processing Shipments Irwin/McGraw-Hill Ryerson $ Billing $ Engineering/Design Changes $ Special Packaging $ Special Handling ©McGraw-Hill Ryerson Limited, 2001 18-9 Customer Profitability Analysis Example Recall Recall from from the the example example in in your your text, text, Koala Koala Camp Camp Gear Gear looked looked at at 55 customers. customers. Customer Profitability $200,000 Bar graphs are common analytical tools. $150,000 $100,000 $50,000 $0 -$50,000 Customer # -$100,000 107 Irwin/McGraw-Hill Ryerson 108 101 102 114 ©McGraw-Hill Ryerson Limited, 2001 18-10 Customer Profitability Analysis Example Customer Profitability Note Note that that attention attention should should be be focused focused on on customer customer #102 #102 and and #114. #114. $200,000 Question: $150,000 Why are customers #102 and #114 not profitable? $100,000 $50,000 $0 -$50,000 Customer # -$100,000 107 Irwin/McGraw-Hill Ryerson 108 101 102 114 ©McGraw-Hill Ryerson Limited, 2001 18-11 Customer Profitability Analysis Example Comparing Comparing the the customer-related customer-related costs costs for for each each customer customer to to established established “norms” “norms” should should reveal reveal helpful helpful insights. insights. For Customer #102, costs of order processing, engineering/design changes, and special handling are above normal. Irwin/McGraw-Hill Ryerson For Customer #114, the cost of special packaging is 4× the norm. The cost for special handling is 6× the norm. ©McGraw-Hill Ryerson Limited, 2001 18-12 Product Life-Cycle Costs Product Product Life-Cycle Life-Cycle Costs Costs include include all all costs costs incurred incurred over over all all phases phases of of aa product’s product’s life life cycle. cycle. !Product planning and concept design. "Preliminary design. #Detailed design and testing. %Production. &Marketing, distribution, and customer service. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-13 Let’s Look at Sales Variances. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-14 Sales Variance Analysis The The company’s company’s overall overall sales sales performance performance can can be be analyzed analyzed two two ways: ways: 1. 1. Focus Focus on on sales sales revenue revenue by by analyzing analyzing the the variance variance between between actual actual and and budgeted budgeted sales sales revenue. revenue. Or Or 2. 2. Focus Focus on on contribution contribution margin. margin. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-15 Sales Revenue Variance Analysis Revenue Budget Variance Sales price variance Sales volume variance Sales mix variance Sales quantity variance Revenue m arket size variance Irwin/McGraw-Hill Ryerson Revenue M arket Share Variance ©McGraw-Hill Ryerson Limited, 2001 18-16 Revenue Budget Variance Revenue budget variance for product x = ( Budgeted Actual sales sales revenue for – revenue for product x product x ) Example Example Elf, Elf, Inc. Inc. sells sells artificial artificial trees. trees. Budgeted Budgeted sales sales for for 2001 2001 are are 65,000 65,000 units units @ @ $120. $120. Koala Koala actually actually sold sold 69,000 69,000 trees trees at at an an average average sales sales price price of of $110. $110. Compute Compute the the Revenue Revenue Budget Budget Variance. Variance. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-17 Revenue Budget Variance Example Budgeted Revenue budget variance for product x $210,000 U = = ( Actual sales sales revenue for – revenue for product x product x ) ( $7,590,000 – $7,800,000 ) Because Because actual actual revenue revenue << budgeted budgeted revenue, revenue, the the variance variance is is UNFAVOURABLE. UNFAVOURABLE. Next, Next, compute compute the the sales sales price price variance variance and and the the sales sales volume volume variance variance for for the the Tree Tree Line Line Tents. Tents. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-18 Sales Price Variance Model Sales price variance = for product x ( Actual Budgeted sales sales – price for price for product x product x ) Actual sales × volume for product x The TheSales SalesPrice PriceVariance Varianceis isaameasure measure of ofhow howmuch muchof of the thetotal total variance variance results resultsfrom fromthe thedifference differencebetween betweenthe the BUDGETED BUDGETEDsales salesprice priceand andthe the ACTUAL ACTUALsales salesprice. price. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-19 Sales Price Variance Example Elf’s budgeted sales for 2001 are 65,000 units @ $120. Koala actually sold 69,000 trees at an average sales price of $110. What is Elf’s Sales Price Variance. A. $ 10 Unfavourable B. $ 650,000 Unfavourable C. $ 480,000 Unfavourable D. $ 690,000 Unfavourable Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-20 Sales Price Variance Example Elf’s budgeted sales for 2001 are 65,000 units @ $120. Koala actually sold 69,000 trees at an average sales price of $110. What is Elf’s Sales Price Variance. A. $ 10 Unfavourable You are on B. $ 650,000 Unfavourable the right C. $ 480,000 Unfavourable track, but you need to try D. $ 690,000 Unfavourable again! Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-21 Sales Price Variance Example Elf’s budgeted sales for 2001 are 65,000 units @ $120. Koala actually sold 69,000 trees at an average sales price of $110. What is Elf’s Sales Price Variance. A. $ 10 Unfavourable Try Tryagain. again. Askyourself yourself B. $ 650,000 Unfavourable Ask ififyou you should should C. $ 480,000 Unfavourable multiply multiplyby by D. $ 690,000 Unfavourable actual actualsales sales or orbudgeted budgeted sales. sales. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-22 Sales Price Variance Example Elf’s budgeted sales for 2001 are 65,000 units @ $120. Koala actually sold 69,000 trees at an average sales price of $110. What is Elf’s Sales Price Variance. A. $ 10 Unfavourable You Youare areWAY WAY off B. $ 650,000 Unfavourable offbase! base! Lookat at the the C. $ 480,000 Unfavourable Look model modeland and D. $ 690,000 Unfavourable then thentry try again. again. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-23 Sales Price Variance Example Elf’s budgeted sales for 2001 are 65,000 units @ $120. Koala actually sold 69,000 trees at an average sales price of $110. What is Elf’s Sales Price Variance. A. $ 10 Unfavourable B. $ 650,000 Unfavourable C. $ 480,000 Unfavourable D. $ 690,000 Unfavourable Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-24 Sales Price Variance Model Sales price variance = for product x Irwin/McGraw-Hill Ryerson ( Actual Budgeted sales sales – price for price for product x product x ) Actual sales × volume for product x ©McGraw-Hill Ryerson Limited, 2001 18-25 Sales Volume Variance Model Sales Volume Variance = ( Actual Budgeted unit sales unit sales volume – volume for for product x product x ) Budgeted sales × price for product x This variance measures how much of the total revenue variance is due to unit sales differing from budgeted unit sales. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-26 Sales Volume Variance Example Elf’s Elf’s budgeted budgeted sales sales for for 2001 2001 are are 65,000 65,000 units units @ @ $120. $120. Koala Koala actually actually sold sold 69,000 69,000 trees trees at at an an average average sales sales price price of of $110. $110. What What is is Elf’s Elf’s Sales Sales Volume Volume Variance. Variance. A. favourable A. $$ 4,000 4,000 favourable B. B. $$ 440,000 440,000 favourable favourable C. C. $$ 480,000 480,000 favourable favourable D. D. $$ 690,000 690,000 Unfavourable Unfavourable Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-27 Sales Volume Variance Example Elf’s Elf’s budgeted budgeted sales sales for for 2001 2001 are are 65,000 65,000 units units @ @ $120. $120. Koala Koala actually actually sold sold 69,000 69,000 trees trees at at an an average average sales sales price price of of $110. $110. What What is is Elf’s Elf’s Sales Sales Volume Volume Variance. Variance. A. favourable A. $$ 4,000 4,000 favourable You are on B. the right B. $$ 440,000 440,000 favourable favourable track, but you C. $ 480,000 favourable C. $ 480,000 favourable need to try D. again! D. $$ 690,000 690,000 Unfavourable Unfavourable Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-28 Sales Volume Variance Example Elf’s Elf’s budgeted budgeted sales sales for for 2001 2001 are are 65,000 65,000 units units @ @ $120. $120. Koala Koala actually actually sold sold 69,000 69,000 trees trees at at an an average average sales sales price price of of $110. $110. What What is is Elf’s Elf’s Sales Sales Volume Volume Variance. Variance. A. Try favourable A. $$ 4,000 4,000 favourable Tryagain. again. Ask Ask yourself ififyou you should should B. B. $$ 440,000 440,000 favourable favourable yourself multiply multiplyby byactual actual C. $ 480,000 favourable C. $ 480,000 favourable price priceor orbudgeted budgeted price. D. price. D. $$ 690,000 690,000 Unfavourable Unfavourable Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-29 Sales Volume Variance Example Elf’s Elf’s budgeted budgeted sales sales for for 2001 2001 are are 65,000 65,000 units units @ @ $120. $120. Koala Koala actually actually sold sold 69,000 69,000 trees trees at at an an average average sales sales price price of of $110. $110. What What is is Elf’s Elf’s Sales Sales Volume Volume Variance. Variance. A. You favourable A. $$ 4,000 4,000 favourable Youare areWAY WAY off offbase! base! B. B. $$ 440,000 440,000 favourable favourable Look Lookat at the the C. $ 480,000 favourable C. $ 480,000 favourable model modeland and then D. thentry try D. $$ 690,000 690,000 Unfavourable Unfavourable again. again. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-30 Sales Volume Variance Example Elf’s Elf’s budgeted budgeted sales sales for for 2001 2001 are are 65,000 65,000 units units @ @ $120. $120. Koala Koala actually actually sold sold 69,000 69,000 trees trees at at an an average average sales sales price price of of $110. $110. What What is is Elf’s Elf’s Sales Sales Volume Volume Variance. Variance. A. favourable A. $$ 4,000 4,000 favourable B. B. $$ 440,000 440,000 favourable favourable C. C. $$ 480,000 480,000 favourable favourable D. D. $$ 690,000 690,000 Unfavourable Unfavourable Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-31 Sales Volume Variance Model Sales Volume Variance Irwin/McGraw-Hill Ryerson = ( Actual Budgeted unit sales unit sales volume – volume for for product x product x ) Budgeted sales × price for product x ©McGraw-Hill Ryerson Limited, 2001 18-32 Sales Mix Variance For For the the Sales Sales Mix Mix Variance, Variance, sum sum the the sales sales mix mix variances variances for for each each product. product. Sales Mix Variance Budget = sales price × ( Actual sales mix % Budget – sales mix % ) Actual × total unit sales Example Example -- Refer Refer to to the the text text Koala Koalaoriginally originallybudgeted budgeted for forTree TreeLine LineTents Tentsto to comprise comprise60% 60%of ofsales. sales. By Bythe theend end of of the theperiod, period, Tree TreeLine LineTents Tentsrepresented representedonly only55% 55%of of sales. sales. Total Totalunit unitsales salesfor forthe theperiod periodwas was55,000 55,000units. units. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-33 Sales Mix Variance For For the the Sales Sales Mix Mix Variance, Variance, sum sum the the sales sales mix mix variances variances for for each each product. product. Sales Mix Variance Budget = sales price $495,000 U = × $180 ( × Budget – sales mix % ) Actual × total unit sales 55% – 60% ) × Actual sales mix % ( 55,000 The Thevariance varianceis isUNFAVOURABLE, UNFAVOURABLE, because becauseTree TreeLine LineTents Tentswere wereaasmaller smaller portion portionof oftotal total sales salesthan than originally originally planned. planned. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-34 Sales Quantity Variance For For the the Sales Sales Quantity Quantity Variance, Variance, sum sum the the sales sales quantity quantity variances variances for for each each product. product. Sales Quantity Variance Budget = sales × price ( Actual Budget unit – unit sales sales ) Budget × Sales % Example Example Koala Koalaoriginally originallybudgeted budgeted for forTree TreeLine LineTents Tentsto to comprise comprise60% 60%of ofsales. sales. Koala Koalaplanned plannedto tosell sell 50,000 50,000Tree TreeLine LineTents, Tents, but but actually actuallysold sold55,000 55,000 Tree TreeLine LineTents. Tents. Budgeted BudgetedSales SalesPrice Priceis is$180. $180. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-35 Sales Quantity Variance For For the the Sales Sales Quantity Quantity Variance, Variance, sum sum the the sales sales quantity quantity variances variances for for each each product. product. Sales Quantity Variance Budget = sales × price $540,000 F = $180 Actual Budget unit – unit sales sales ( × ( 55,000 – 50,000 ) Budget × Sales % ) × 60% The Thevariance varianceis isFAVOURABLE, FAVOURABLE,because because Tree TreeLine LineTents Tentssold soldmore moreunits unitsthat that originally originallyplanned. planned. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-36 Revenue Market Size Variance Base Base the the Revenue Revenue Market Market Size Size Variance Variance on on total total production production and and budgeted budgeted market market share. share. Budget Revenue weighted market = avg. unit × size sales variance price ( Actual total market unit sales Budget total – market unit sales ) Budget × market share % The The resulting resulting variance variance is is favourable, favourable, or or unfavourable, unfavourable, simply simply as as aa function function of of how how the the industry, industry, as as aa whole, whole, did did compared compared to to expectations. expectations. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-37 Revenue Market Share Variance Budget Revenue weighted market = avg. unit × share sales variance price ( Actual Budget market – market share % share % ) Actual total × market unit sales Example Example Koala’s Koala’sbudgeted budgeted market market share shareis is5%. 5%. However, However,Koala Koalaonly onlyachieved achieved aamarket market share shareof of 4%. 4%. Weighted Weightedaverage averageunit unitsales sales price pricefor forKoala’s Koala’sthree threetypes typesof of tents tentsis is $199. $199. Total Totalindustry industrysales saleswere were1,375,000 1,375,000 units. units. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-38 Revenue Market Share Variance Example Budget Revenue weighted market = avg. unit × share sales variance price = $199 × = $2,736,250 U Irwin/McGraw-Hill Ryerson ( ( Actual Budget market – market share % share % 4% – 5% ) × ) Actual total × market unit sales 1,375,000 Koala’s market share is down. This particular variance is likely to be of great concern to management. ©McGraw-Hill Ryerson Limited, 2001 18-39 Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-40 CM Variance Analysis CM Budget Variance CM variance CM sales volume variance Each Eachof ofthese thesevariances variancesis is computed computedthe thesame sameway wayas asits its revenue revenuecounterpart. counterpart. Use UseCM CMinstead insteadof ofsales salesprice. price. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-41 CM Variance Analysis CM Budget Variance CM variance CM sales volume variance CM sales mix variance CM Sales quantity variance Each Eachof ofthese thesevariances variancesis is computed computedthe thesame sameway wayas asits its revenue revenuecounterpart. counterpart. Use UseCM CMinstead insteadof ofsales salesprice. price. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-42 CM Variance Analysis CM Budget Variance CM variance CM sales volume variance CM sales mix variance Each Eachof ofthese thesevariances variancesis is computed computedthe thesame sameway wayas asits its revenue revenuecounterpart. counterpart. Use UseCM CMinstead insteadof ofsales salesprice. price. Irwin/McGraw-Hill Ryerson CM Sales quantity variance CM market size variance CM Market Share Variance ©McGraw-Hill Ryerson Limited, 2001 Income Reporting Effects of Alternative Product-Costing Approaches Absorption Costing Irwin/McGraw-Hill Ryerson Vs. 18-43 Variable Costing ©McGraw-Hill Ryerson Limited, 2001 18-44 Absorption Costing Product Product cost cost includes includes both both variable variable and and fixed fixed manufacturing manufacturing overhead, overhead, in in addition addition to to direct direct materials materials (variable) (variable) and and direct direct labour labour (variable). (variable). Direct DirectMaterial Material Costs incurred Direct Directlabour labour ALL ALLMfg. Mfg.O/H O/H Irwin/McGraw-Hill Ryerson WIP WIP Inventory Inventory on onBal. Bal. Sheet Sheet COGS COGSon on Income Income Statement Statement Goods completed Finished Finished Goods Goods Inventory Inventory on onBal. Bal. Sheet Sheet Goods sold ©McGraw-Hill Ryerson Limited, 2001 18-45 Variable Costing Variable Variable costing costing uses uses only only the the variable variable portion portion of of manufacturing manufacturing overhead overhead when when computing computing product product cost. cost. Direct DirectMaterial Material Direct Directlabour labour Variable VariableMfg. Mfg. O/H O/H Irwin/McGraw-Hill Ryerson Costs incurred WIP WIP Inventory Inventory on onBal. Bal. Sheet Sheet COGS COGSon on Income Income Statement Statement Goods completed Finished Finished Goods Goods Inventory Inventory on onBal. Bal. Sheet Sheet Goods sold ©McGraw-Hill Ryerson Limited, 2001 18-46 Variable Costing With With Variable Variable Costing, Costing, the the Fixed Fixed manufacturing manufacturing overhead overhead is is charged charged directly directly to to expenses expenses on on the the income income statement. statement. Fixed Fixed Manufacturing Manufacturing Overhead Overhead Irwin/McGraw-Hill Ryerson Costs incurred Expenses Expenseson on Income Income Stmt. Stmt. ©McGraw-Hill Ryerson Limited, 2001 18-47 Alternative Product-Costing Absorption costing will often result in different net income than variable costing. Remember, the only difference is in how we treat FIXED manufacturing overhead. Koala Koala Cooking Cooking Gear Gear needs needs to to know know how how net net income income would would differ differ under under absorption absorption costing costing and and variable variable costing. costing. Use Use the the information information in in the the following following table table to to prepare prepare income income statements statements for for both both absorption absorption costing costing and and variable variable costing. costing. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-48 Alternative Product-Costing Example Production and Inventory data: Beginning Inventory Units Produced Units Sold Ending Inventory 0 18,000 13,500 4,500 Revenue and Cost data: Sales Price per Unit Direct Material Cost per Unit Direct Labour Cost per Unit Variable Manufacturing Overhead per Unit Variable SG&A Fixed Manufacturing Overhead Fixed SG&A Irwin/McGraw-Hill Ryerson $34 $12 $4 $7 $3 $81,000 $45,000 ©McGraw-Hill Ryerson Limited, 2001 18-49 Absorption Costing Example Step 1: Compute Fixed Overhead Rate per Unit of Production Budgeted Planned Fixed annual ÷ annual = Overhead fixed production Rate overhead $81,000 Irwin/McGraw-Hill Ryerson ÷ 18,000 = $4.50 ©McGraw-Hill Ryerson Limited, 2001 18-50 Absorption Costing Example Step 2: Compute Absorption Cost per Unit Direct Materials Cost per Unit Direct Labour Cost per Unit Variable Overhead Cost per Unit Fixed Overhead Cost per Unit* TOTAL COST PER UNIT** $12.00 4.00 7.00 4.50 $27.50 * Com pute d in Ste p 1 ** Us e to prepare Incom e Statem ent Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-51 Absorption Costing Example Koala Cooking Gear Absorption Costing Income Statement Revenue ( 13,500 × $34.00 ) $ 459,000 COGS ( 13,500 × $27.50 ) (371,250) Gross Margin $ 87,750 SG& A Expenses Variable ( 13,500 × $3.00 ) (40,500) Fixed (45,000) NET INCOME $ 2,250 Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-52 Absorption Costing Example Koala Cooking Gear Absorption Costing Income Statement Revenue ( 13,500 × $34.00 ) $ 459,000 COGS ( 13,500 × $27.50 ) (371,250) Gross Margin $ 87,750 SG& A Expenses Variable ( 13,500 × $3.00 ) (40,500) Fixed (45,000) NET INCOME $ 2,250 Irwin/McGraw-Hill Ryerson COGS includes only part of the fixed overhead incurred during the period. ©McGraw-Hill Ryerson Limited, 2001 18-53 Variable Costing Example Koala Cooking Gear Variable Costing Income Statement Revenue ( 13,500 × $34.00 ) $ 459,000 COGS ( 13,500 × $23.00 ) $(310,500) Variable SG&A ( 13,500 × $3.00 ) (40,500) Contribution Margin $ 108,000 Fixed Expenses SG&A (45,000) Mfg. Overhead (81,000) NET INCOME $ (18,000) Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-54 Variable Costing Example Koala Cooking Gear Variable Costing Income Statement Revenue ( 13,500 × $34.00 ) $ 459,000 COGS ( 13,500 × $23.00 ) $(310,500) Variable SG&A ( 13,500 × $3.00 ) (40,500) Contribution Margin $ 108,000 Fixed Expenses SG&A (45,000) Mfg. Overhead (81,000) Includes direct NET INCOME material ($12), direct $ (18,000) labour ($4) and variable overhead ($7) Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-55 Variable Costing Example Koala Cooking Gear Variable Costing Income Statement Revenue ( 13,500 × $34.00 ) $ 459,000 COGS ( 13,500 × $23.00 ) $(310,500) Variable SG&A ( 13,500 × $3.00 ) (40,500) Contribution Margin $ 108,000 Fixed Expenses SG&A (45,000) This includes Mfg. Overhead ALL the fixed (81,000) NET INCOME $ (18,000) overhead for the period. Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 18-56 Absorption vs. Variable Costing Reconciling Income Period-to-Period Income Comparison Income Comparison No Change in Inventory Increase in Inventory Decrease in Inventory Absorption = Variable Absorption > Variable Absorption < Variable Difference in Fixed Overhead Expensed Under Absorption and = Variable Costing Methods Irwin/McGraw-Hill Ryerson Change in Inventory Units Predetermined × Fixed-Overhead Rate Per Unit ©McGraw-Hill Ryerson Limited, 2001 18-57 End of Chapter 18 I can’t stand it anymore! Please make it stop! Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001
