ACC 117 Lecture Notes - Lecture 27: Income Statement, Fixed Cost, Indian Railways

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26 Nov 2020

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Charlie Kent

ACC 117

Summer 2017

Introduction to Anthropology

● Calculating Contribution Margin

○ Unit

○ Ratio

Break Even in Units & Sales

○ Profit = 0

○ Common AND Traceable Fixed Costs (All Fixed Costs)

Margin of Safety

Calculating Degree of Operating Leverage

○ How sensitive company’s net income is to changes in sales

Absorption Costing

○ Cost/Unit

○ Income Statement

○ Net Income

Variable Costing

○ Cost/Unit

○ Income Statement

○ Net Income

Segment Reporting

○ Breaking down Income Statement by Project / Section

■ Break-Even by Segments (Traceable Fixed Costs)

Activity-Based Costing

○ Rates

○ Allocate Overhead (Rate x Actual Activity)

○ Allocate to either a Job or Customer

○ Customer Margin (same thing as Customer Profit)

■ Sales for the customer – All the costs for the customer

Profit Planning –

○ Accomplished by a collection of Budgets (Master Budget)

Budget – Detailed plan for the future

○ Planning

■ Developing goals

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Document Summary

Common and traceable fixed costs (all fixed costs) How sensitive company"s net income is to changes in sales. Breaking down income statement by project / section. Allocate to either a job or customer. Customer margin (same thing as customer profit) Sales for the customer all the costs for the customer. Accomplished by a collection of budgets (master budget) Monitoring, to ensure proper execution of plans. Help communicate plans and motivate managers to plan for future. System of accountability in which managers are held responsible over items of revenue and cost over which they have significant control. Most are usually 1 year fiscal year of the company. Requires review and re-appraisal throughout the year. Continuous budgets 12 months, and 1 month is added after the end of each month (ex) Self-imposed budget prepared with full participation and awareness of managers at all levels. Acceptance and how budget data is used by people in key positions.

Related Questions

The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead: $0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.

1. Compute net income before tax.

2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.

3. Calculate the break-even point in units and dollars ofrevenue.

4. Calculate the margin of safety:

In units

In sales dollars

As a percentage

5. Calculate the degree of operating leverage.

6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.

7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.

8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.

Requirement 1
	Units	Price	Totals
Sales	X	$	$
Variable Costs	X	$	$
Fixed Costs			$
Net Income			$

Requirement 2

Contribution Margin per Unitin Dollars = Selling Price â Variable Costs

Selling Price		Variable Costs	Contribution Margin per Unit



Contribution Margin Ratio =Contribution Margin/Selling Price

Contribution Margin		Selling Price	Contribution Margin Ratio


Requirement 3

Break-Even Point = Fixed Costs/ Contribution Margin

Fixed Costs		Contribution Margin	Break-Even Point in Units (Rounded)


Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales

Break-Even Point in Units		Selling Price per Unit	Break-Even Point in Sales (Rounded)


Requirement 4A

Margin of Safety in Units =Current Unit Sales â Break-Even Point in Unit Sales

Current Unit Sales		Break-Even Point in Sales	Margin of Safety in Units


Requirement 4B

Margin of Safety in Dollars =Current Sales in Dollars â Break-Even Point Sales in Dollars

Current Sales in Dollars		Break-Even Point in Dollars	Margin of Safety in Dollars


Requirement 4C

Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales

Margin of Safety in Units		Current Unit Sales	Margin of Safety Percentage



Requirement 5

Degree of Operating Leverage =Contribution Margin / Operating Income

Contribution Margin		Operating Income	Operating Leverage



Requirement 6
	Units	$ Per Unit	Totals
Sales	X	$	$
Variable Costs	X	$	$
Fixed Costs			$
Net Income			$

Operating Leverage		Times % Increase	Increase would be XX%


Prior Income	$	From Part 1
Increase	$	Prior Income X XX% Above
Total	$


Requirement 7

Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin

Fixed Costs + Target Income		Divided by Contribution Margin	# of Units (Rounded)
Fixed Costs	$
Target Income	$
Total	$	$	X

		# of Units Above X $ Per Unit
Proof	Revenue	XX,XXX X $XX.XX	$
	Variable Costs	XX,XXX X $X.XX	$
	Contribution Margin		$
	Fixed Costs		$
	Net Income		$


Requirement 8

Sales Mix
	Current	Specialty	Total
Expected Sales Units	X	X
Revenue = Sales X Price	$	$	$
Variable Costs X Units	$	$	$
Contribution Margin	$	$	$
Fixed Costs	$	$	$
Operating Income			$

Prior Net Income FromRequirement 1			$

Additional Operating Income	(Operating Income Above Less Prior Income)		$

Decision With Explanation

redant669

Diego Company manufactures one product that is sold for $72 perunit in two geographic regionsâthe East and West regions. Thefollowing information pertains to the companyâs first year ofoperations in which it produced 43,000 units and sold 38,000 units.Variable costs per unit: Manufacturing: Direct materials $ 22Direct labor $ 14 Variable manufacturing overhead $ 3 Variableselling and administrative $ 5 Fixed costs per year: Fixedmanufacturing overhead $ 774,000 Fixed selling and administrativeexpenses $ 346,000 The company sold 28,000 units in the East regionand 10,000 units in the West region. It determined that $170,000 ofits fixed selling and administrative expenses is traceable to theWest region, $120,000 is traceable to the East region, and theremaining $56,000 is a common fixed cost. The company will continueto incur the total amount of its fixed manufacturing overhead costsas long as it continues to produce any amount of its only product.Required: 1. What is the unit product cost under variable costing?2. What is the unit product cost under absorption costing? 3. Whatis the companyâs total contribution margin under variable costing?4. What is the companyâs net operating income (loss) under variablecosting? 5. What is the companyâs total gross margin underabsorption costing? 6. What is the companyâs net operating income(loss) under absorption costing? 7. What is the amount of thedifference between the variable costing and absorption costing netoperating incomes (losses)? 8-1. What is the companyâs break-evenpoint in unit sales? 2. Is it above or below the actual salesvolume? 9. If the sales volumes in the East and West regions hadbeen reversed, what would be the companyâs overall break-even pointin unit sales 10. What would have been the companyâs variablecosting net operating income (loss) if it had produced and sold38,000 units? 11. What would have been the companyâs absorptioncosting net operating income (loss) if it had produced and sold38,000 units? 12. If the company produces 5,000 fewer units than itsells in its second year of operations, will absorption costing netoperating income be higher or lower than variable costing netoperating income in Year 2? Lower Higher 13. Prepare a contributionformat segmented income statement that includes a Total column andcolumns for the East and West regions. 14.Diego is consideringeliminating the West region because an internally generated reportsuggests the regionâs total gross margin in the first year ofoperations was $20,000 less than its traceable fixed selling andadministrative expenses. Diego believes that if it drops the Westregion, the East region's sales will grow by 5% in Year 2. Usingthe contribution approach for analyzing segment profitability andassuming all else remains constant in Year 2, what would be theprofit impact of dropping the West region in Year 2? 15. Assume theWest region invests $33,000 in a new advertising campaign in Year 2that increases its unit sales by 20%. If all else remains constant,what would be the profit impact of pursuing the advertisingcampaign? ANSWERS 5-15 NEEDED PLEASE!!

Koontz Company manufactures two models of industrialcomponentsâa Basic model and an Advanced Model. The companyconsiders all of its manufacturing overhead costs to be fixed andit uses plantwide manufacturing overhead cost allocation based ondirect labor-hours. Koontzâs controller prepared the segmentedincome statement that is shown below for the most recent year (heallocated selling and administrative expenses to products based onsales dollars):

	Basic			Advanced			Total
Number of units produced andsold		20,000			10,000		30,000

Sales	$	3,000,000		$	2,000,000	$	5,000,000
Cost of goods sold		2,300,000			1,350,000		3,650,000
Gross margin		700,000			650,000		1,350,000
Selling and administrativeexpenses		720,000			480,000		1,200,000
Net operating income (loss)	$	(20,000	)	$	170,000	$	150,000

Direct laborers are paid $20 per hour. Direct materials cost $40per unit for the Basic model and $60 per unit for the Advancedmodel. Koontz is considering a change from plantwide overheadallocation to a departmental approach. The overhead costs in thecompanyâs Molding Department would be allocated based onmachine-hours and the overhead costs in its Assembly and PackDepartment would be allocated based on direct labor-hours. Toenable further analysis, the controller gathered the followinginformation:

	Molding		Assemble and Pack			Total
Manufacturing overheadcosts	$	787,500	$	562,500	$	1,350,000
Direct labor hours:
Basic		10,000		20,000		30,000
Advanced		5,000		10,000		15,000
Machine hours:
Basic		12,000		-		12,000
Advanced		10,000		-		10,000

Required:

3. Koontzâs production manager has suggested usingactivity-based costing instead of either the plantwide ordepartmental approaches. To facilitate the necessary calculations,she assigned the companyâs total manufacturing overhead cost tofive activity cost pools as follows:

Activity Cost Pool	Activity Measure	Manufacturing Overhead
Machining	Machine-hours inMolding	$	417,500
Assemble and pack	Direct labor hours in Assembleand Pack		282,500
Order processing	Number of customer orders		230,000
Setups	Setup hours		340,000
Other (unused capacity)			80,000
		$	1,350,000

She also determined that the average order size for the Basicand Advanced models is 400 units and 50 units, respectively. Themolding machines require a setup for each order. One setup hour isrequired for each customer order of the Basic model and three hoursare required to setup for an order of the Advanced model.

The company pays a sales commissions of 5% for the Basic modeland 10% for the Advanced model. Its traceable fixed advertisingcosts include $150,000 for the Basic model and $200,000 for theAdvanced model. The remainder of the companyâs selling andadministrative costs are organization-sustaining in nature.

Using the additional information provided by the productionmanager, calculate:

a. An activity rate for each activity cost pool.

b. The total manufacturing overhead cost allocated to the Basicmodel and the Advanced model using the activity-based approach.

c. The total selling and administrative cost traced to the Basicmodel and the Advanced model using the activity-based approach.

4. Using your activity-based cost assignments from requirement3, prepare a contribution format segmented income statement that isadapted from Exhibit 7-8. (Hint: Organize all of the companyâscosts into three categories: variable expenses, traceable fixedexpenses, and common fixed expenses.)

5. Using your contribution format segmented income statementfrom requirement 4, calculate the break-even point in dollar salesfor the Advanced model.

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ACC 117 Lecture Notes - Lecture 27: Income Statement, Fixed Cost, Indian Railways

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