ACCT20100 Lecture Notes - Lecture 10: Income Statement, Contribution Margin, Cost Driver

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periwinklechimpanzee451

21 Sep 2020

School

Department

Accountancy

Course

ACCT20100

Professor

Colleen Creighton

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Document Summary

A cost driver is a factor, such as machine-hours, beds occupied, computer time, or flight- hours that causes overhead costs. Absorption costing is required under gaap but variable costing helps with operational decision making. Relationship between variable and absorption income based on production and sales: Segment: any part or activity of an organization about which a manager seeks cost, revenue, or profit data. Examples: an individual store, sales territory, service center. Traceable fixed costs: arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared. Common fixed costs: arise because of the overall operation of the company and would not disappear if any particular segment were eliminated. Hiring and firing decisions are made on segment margin. Computed by subtracting traceable fixed costs from the segment"s contribution margin. Best gauge of long-run profitability of the segment. Common costs (are not allocated to the divisions) For the company analysis, include common costs.

Related Questions

Diego Company manufactures one product that is sold for $73 perunit in two geographic regionsâthe East and West regions. Thefollowing information pertains to the companyâs first year ofoperations in which it produced 44,000 units and sold 39,000units.

Variable costs per unit: Manufacturing: Direct materials $ 23Direct labor $ 16 Variable manufacturing overhead $ 2 Variableselling and administrative $ 4 Fixed costs per year: Fixedmanufacturing overhead $ 748,000 Fixed selling and administrativeexpenses $ 400,000

The company sold 29,000 units in the East region and 10,000units in the West region. It determined that $180,000 of its fixedselling and administrative expenses is traceable to the Westregion, $130,000 is traceable to the East region, and the remaining$90,000 is a common fixed cost. The company will continue to incurthe total amount of its fixed manufacturing overhead costs as longas it continues to produce any amount of its only product.

What is the companyâs net operating income (loss) underabsorption costing? 7. What is the amount of the difference betweenthe variable costing and absorption costing net operating incomes(losses)? Difference of Variable Costing and Absorption Costing NetOperating Incomes Variable costing net operating income (loss)Absorption costing net operating income (loss) Add: Fixedmanufacturing overhead cost deferred in inventory under absorptioncosting Add: Fixed manufacturing overhead cost released frominventory under absorption costing Deduct: Fixed manufacturingoverhead cost deferred in inventory under absorption costingDeduct: Fixed manufacturing overhead cost released from inventoryunder absorption costing which one? 8. What is the companyâsbreak-even point in unit sales? 9. If the sales volumes in the Eastand West regions had been reversed, what would be the companyâsoverall break-even point in unit sales? 10. What would have beenthe companyâs variable costing net operating income (loss) if ithad produced and sold 39,000 units? 11. What would have been thecompanyâs absorption costing net operating income (loss) if it hadproduced and sold 39,000 units? 12. If the company produces 5,000fewer units than it sells in its second year of operations, willabsorption costing net operating income be higher or lower thanvariable costing net operating income in Year 2? Higher or Lower13. Prepare a contribution format segmented income statement thatincludes a Total column and columns for the East and West regions.Income Statement Total Company East West 0 0 $0

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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!!

The Zwatch Company manufactures trendy, high-quality moderately priced watches. As Zwatch's senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Zwatch's 2014 income statement. The following data are for the year ended December 31, 2014:

Beginning inventory, January 1, 2014, 90,000 units

Ending inventory, December 31, 2014, 32,000 units

2014 sales 350,000 units

Selling price (to the distributor) $25.00 per unit

Variable manufacturing cost per unit, including direct materials $5.80 per unit

Variable operating (marketing) cost per unit sold $1.70 per unit sold

Fixed manufacturing costs $1,586,000

Denominator-level machine-hours 6,100

Standard production rate 50 units per machine-hour

Fixed operating (marketing) costs $1,110,000

Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to the cost of goods sold in the month in which it occurs.

Requirements:

1. Prepare income statements under variable and absorption costing for the year ended December 31, 2014.

2. What is Zwatch's operating income as a percentage of revenues under each costing method?

3. Explain the difference in operating income between the two methods.

4. Which costing method would you recommend to the CFO? Why?

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ACCT20100 Lecture Notes - Lecture 10: Income Statement, Contribution Margin, Cost Driver

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