15 -1

CHAPTER
Segment
Reporting and
Performance
Evaluation
 15 -2

Objectives
Objectives
1. Discuss the differences between variable and
After
After studying
studying this
this
absorption costing.
chapter,
chapter, you
you should
should
2. Explain how variable costing is useful in
be
be able
able to:
to:
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
Objectives
4. Show how variable costing can be used in
planning and control.
 15 -4

Variable
Variable costing
costing
assigns
assigns only
only variable
variable
manufacturing
manufacturing costs
costs to
to
the
the product.
product.
Direct materials
Direct labor
Variable overhead
 15 -5

Absorption
Absorption costing
costing assigns
assigns
all
all manufacturing
manufacturing costs
costs to
to
the
the product;
product; this
this adds
adds fixed
fixed
overhead
overhead to
to the
the formula.
formula.
Direct materials
Direct labor
Variable overhead
Fixed overhead
 15 -6

Inventory Valuation
Units in beginning inventory ---
Units produced 10,000
Units sold ($300 each) 8,000
Normal volume 10,000
Fixed costs:
Variable cost per unit:
Direct overhead
Fixed materials $250,000
$ 50
Fixed
Direct selling
labor and administrative 100,000
100
Variable overhead 50
Variable selling and administrative 10
 15 -7

Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25

$250,000
$250,000
10,000
10,000
 15 -8

Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25
Total $200 $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 $370,000

Fixed portion of ending inventory
(2,000 units x $25) 50,000
Absorption costing net income $420,000
 15 -11

Production,
Production, Sales,
Sales, and
and
Income
Income Relationships
Relationships
If Then
Production > Sales Absorption NI > Variable NI
Production < Sales Absorption NI < Variable NI
Production = Sales Absorption NI = Variable NI
 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
Estimatedfixed
fixedoverhead
overheadwas
was$150,000
$150,000each
eachyear.
year. Normal
Normal
production
productionwas
was150,000
150,000units
unitsand
andthe
thesales
salesprice
pricewas
was$10.
$10.
Fixed
Fixedselling
sellingand
andadministrative
administrativeexpenses
expenseswere
were$50,000.
$50,000.
 15 -13

Variable-Costing
Variable-Costing Income
Income Statement
Statement
2002 2003 2004
Sales $1,500.00 $1,000 $2,000
Less variable expenses: BI
Cost of GM
$ 300
-900.00
900
Variable cost of goods sold
GAFS -87.50
$1,200 -600 -1,200
Variable selling and admin. $ 562.50
Less: EI 0 -25 -50
VCof GS $1,200
Contribution margin -150.00 $ 375 $ 750
Less fixed expenses: BI BI $ 0 $ 0
Cost of GM Cost of900
GM 900
Fixed overhead GAFS
-0.50
GAFS$900
-150 -150
$900
Fixed selling and admin. Less:$ EI367.50
Less: EI0 -50 -50
300
Net income VCof GS $ 367
VCof$900
GS $ $600
550
 15 -14

Absorption-Costing
Absorption-Costing Income
Income Statement
Statement
2002 2003 2004
BI $ 350
Sales $1,500.00
Cost of GM 1,050
$1,000 $2,000
Less: Cost of goods sold GAFS-1,050.00
$1,400 700 1,400
Gross margin Less:$EI 450.00 0 $ 300 $ 600
Cof GS $1,400
Less: Selling and admin. exp. 87.50 75 100
Net income BI $ 362.50 BI$ $0 225 $$ 500
0
Cost of GM Cost
1,050
of GM 1,050
GAFS GAFS
$1,050 $1,050
Less: EI Less: EI
0 350
Cof GS Cof
$1,050
GS $ 700
 15 -15

Absorption
Absorption costing
costing income
income –– Variable
Variable
costing
costing income
income == Fixed
Fixed overhead
overhead xx (Units
(Units
produced
produced –– Units
Units sold)
sold)

2004
2004

$500,000
$500,000 –– $550,000
$550,000 == $1
$1 xx
(150,000
(150,000 –– 200,000)
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
Segment Reporting
Reporting
Elcom, Inc.
Income Statement, 2004
Absorption-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less: Cost of goods sold 350,000 300,000 650,000
Gross margin $ 50,000 $ -10,000 $ 40,000
Less: Selling and
administrative exp. 30,000 20,000 50,000
Net income or loss $ 20,000 $ -30,000 $ -10,000
 Elcom, Inc. 15 -18
Income Statement, 2004
Variable-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less variable expenses:
Variable C of GS -300,000 -200,000 -500,000
Variable S & A -5,000 -10,000 -15,000
Contribution margin $ 95,000 $ 80,000 $175,000
Less direct fixed exp.:
Direct fixed overhead -30,000 -20,000 -50,000
Direct S & A -10,000 -5,000 -15,000
Segment margin $ 55,000 $ 55,000 $110,000
Less common fixed exp.:
Common fixed OH -100,000
Common S & A -20,000
Net income or loss $-10,000
 15 -19

Barton,
Barton, Inc.
Inc.
Profit for
Chain Stores
Sales $4,725,000
Less: Discounts 393,750
Net sales $4,331,250
Less: Cost of goods sold 2,520,000
Gross profit $1,811,250
Less: Shelf space -112,500
Shipping -157,500
EDI -100,000
Profit $1,441,250
 15 -20

Barton,
Barton, Inc.
Inc.
Profit for
Independent Toy Stores

Sales $2,625,000
Less: Cost of goods sold 1,400,000
Gross profit $1,225,000
Less: Commissions -131,250
Special packaging -35,000
Profit $1,058,750
 15 -21

Barton,
Barton, Inc.
Inc.
Profit for Fairs
Sales $150,000
Less: Cost of goods sold 80,000
Gross profit $ 70,000
Less: Fair expense -75,000
Design time -2,100
Setup -1,000
Loss $ -8,100
 15 -22

Chapter Fifteen

The
The End
End
15 -23