15 -1

CHAPTER

Segment
Reporting and
Performance
Evaluation

15 -2

Objectives
Objectives
1. Discuss the differences between variable and
After
studying
this
After
studying
this
absorption costing.
chapter,
chapter, you
you should
should
2. Explain how variable
costing
is
useful
in
be
able
to:
be
able
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
Units sold ($300 each)
Normal volume
Fixed costs:
Variable
cost per unit:
Direct overhead
Fixed
materials
Fixed
Direct selling
labor and administrative
Variable overhead
Variable selling and administrative

--10,000
8,000
10,000
$250,000
$ 50
100,000
100
50
10

15 -7

Unit
Unit Cost
Cost

Direct materials
Direct labor
Variable overhead
Fixed overhead

Variable Absorption
costing
costing
$ 50$ 50
100100
5050
25

$250,000
$250,000
10,000
10,000

15 -8

Unit
Unit Cost
Cost

Direct materials
Direct labor
Variable overhead
Fixed overhead
Total

Variable
costing
$ 50
100
50
$200

Absorption
costing
$ 50
100
50
25
$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
Fixed portion of ending inventory
(2,000 units x $25)
Absorption costing net income

$370,000
50,000
$420,000

Production,
Production, Sales,
Sales, and
and
Income
Income Relationships
Relationships
If

Then

Production > Sales

Production < Sales
Production = Sales

Absorption NI > Variable NI

Absorption NI < Variable NI
Absorption NI = Variable NI

15 -11

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

2004
$2,000
-1,200
-50
$ 750
$ 0
900
-150
$900
-50
300
$ $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
700 1,400
$1,400
Less:$EI 450.00 0 $ 300 $ 600
Gross margin
Cof GS
$1,400
Less: Selling and admin. exp.
87.50
75
100
BI $ 362.50
BI$ $
0 225 $$ 500
0
Net income
Cost of GM
GAFS
Less: EI
Cof GS

Cost
1,050
of GM
GAFS
$1,050
Less: EI
0
Cof
$1,050
GS

1,050
$1,050
350
$ 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
Less: Cost of goods sold 350,000
Gross margin
$ 50,000
Less: Selling and
administrative exp.
30,000
Net income or loss
$ 20,000

$290,000
300,000
$ -10,000

$690,000
650,000
$ 40,000

20,000
$ -30,000

50,000
$ -10,000

Elcom, Inc.
Income Statement, 2004
Variable-Costing Basis
Stereos Video Recorders Total
Sales
$400,000
Less variable expenses:
Variable C of GS
-300,000
Variable S & A
-5,000
Contribution margin
$ 95,000
Less direct fixed exp.:
Direct fixed overhead -30,000
Direct S & A
-10,000
Segment margin
$ 55,000
Less common fixed exp.:
Common fixed OH
Common S & A
Net income or loss

$290,000

$690,000

-200,000
-10,000
$ 80,000

-500,000
-15,000
$175,000

-20,000
-5,000
$ 55,000

-50,000
-15,000
$110,000
-100,000
-20,000
$-10,000

15 -18

15 -19

Barton,
Barton, Inc.
Inc.
Sales
Less: Discounts
Net sales
Less: Cost of goods sold
Gross profit
Less: Shelf space
Shipping
EDI
Profit

Profit for
Chain Stores
$4,725,000
393,750
$4,331,250
2,520,000
$1,811,250
-112,500
-157,500
-100,000
$1,441,250

15 -20

Barton,
Barton, Inc.
Inc.
Profit for
Independent Toy Stores
Sales
Less: Cost of goods sold
Gross profit
Less: Commissions
Special packaging
Profit

$2,625,000
1,400,000
$1,225,000
-131,250
-35,000
$1,058,750

15 -21

Barton,
Barton, Inc.
Inc.
Profit for Fairs
Sales
Less: Cost of goods sold
Gross profit
Less: Fair expense
Design time
Setup
Loss

$150,000
80,000
$ 70,000
-75,000
-2,100
-1,000
$ -8,100

15 -22

Chapter Fifteen

The
The End
End

15 -23