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Chapter 10 Cost Analysis for Management Decision Making

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Chapter 10Learning ObjectivesSlide 3Slide 4Variable CostingVariable Costing (cont.)Absorption CostingAbsorption Costing (cont.)Merits and Limitations of Variable CostingSegment Reporting for Profitability AnalysisSegment Reporting for Profitability Analysis (cont.)Cost-Volume-Profit (CVP) AnalysisLimitations of CVP AnalysisBreak-Even AnalysisBreak-Even Point CalculationsBreak-Even Point Calculations (cont.)Margin of SafetyDifferential AnalysisAccept or Reject a Special OrderMake-or-Buy DecisionsDistribution CostsChapter 10Chapter 10Cost Analysis for Management Cost Analysis for Management Decision MakingDecision MakingLearning ObjectivesLearning ObjectivesLO1LO1Compute net income under the variable Compute net income under the variable costing and absorption costing costing and absorption costing methods.methods.LO2LO2Discuss the merits and limitations of Discuss the merits and limitations of variable costing.variable costing.LO3LO3Define the concept of segment Define the concept of segment profitability analysis and explain the profitability analysis and explain the distinction between direct and indirect distinction between direct and indirect costs.costs.Learning ObjectivesLearning ObjectivesLO4LO4Compute the break-even point and the Compute the break-even point and the target volume needed to earn a certain target volume needed to earn a certain profit for both single- and multi-product profit for both single- and multi-product firms.firms.LO5LO5Calculate the contribution margin ratio Calculate the contribution margin ratio and the margin of safety ratio.and the margin of safety ratio.LO6LO6Discuss the impact of income tax on Discuss the impact of income tax on break-even and target-volume break-even and target-volume computations.computations.Learning ObjectivesLearning ObjectivesLO7LO7Use differential analysis techniques to Use differential analysis techniques to make special decisions.make special decisions.LO8LO8Identify the appropriate techniques to Identify the appropriate techniques to analyze and control the distribution analyze and control the distribution costs incurred in selling and delivering costs incurred in selling and delivering products.products.Variable CostingVariable CostingThe cost of manufacturing a product The cost of manufacturing a product includes only variable manufacturing costs.includes only variable manufacturing costs.Fixed factory overhead is a period cost and Fixed factory overhead is a period cost and is expensed on each month’s income is expensed on each month’s income statement.statement.The difference between sales and variable The difference between sales and variable cost of goods sold is termed contribution cost of goods sold is termed contribution margin.margin.Variable Costing (cont.)Variable Costing (cont.)Direct MaterialDirect LaborVariable Manufacturing OHFixed Manufacturing OHSelling CostsAdministrative CostsInventory Accountson Balance SheetCost of Goods Sold WhenFinished Goods are SoldExpense Accounts onIncome StatementProduct Costs Period CostsAbsorption CostingAbsorption CostingAssigns both fixed and variable Assigns both fixed and variable manufacturing costs to the product.manufacturing costs to the product.Absorption method will report a higher cost Absorption method will report a higher cost of goods sold due to the inclusion of the of goods sold due to the inclusion of the fixed factory overhead.fixed factory overhead.The difference between sales revenue and The difference between sales revenue and cost of goods sold is termed gross margin.cost of goods sold is termed gross margin.Absorption Costing Absorption Costing (cont.)(cont.)Direct MaterialDirect LaborVariable Manufacturing OHFixed Manufacturing OHSelling CostsAdministrative CostsInventory Accounts onBalance SheetCost of Goods SoldWhen Finished Goodsare SoldExpense Accounts onIncome StatementProduct Costs Period CostsMerits and Limitations of Merits and Limitations of Variable CostingVariable CostingThis method highlights the relationship between This method highlights the relationship between sales and variable production costs.sales and variable production costs.May be easier for members of management who May be easier for members of management who are not formally trained in accounting.are not formally trained in accounting.Variable costing is not a generally accepted Variable costing is not a generally accepted method of inventory costing for external purposes method of inventory costing for external purposes because total costs are not matched with sales because total costs are not matched with sales revenue and does not include fixed factory revenue and does not include fixed factory overhead in the work in process and finished overhead in the work in process and finished goods inventories.goods inventories.Segment Reporting for Segment Reporting for Profitability AnalysisProfitability AnalysisA segment of a company may be a A segment of a company may be a division, a product line, a sales territory, division, a product line, a sales territory, or another identifiable unit.or another identifiable unit.This analysis requires that all costs be This analysis requires that all costs be classified into one of two categories:classified into one of two categories:Direct costs – can be traced to the Direct costs – can be traced to the segment being analyzed.segment being analyzed.Indirect costs – cannot be identified Indirect costs – cannot be identified directly with a specific segment.directly with a specific segment.Segment Reporting for Segment Reporting for Profitability Analysis (cont.)Profitability Analysis (cont.)A company’s segment report isolates A company’s segment report isolates costs, variable and fixed, that can be costs, variable and fixed, that can be charged directly to the segments.charged directly to the segments.Costs may be direct costs in one Costs may be direct costs in one segment and indirect costs in another segment and indirect costs in another segment.segment.Cost-Volume-Profit (CVP) Cost-Volume-Profit (CVP) AnalysisAnalysisTechnique that uses the degrees of cost Technique that uses the degrees of cost variability for measuring the effect of variability for measuring the effect of changes in volume on resulting profits.changes in volume on resulting profits.It is assumed that fixed costs will remain It is assumed that fixed costs will remain the same in total within a