COB 242 1st Edition Lecture 14 Outline of Current Lecture I. Chapter 6 ContinuedII. Advantages of Variable costing and the contribution approacha. Enabling CVP analysisb. Explaining changes in net operating incomec. Supporting Decision MakingIII. Segmented Income Statements and The Contribution Approacha. Traceable and Common Fixed Costs and the Segment Marginb. Identifying Traceable fixed costsc. Traceable costs can become common costsIV. Segmented Income StatementCurrent LectureI. Advantages of Variable costing and the contribution approacha. Enabling CVP analysisi. CVP analysis requires costs to be broken down into fixed and variable components (variable costing does this)ii. Absorption costing net income may or may not agree with CVP resultsb. Explaining changes in net operating incomei. When sales go up, net operating income goes upii. When sales go down, net operating income goes downiii. When sales are constant, net operating income is constantiv. Number of units produced doesn’t affect net operating incomev. Absorption costing income statements can be confusing and easily misinterpretedc. Supporting Decision Makingi. Correctly identifies the additional variable costs that will be incurred to make one more unitii. Absorption costing can lead to misinterpreting unit product costs as variable which can result in many decision problems II. Segmented Income Statements and The Contribution Approachi. Useful for analyzing profitability, making decisions, and measuring performanceb. Traceable and Common Fixed Costs and the Segment MarginThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Traceable fixed cost( of a segment)- incurred because of the existence ofthe segment (no segment = fixed costs never incurred)1. Example: salary of a product manager, maintenance cost for the building where planes are assembled, liability insurance at Disneyii. Common fixed cost- supports the operations of more than one segment (no segment = no change in common fixed cost)1. Example: salary of CEO (various divisions of General Motors), cost of heating a store (store’s various departments), receptionists salary (doctors office)iii. Find contribution margin for the segment 1. Contribution margin (for the segment) = sales – variable expensesiv. Segment Margin = segment contribution margin – traceable fixed costs of a segment1. Best gauge of the long-run profitability of a segment2. If a segment can’t cover its own costs, it should probably be droppedc. Identifying Traceable fixed costsi. Traceable cost = only those costs that would disappear over time if the segment itself disappearedii. Any allocation of common costs to segments reduces the value of the segment margin as a measure of long-run segment profitability and segment performanced. Traceable costs can become common costsi. Fixed costs that are traceable to one segment may be a common cost of another segment1. Example: airlines might want a segmented income statement that shows the segment margin for a particular flight further broken down into first-, business-, and economy-class segment margins2. Fixed landing fee= traceable for flight; common for the classesIII. Segmented Income Statementa. Levels of Segmented Income Statement i. Page 248 shows segmented income statement