Variable Costing for Management Analysis

Variable Costing for Management Analysis

1. Income from Operations

   • Absorption Costing
     • Direct materials
     • Direct Labor
     • Factory Overhead
   • Variable Costing
     • Direct Materials
     • Direct Labor
     • Variable factory overhead
     • Manufacturing margin
       • Excess of sales over variable cost of goods sold
         • For the units sold
       • Contribution margin
         • Excess of manufacturing margin over variable selling and administrative expenses

2. Effects of Inventory

   • Units Manufactured = units sold - > no change inventory
   • Units Manufactured > units sold - > Increase in inventory
   • Units manufactured < units sold - > Decrease in inventory

3. Using Absorption and Variable Costing

   • Conrolling Costs
     • Controllable costs - > Costs that can be influenced by management at that level
     • Noncontrollable costs - > Costs that another level of management controls
   • Pricing Products
     • The price of a product should be equal to the variable costs of making and selling it.
   • Planning Production
     • Is limited to existing capacity, in many cases, operating decisions must be made quickly before opportunities are lost.
   • Analyzing Contribution Margins
     • Managers compare planned and actual contribution margins
   • Analyzing Market Segments
     • Determines the profit contributed by the market segments of a company.

4. Analyzing Market Segments

   • Companies can report income for internal decisions making using either absorption or variable costing.
     • Absorption - > long term analysis
     • Variable - > short term analysis
   • Companies prepare variable costing reports for each product.
     • These reports arre used for product pricing and deciding whether to discontinue a product.

5. Sales Territory Profitability

   • May lead management to do:
     • Reduce costs in lower-profit sales territories
     • Increase sales efforts in higher-profit territories

6. Product Profitability Analysis

   • Is used by management in making decisions regarding product sales and promotional efforts.

7. Salesperson Profitability Analysis

   • Is useful in evaluating sales performance
     • Total sales
     • Variable cost of goods sold
     • Variable selling expenses
     • Contribution margin
     • Contribition margin ratio for each salesperson