Variable costing for management analysis

Variable costing for management analysis

1. Variable costing

   • Internal use
   • Sales - variable cost of goods sold = Manufacturing margin
     • Direct materials + Direct labor + variable factory overhead = variable cost of goods sold
       • Only variable manufacturing costs
     • Manufacturing margin - variable selling and administrative expenses = contribution margin
       • Income for operation= contrubution margin - Fixed costs
       • Fixed costs = Fixed manufacturing costs +fixed selling and administrative expenses

2. Absorption costing

   • External use
   • Does not distinguish between fixex and variable costs
   • All manufacturing costs = cost of goods sold
   • Sales - cost of good sold = gross profit
     • Gross profit - selling and administrative expenses = income for operation

3. Accounting reports

   • Controllable costs
     • Noncontrollable costs
       • They can not be changed because they are controlled by other level of management
     • they can be influenced (increased or decreased) by management at that level
     • All costs are controllabe at a long run
   • Pricing products
     • At a long run, the pricing product must be set to cover all fixed and variable costs and expenses and generate income
   • Planning production
     • In a short run it is limited to exisiting capacity
     • In a long run it can consider to expand the capacity
   • Analyzing contribution margins
     • Often managers compare planneed and actual contribution margins in order to plan and control purposes
   • Analyzing market segment
     • Market segment is a portion of the company that can be analyzed by sales, costs and expenses in order to determine its profitability
     • Market analysis determines profits contributed by a market segment in a company

4. Sales territory profitability analysis

   • It helps evaluating past performances and directing future slaes efforts
   • It helps deciding which territory is worth investing to increases sales

5. Product profitability analysis

   • By focusing its efforts on products that will maximize contribution margin a company gets beneficts
   • It helps identifying which products generates more income

6. Salesperson profitability analysis

   • Used to evaluate salespersons´ performances
     • Total sales, variable cost of goods sold, variable selling expenses, contribution margin for each salesperson