The document discusses various costing methods and contribution margin analysis techniques used for managerial decision making. It provides examples of calculating income statements and contribution margins under absorption costing and variable costing. It also illustrates how contribution margin analysis can be used to evaluate performance by market segment, product line, salesperson, and route for various companies including a fragrance producer and airline.

1. Universidad Cuauhtémoc
Campus Aguascalientes
Profit Reporting for
Managerial Analysis
Análisis de Costos
Maestría en Administración

2. Contents
Absorption Costing Method1
Variable Costing Method2
Analyzing Market Segments3
Contribution Margin Analysis4

3. Two Costing Methods
 Used for external financial
reporting
 Includes direct materials, direct
labor, variable factory overhead,
and fixed factory overhead as
part of total product cost
Absorption Costing

4. Two Costing Methods
Variable Costing
 Used for internal planning
and decision making
 Does not include fixed factory
overhead as a product cost

5. Absorption Costing Compared to
Variable Costing
Variable Costing
Absorption Costing
Cost of Goods Manufactured
Cost of Goods Manufactured
Direct
Materials
Direct
Labor
Variable
Factory OH
Fixed
Factory OH
Period Expense

6. Income Analysis Under Variable Costing
and Absorption Costing
Frand Manufacturing
Company has no beginning
inventory and sales are
estimated to be 20,000 units at
$75 per unit, regardless of
production levels.

7. Income Analysis Under Variable Costing
and Absorption Costing
Proposal 1: 20,000 Units to Be Manufactured and Sold
Total Cost Unit Cost
Manufacturing costs:
Variable $ 700,000 $35
Fixed 400,000 20
Total costs $1,100,000 $55
Selling and administrative exp.
Variable ($5 per unit sold) $ 100,000
Fixed 100,000
Total expenses $ 200,000

8. Income Analysis Under Variable Costing
and Absorption Costing
Total Cost Unit Cost
Manufacturing costs:
Variable $ 875,000 $35
Fixed 400,000 16
Total costs $1,275,000 $51
Selling and administrative exp.
Variable ($5 per unit sold) $ 100,000
Fixed 100,000
Total expenses $ 200,000
Proposal 2: 25,000 Units to Be Manufactured; 20,000 Units to Be Sold

9. Frand Manufacturing Company
Absorption Costing Income Statements
20,000 Units
Manufactured
25,000 Units
Manufactured
$35 + ($400,000 ÷ 20,000)
Sales $1,500,000 $1,500,000
Cost of goods sold:
Cost of goods manufactured
(20,000 units x $55) $1,100,000

10. Frand Manufacturing Company
Absorption Costing Income Statements
20,000 Units
Manufactured
25,000 Units
Manufactured
Sales $1,500,000 $1,500,000
Cost of goods sold:
Cost of goods manufactured
(20,000 units x $55) $1,100,000
(25,000 units x $51) $1,275,000
$35 + ($400,000 ÷ 25,000)

11. Frand Manufacturing Company
Absorption Costing Income Statements
20,000 Units
Manufactured
25,000 Units
Manufactured
Sales $1,500,000 $1,500,000
Cost of goods sold:
Cost of goods manufactured
(20,000 units x $55) $1,100,000
(25,000 units x $51) $1,275,000
Less ending inventory:
(5,000 units x $51) 255,000
Cost of goods sold $1,100,000 $1,020,000
Gross profit $ 400,000 $ 480,000
Selling and administrative expenses
($100,000 + $100,000) 200,000 200,000
Income from operations $ 200,000 $ 280,000

12. Now, assume that
Frand Manufacturing
uses variable costing.

13. Frand Manufacturing Company
Variable Costing Income Statements
20,000 Units
Manufactured
25,000 Units
Manufactured
Sales $1,500,000 $1,500,000
Variable cost of goods sold:
Variable cost of goods manufactured:
(20,000 units x $35) $ 700,000
(25,000 units x $35) $ 875,000
Direct materials, direct labor, and
variable manufacturing overhead only.

14. Frand Manufacturing Company
Variable Costing Income Statements
20,000 Units
Manufactured
25,000 Units
Manufactured
Sales $1,500,000 $1,500,000
Variable cost of goods sold:
Variable cost of goods manufactured:
(20,000 units x $35) $ 700,000
(25,000 units x $35) $ 875,000
Less ending inventory:
(0 units x $35) 0
(5,000 units x $35) 175,000
Variable cost of goods sold $ 700,000 $ 700,000
Manufacturing margin $ 800,000 $ 800,000
Continued

15. Frand Manufacturing Company
Variable Costing Income Statements
20,000 Units
Manufactured
25,000 Units
Manufactured
Manufacturing margin $ 800,000 $ 800,000
Variable selling and administrative
expenses 100,000 100,000
Contribution margin $ 700,000 $ 700,000
Fixed costs:
Fixed manufacturing costs $ 400,000 $ 400,000
Fixed selling and administrative
expenses 100,000 100,000
Total fixed costs $ 500,000 $ 500,000
Income from operations $ 200,000 $ 200,000

16. Accounting Reports and
Management Decisions
ACCOUNTING REPORTS
Absorption Costing and Variable Costing
MANAGEMENT

17. MANAGEMENT
DECISIONS
Controlling
Costs
Pricing
Planning
Production
Analyzing
Market
Segments
Analyzing
Contribution
Margins
ACTUAL PLANNED

18. Analyzing Market Segment
A market segment is a
portion of business that
can be assigned to a
manager for profit
responsibility.

19. Contribution Margin Reporting
for Market Segments
Camelot Fragrance Company manufactures
and sells the Gwenevere perfume for women
and the Lancelot cologne line for men.

20. Northern Southern
Territory Territory Total
Sales:
Gwenevere $60,000 $30,000 $ 90,000
Lancelot 20,000 50,000 70,000
Total territory sales $80,000 $80,000 $160,000
Variable production costs:
Gwenevere (12% of sales) $ 7,200 $ 3,600 $ 10,800
Lancelot (12% of sales) 2,400 6,000 8,400
Total variable production
cost by territory $ 9,600 $ 9,600 $ 19,200
Continued

21. Promotion costs:
Gwenevere (30% of sales) $18,000 $ 9,000 $ 27,000
Lancelot(20% of sales) 4,000 10,000 14,000
Total promotion
cost by territory $22,000 $19,000 $ 41,000
Sales commissions:
Gwenevere (20% of sales) $12,000 $ 6,000 $ 18,000
Lancelot (12% of sales) 2,000 5,000 7,000
Total sales commission
by territory $14,000 $11,000 $ 25,000
Northern Southern
Territory Territory Total

22. Sales $80,000 $80,000
Variable cost of goods sold 9,600 9,600
Manufacturing margin $70,400 $70,400
Variable selling expenses:
Promotion costs $22,000 $19,000
Sales commissions 14,000 11,000
Total $36,000 $30,000
Contribution margin $34,400 $40,400
Contribution margin ratio 43% 50.5%
Camelot Fragrance Company
Contribution Margin by Sales Territory
For the Month Ended December 31, 2009
Northern Southern
Territory Territory

23. Sales $90,000 $70,000
Variable cost of goods sold 10,800 8,400
Manufacturing margin $79,200 $61,600
Variable selling expenses:
Promotion costs $ 27,000 $14,000
Sales commissions 18,000 7,000
Total $45,000 $21,000
Contribution margin $34,200 $40,600
Contribution margin ratio 38% 58%
Gwenevere Lancelot
Camelot Fragrance Company
Contribution Margin by Product Line
For the Month Ended December 31, 2009

24. Sales $20,000 $20,000 $40,000 $80,000
Variable cost of goods sold 2,400 2,400 4,800 9,600
Manufacturing margin $17,600 $17,600 $35,200 $70,400
Variable selling expenses:
Promotion costs $ 5,000 $ 5,000 $12,000 $22,000
Sales commissions 3,000 3,000 8,000 14,000
$ 8,000 $ 8,000 $20,000 $36,000
Contribution margin $ 9,600 $ 9,600 $15,200 $34,400
Contribution margin ratio 48% 48% 38% 43%
Sales mix (% Lancelot sales) 50% 50% 0% 25%
Camelot Fragrance Company
Contribution Margin by Salesperson—Northern Territory
For the Month Ended December 31, 2009
Eduardo Hector Paula
Macías Martinez Arellano Total

25. Contribution Margin Analysis
Planned
Contribution
Margin
Actual
Contribution
Margin
–
Sales Variable Cost of
Goods Sold
Variable Selling
and
Administrative
Expenses
Continued

26. Contribution Margin Analysis
Sales Variable Cost of
Goods Sold
Variable Selling
and
Administrative
Expenses
Quantity
Factor
+/–
Price
Factor
Quantity
Factor
+/–
Unit Cost
Factor
Quantity
Factor
+/–
Unit Cost
Factor

27. Changes in Contribution Margin as a
Result of Quantity and Price Factors
The difference between the actual quantity
sold and the planned quantity sold,
multiplied by the planned unit sales price or
unit cost.
Quantity factor
Unit price or unit cost factor
The difference between the actual unit cost
and the planned unit cost, multiplied by the
actual quantity sold.

28. Noble Inc. for Year Ended
December 31, 2009
Actual Planned
Increase or
(Decrease)
Sales $937,500 $800,000 $137,500
Less: Variable cost of
goods sold $425,000 $350,000 $ 75,000
Variable selling and
administrative exp. 162,500 125,000 37,500
Total $587,500 $475,000 $112,500
Contribution margin $350,000 $325,000 $ 25,000
Continued

29. Noble Inc. for Year Ended
December 31, 2009
Actual Planned
Number of units sold 125,000 100,000
Per unit:
Sales price $7.50 $8.00
Variable cost of
goods sold $3.40 $3.50
Variable selling and
administrative exp. $1.30 $1.25

30. Contribution Margin Report
Blue Skies Airlines
Inc. operates a small
commercial airline.

31. Blue Skies Airlines Inc.
Contribution Margin and Income from Operations Report
for the Month Ended April 30, 2009
Revenue $19,238,000
Variable costs:
Fuel expense $4,080,000
Wages expense 6,120,000
Food and beverage service exp. 444,000
Selling expenses 3,256,000 13,900,000
Contribution margin $ 5,338,000
Fixed costs:
Depreciation expense $3,600,000
Rental expense 800,000 4,400,000
Income from operations $ 938,000

32. Blue Skies Airlines Inc.
Contribution Margin by Route Report - Chicago/Atlanta
for the Month Ended April 30, 2009
Revenue $6,400,000
Variable costs:
Fuel expense $1,120,000
Wages expense 1,680,000
Food and beverage service exp. 240,000
Selling expenses 1,760,000 4,800,000
Contribution margin $1,600,000
Contribution Margin Ratio = 0.25

33. Blue Skies Airlines Inc.
Contribution Margin by Route Report—Atlanta/Los Angeles
for the Month Ended April 30, 2009
Revenue $7,525,000
Variable costs:
Fuel expense $1,760,000
Wages expense 2,640,000
Food and beverage service exp. 105,000
Selling expenses 770,000 5,275,000
Contribution margin $2,250,000
Contribution Margin Ratio = 0.30

34. Blue Skies Airlines Inc.
Contribution Margin by Route Report—Los Angeles/Chicago
for the Month Ended April 30, 2009
Revenue $5,313,000
Variable costs:
Fuel expense $1,200,000
Wages expense 1,800,000
Food and beverage service exp. 99,000
Selling expenses 726,000 3,825,000
Contribution margin $1,488,000
Contribution Margin Ratio = 0.28

35. Blue Skies Airlines Inc.
Contribution Margin—Chicago/Atlanta
Revenue $7,600,000 $6,400,000
Less variable expenses:
Fuel expense $1,232,000 $1,120,000
Wages expense 1,680,000 1,680,000
Food and beverage service exp. 300,000 240,000
Selling expenses and commiss. 2,200,000 1,760,000
Total $5,412,000 $4,800,000
Contribution margin $2,188,000 $1,600,000
Contribution Margin Ratio 0.29 0.25
Actual—May Planned—May
Continued

36. Blue Skies Airlines Inc.
Contribution Margin—Chicago/Atlanta
Number of miles flown 56,000 56,000
Number of passengers flown 20,000 16,000
Per unit:
Ticket price $380 $400
Fuel expense 22 20
Wages expense 30 30
Food and beverage service exp. 15 15
Selling expenses 110 110
Actual—May Planned—May

37. Contribution Margin Analysis
Report—Service Company
Blue Skies Airlines Inc.
Contribution Margin Analysis
For the Month Ended May 31, 2009
Increase in revenue attributed to:
Quantity factor:
Increase in the number of tickets sold
in May (4,000 x $400) $1,600,000
Price factor:
Decrease in the ticket price in May
($20 x 20,000) (400,000)
Net increase in revenue $1,200,000
Continued

38. Contribution Margin Analysis
Report—Service Company
Blue Skies Airlines Inc.
Contribution Margin Analysis
For the Month Ended May 31, 2009
Increase in fuel costs attributed to:
Unit cost factor:
Increase in unit cost in May times
number of miles flown
($2 x 56,000) $112,000
Continued

39. Contribution Margin Analysis
Report—Service Company
Blue Skies Airlines Inc.
Contribution Margin Analysis
For the Month Ended May 31, 2009
Increase in food and beverage service
costs attributed to:
Quantity factor:
Increase in number of tickets sold
in May times planned unit cost
in May (4,000 x $15.00) $60,000
Continued

40. Contribution Margin Analysis
Report—Service Company
Blue Skies Airlines Inc.
Contribution Margin Analysis
For the Month Ended May 31, 2009
Increase in selling costs and commissions
attributed to:
Quantity factor:
Increase in number of tickets sold
in May times planned unit cost
in May (4,000 x $110) $440,000
Continued

41. Contribution Margin Analysis
Report—Service Company
Blue Skies Airlines Inc.
Contribution Margin Analysis
For the Month Ended May 31, 2009
Summary:
Net increase in revenue $1,200,000
Net increase in fuel cost (112,000)
Net increase in food and beverage
service costs (60,000)
Net increase in selling costs (440,000)
Increase in contribution margin $ 588,000

42. Análisis de Costos
Maestría en Administración
Universidad Cuauhtémoc
Campus Aguascalientes