The document discusses variable and absorption costing methods in managerial accounting, highlighting key differences in handling costs and income statements. It includes topics like segmentation, contribution margins, and break-even analysis, illustrated through examples from a company named Prophetmax, Inc. Additionally, it provides insights on how to reconcile the two costing methods and prepare segmented income statements to assess profitability.

1. Managerial Accounting
Chapter #06
Variable Costing and segment Reporting:
Tools For Management
Edition 17th
By:Saima Rajput
Instructor: Nadia Anjum
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2. Table of Contents
• Explain How Variable Costing Differ from Absorption Costing and
Compute Unit product cost
• Prepare Income Statement using Both variable and absorption Costing
• Reconcile Variable Costing and Absorption Costing Net operating Income.
• Prepare a segmented Income Statement That differentiate Traceable
Fixed Cost From Common Cost and Use itTo mae dicision .
• Commute Companywide and Segmented Breakeven Point For a Company
with Traceable Fixed Cost.
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3. Overview of Variable and Absorption
Costing
Variable Costing
Under variable costing, only those
manufacturing costs that vary with
output are treated as product costs.
This would usually include direct
materials, direct labor, and the
variable portion of manufacturing
overhead. Fixed manufacturing
overhead is not treated as a product
cost under this method.
Absorption Costing
Absorption costing treats all
manufacturing costs as product
costs, regardless of whether they
are variable or fixed. The cost of
a unit of product under the
absorption costing method
consists of direct materials, direct
labor, and both variable and fixed
manufacturing overhead
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4. Selling and Administrative Expenses
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5. Variable and Absorption Costing—An Example
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6. Variable Costing Contribution Format Income Statement
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7. The Variable costing cost of goods sold for all three method can be computed as follows
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8. Variable Costing Income Statement
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9. • how Weber Light Aircraft computed its variable costing net operating income for each month is
to focus on the contribution margin per aircraft sold, which is computed as follows:
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10. • The variable costing net operating income for each period can always be computed by
multiplying the number of units sold by the contribution margin per unit and then
subtracting total fixed expenses. For Weber Light Aircraft these computations would
appear as follows:
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11. Absorption Costing Income Statement
• The first step in preparing Weber’s absorption costing income statements for January,
February, and March is to determine the company’s unit product costs for each month as
follows:
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12. Absorption Costing Income Statement
• the company’s absorption costing net operating income in each month would be
determined as shown in Exhibit 6–3.
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13. Reconciliation of Variable Costing with Absorption Costing Income
• Variable costing and absorption costing net operating incomes can be
reconciled by determining how much fixed manufacturing overhead was
deferred in, or released from, inventories during the period:
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14. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
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15. Comparative Income Effects Absorption and Variable Costing
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16. Segmented Income Statements and the Contribution Approach
• segmented income statements are useful for analyzing the profitability of
segments, making decisions, and measuring the performance of segment
managers.
Segmented Income Statements—An Example
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17. Prophetmax, Inc.: Examples of Business Segments
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18. ProphetMax, Inc. Segmented Income Statements in the Contribution Format
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19. Break-Even Analysis
• ProphetMax’s total traceable fixed expenses are $171,000 and
its total common fixed expenses are $85,500. Furthermore, the
company’s overall contribution margin of $270,000 divided by
its total sales of $500,000 equals its overall CM ratio of 0.54.
Given this information, ProphetMax’s companywide break-even
point is computed as follows:
Dollar sales for company to break even = Traceable fixed
expenses + Common fixed expenses/ Overall CM ratio
= $171,000 + $85,500/ 0.54
=$256,500/0.54
= $475,000
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20. • the Business Products Division’s traceable fixed expenses are $90,000 and its CM ratio is 0.50
($150,000 ÷ $300,000). Given this information, the Business Products Division’s break-even point is
computed as follows:
Dollar sales for a segment to break even = Segment
traceable fixed expenses/ Segment CM ratio
=$90,000/0.50
= $180,000
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21. the Consumer Products Division’s traceable fixed expenses are
$81,000 and
its CM ratio is 0.60 ($120,000 ÷ $200,000), its break-even point is
computed as follows:
Dollar sales for a segment to break even = Segment traceable
fixed expenses / Segment CM ratio
= $81,000 / 0.60
= $135,000
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22. • the sum of the segment break-even sales figures of $315,000 ($180,000+ $135,000) is
less than the companywide break-even point of $475,000. This occurs because the
segment break-even calculations do not include the company’s common fixed expenses.
The exclusion of the company’s common fixed expenses can be verified by preparing
income statements based on each segment’s break-even dollar sales as follows:
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