Topic 5_Cost Analysis for Management Decision

Topic Cost Analysis for Management Decision Lecturer: Sumit, Ph.D.(in progress), MPA, MFC, NCFM, CCIO Today’s lecture • LO1: Compute net income under variable and absorption costing • LO3: Define segment profitability and distinguish between direct and indirect costs • LO4Compute the break-even point and the target volume needed to earn a certain profit • LO5 Calculate the contribution margin ratio and the margin of safety ratio • LO6Discuss the impact of income tax on BE computations • LO7Use differential analysis to make special decisions LO1: Compute net income under variable and absorption costing • Under variable costing, the cost of a manufactured product includes only the costs that vary directly with volume: direct materials, direct labor, and variable factory overhead This method is referred to as variable costing, whereas fixed factory overhead is charged to expense in the period in which the fixed costs were incurred LO1: Compute net income under variable and absorption costing • The alternative to variable costing is absorption costing or full Costing Under this method, both fixed and variable manufacturing costs are assigned to the product, and no particular attention is given to classifying the costs as either fixed or variable • Figure 10-1 compares the flow of costs under variable costing and absorption costing LO1: Compute net income under variable and absorption costing LO3: Define segment profitability and distinguish between direct and indirect costs • Segment reporting provides data that management can use to evaluate the operations and profitability of individual segments within a company • Segment profitability analysis requires that all costs be classified into one of two categories: direct or indirect LO3: Define segment profitability and distinguish between direct and indirect costs • Under the contribution margin approach, only those costs directly traceable to a segment are assigned to the segment The excess of segment revenue over variable direct costs—manufacturing as well as selling and administrative—is called contribution margin, and the remainder after direct fixed costs (also manufacturing and selling and adminis- trative) are assigned to the segment is called the segment margin LO3: Define segment profitability and distinguish between direct and indirect costs • The segment margin analysis is particularly beneficial as an aid to making decisions that relate to a company’s long-run requirements and performance • Fixed Cost measures the ability of the division or product to recover not only its variable costs but also the direct fixed costs that must be recovered to keep the company solvent in the long run • Contribution margin can be used as a guide in making management decisions regarding short-run opportunities, ... indirect costs • The segment margin analysis is particularly beneficial as an aid to making decisions that relate to a company’s long-run requirements and performance • Fixed Cost measures the... making management decisions regarding short-run opportunities, LO4: Compute the break-even point and the target volume needed to earn a certain profit • A company’s net income is a measure of management? ??s... ratio • LO6Discuss the impact of income tax on BE computations • LO7Use differential analysis to make special decisions LO1: Compute net income under variable and absorption costing • Under variable