logging in or signing up Profitability Analysis Cannes Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINTLite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 3542 Category: Education License: All Rights Reserved Like it (3) Dislike it (0) Added: February 24, 2008 This Presentation is Public Favorites: 4 Presentation Description No description available. Comments Posting comment... By: siva3250 (22 month(s) ago) please send the ppt to my mail id.... Saving..... Post Reply Close Saving..... Edit Comment Close By: niranjanalaxmi (23 month(s) ago) this is nice project .................i learned many things from this pro..........plz can i download this project Saving..... Post Reply Close Saving..... Edit Comment Close By: deeptimaan (36 month(s) ago) How to download????????? Saving..... Post Reply Close Saving..... Edit Comment Close By: adefauji (37 month(s) ago) me to hw to download file in ppt.. pls Saving..... Post Reply Close Saving..... Edit Comment Close By: sarforo (38 month(s) ago) How to download pls Saving..... Post Reply Close Saving..... Edit Comment Close loading.... See all Premium member Presentation Transcript Profitability Analysis: Profitability AnalysisProfits = Revenues - Costs: Profits = Revenues - Costs To analyze the profitability of a firm we need to analyze the revenues and the costs separatelyCosts Analyses: Costs Analyses So far we covered various topics that help us understand the costs side of the equation such as: 1. Budget analysis (Static versus flexible) 2. Product costing (DM, DL, OH) 3. Cost Behavior (Variable versus Fixed costs) 4. Variance analysis (covered in the lab in detail) One additional piece that we need to add here is to distinguish between variable vs. absorption costingAbsorption and Variable Costing: Absorption and Variable Costing Absorption costing: It assigns all manufacturing costs, DM, DL, VOH, and a share of FOH to each unit of product. Variable Costing: It assigns only unit-level variable manufacturing costs to the product; these costs include DM, DL, and VOH. FOH is treated as period costs and is not inventoried with the other product costs.Slide5: Classification of Costs as Product or Period Costs Under Absorption and Variable Costing Absorption Variable Costing Costing Direct Materials Product Product Direct Labor Product Product Variable Overhead Product Product Fixed Overhead Product* Period* Selling Expenses Period Period Administrative Expenses Period Period * Fixed overhead is the only cost that changes classifications between the two methods.Slide6: Absorption and Variable Costing Example Estimated and Actual Costs: Manufacturing: Direct materials $100,000 Direct labor 50,000 Variable overhead 80,000 Fixed overhead 90,000 Total manufacturing cost $320,000 ======= Non-manufacturing: Variable selling $ 32,000 Fixed selling & administrative 100,000 Total manufacturing $132,000 =======Slide7: Absorption and Variable Costing Example (continued) Estimated and actual production 100,000 units Sales 80,000 units Price $6.50 per unit Beginning finished goods 0Slide8: Absorption and Variable Costing Example (continued) Unit Cost: Variable Absorption Direct materials $1.00 $1.00 Direct labor 0.50 0.50 Variable overhead 0.80 0.80 Fixed overhead 0.00 0.90 Total $2.30 $3.20 ==== ==== Value of ending finished goods inventory: Variable costing: $2.30 x 20,000 = $46,000 Absorption costing: $3.20 x 20,000 = $64,000Slide9: Income Statements: Absorption Costing Sales ($6.50 x 80,000) $520,000 Less: COGS ($3.20 x 80,000) 256,000 Gross profit $264,000 Less: S & A expenses 132,000 Operating income $132,000 ======== Slide10: Income Statements: Variable Costing Sales ($6.50 x 80,000) $520,000 Less variable expenses: Variable COGS: ($2.30 x 80,000) $184,000 Variable selling 32,000 216,000 Contribution margin $304,000 Less fixed expenses: Fixed overhead $ 90,000 Fixed administrative 100,000 190,000 Operating income $114,000 ========Slide11: Income Statements: Analysis and Comparison Difference: Absorption income $132,000 Variable income 114,000 $ 18,000 ======= Explained: Production (in units) 100,000 Sales (in units) 80,000 Increase in inventory (in units) 20,000 Fixed overhead rate x $0.90 $ 18,000 =======Slide12: Production, Sales, and Income Relationships If Then Production > Sales Absorption NI > Variable NI Production < Sales Absorption NI < Variable NI Production = Sales Absorption NI = Variable NIAdvantages of Variable Costing: Advantages of Variable Costing Does not bury fixed costs in the cost of goods sold calculation. Enables one to focus on fixed costs. Enables one to perform incremental analysis and assists in decision making. Enables one to perform segmented reporting. Net income under variable costing is highly correlated with changes in sales and production. Disadvantages of Variable Costing: Disadvantages of Variable Costing Too much focus on the short-run. May ignore the impact of fixed costs on decisions. Very expensive to install.Revenues Analysis: Revenues Analysis We nee to analyze the effect on the budgeted profit of: changes in selling prices changes in the volume of sales Allowing for changes in market size, and changes in market share if more than one product, changes in sales mix.Slide16: Revenue variances If more than one product, Sales activity variance breaks down into Sales mix variance Sales volume variance The sales volume variance breaks down into Market size variance Market share variance If only one product: Sales activity = Sales volumeSlide17: Example: Krueger Company The Krueger Company produces three kinds of folding chairs: #64, #65, and #66. Its budget for the accounting period was based on the following:Slide18: Example: Krueger Company Krueger Company anticipated a 20 percent market share and the actual total industry market was 70,000 units sold. Compute the following variances: Sales price variances: #64: $8 x 2,000 - $12,000 = $4,000 #65: $12 x 4,000 - $64,000 = $16,000 #66: $10 x 6000 - $78,000 = $18,000 Total = $30,000 U F F FSlide19: Example: Krueger Company Use budgeted contribution margins for the remaining variances: A weighted average CM WACM = $4x(3/15) + $3x(7.5/15) + $6x(4.5/15) Sales volume variance = (change in units sold) x WACM = (15000 - 12000) x $4.10 = $12,300 U WACM = $4.10 Or: Budgeted total contribution margin/budgeted sales WACM = $61,500/15,000 = $4.10Slide20: Example: Krueger Company Sales mix variance = (change in 64 sales) x ($4 - $4.10) + (change in 65 sales) x ($3 - $4.10) + (change in 66 sales) x ($6 - $4.10) = $6,800 FSlide21: Example: Krueger Company Sales volume variance = Total change in volume x WACM (15,000 - 12,000) x $4.10 = $12,300 U Sales activity variance = Sales mix + Sales volume $6,800 - $12,300 = -$5,500 U Sales activity variance = (3000 - 2000) x $4 + (7500 - 4000) x $3 + (4500 - 6000) x $6 = $5,500 USlide22: Example: Krueger Company Market size variance = (budgeted market size - actual market size) x budgeted market share x WACM = ((15,000/.2) - 70,000) x .2 x $4.10 = $4,100 U Market share variance = (budgeted market share - actual market share) x actual market size x WACM = (.2 - (12000/70000)) x 70,000 x $4.10 = $8,200 U You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
Profitability Analysis Cannes Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINTLite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 3542 Category: Education License: All Rights Reserved Like it (3) Dislike it (0) Added: February 24, 2008 This Presentation is Public Favorites: 4 Presentation Description No description available. Comments Posting comment... By: siva3250 (22 month(s) ago) please send the ppt to my mail id.... Saving..... Post Reply Close Saving..... Edit Comment Close By: niranjanalaxmi (23 month(s) ago) this is nice project .................i learned many things from this pro..........plz can i download this project Saving..... Post Reply Close Saving..... Edit Comment Close By: deeptimaan (36 month(s) ago) How to download????????? Saving..... Post Reply Close Saving..... Edit Comment Close By: adefauji (37 month(s) ago) me to hw to download file in ppt.. pls Saving..... Post Reply Close Saving..... Edit Comment Close By: sarforo (38 month(s) ago) How to download pls Saving..... Post Reply Close Saving..... Edit Comment Close loading.... See all Premium member Presentation Transcript Profitability Analysis: Profitability AnalysisProfits = Revenues - Costs: Profits = Revenues - Costs To analyze the profitability of a firm we need to analyze the revenues and the costs separatelyCosts Analyses: Costs Analyses So far we covered various topics that help us understand the costs side of the equation such as: 1. Budget analysis (Static versus flexible) 2. Product costing (DM, DL, OH) 3. Cost Behavior (Variable versus Fixed costs) 4. Variance analysis (covered in the lab in detail) One additional piece that we need to add here is to distinguish between variable vs. absorption costingAbsorption and Variable Costing: Absorption and Variable Costing Absorption costing: It assigns all manufacturing costs, DM, DL, VOH, and a share of FOH to each unit of product. Variable Costing: It assigns only unit-level variable manufacturing costs to the product; these costs include DM, DL, and VOH. FOH is treated as period costs and is not inventoried with the other product costs.Slide5: Classification of Costs as Product or Period Costs Under Absorption and Variable Costing Absorption Variable Costing Costing Direct Materials Product Product Direct Labor Product Product Variable Overhead Product Product Fixed Overhead Product* Period* Selling Expenses Period Period Administrative Expenses Period Period * Fixed overhead is the only cost that changes classifications between the two methods.Slide6: Absorption and Variable Costing Example Estimated and Actual Costs: Manufacturing: Direct materials $100,000 Direct labor 50,000 Variable overhead 80,000 Fixed overhead 90,000 Total manufacturing cost $320,000 ======= Non-manufacturing: Variable selling $ 32,000 Fixed selling & administrative 100,000 Total manufacturing $132,000 =======Slide7: Absorption and Variable Costing Example (continued) Estimated and actual production 100,000 units Sales 80,000 units Price $6.50 per unit Beginning finished goods 0Slide8: Absorption and Variable Costing Example (continued) Unit Cost: Variable Absorption Direct materials $1.00 $1.00 Direct labor 0.50 0.50 Variable overhead 0.80 0.80 Fixed overhead 0.00 0.90 Total $2.30 $3.20 ==== ==== Value of ending finished goods inventory: Variable costing: $2.30 x 20,000 = $46,000 Absorption costing: $3.20 x 20,000 = $64,000Slide9: Income Statements: Absorption Costing Sales ($6.50 x 80,000) $520,000 Less: COGS ($3.20 x 80,000) 256,000 Gross profit $264,000 Less: S & A expenses 132,000 Operating income $132,000 ======== Slide10: Income Statements: Variable Costing Sales ($6.50 x 80,000) $520,000 Less variable expenses: Variable COGS: ($2.30 x 80,000) $184,000 Variable selling 32,000 216,000 Contribution margin $304,000 Less fixed expenses: Fixed overhead $ 90,000 Fixed administrative 100,000 190,000 Operating income $114,000 ========Slide11: Income Statements: Analysis and Comparison Difference: Absorption income $132,000 Variable income 114,000 $ 18,000 ======= Explained: Production (in units) 100,000 Sales (in units) 80,000 Increase in inventory (in units) 20,000 Fixed overhead rate x $0.90 $ 18,000 =======Slide12: Production, Sales, and Income Relationships If Then Production > Sales Absorption NI > Variable NI Production < Sales Absorption NI < Variable NI Production = Sales Absorption NI = Variable NIAdvantages of Variable Costing: Advantages of Variable Costing Does not bury fixed costs in the cost of goods sold calculation. Enables one to focus on fixed costs. Enables one to perform incremental analysis and assists in decision making. Enables one to perform segmented reporting. Net income under variable costing is highly correlated with changes in sales and production. Disadvantages of Variable Costing: Disadvantages of Variable Costing Too much focus on the short-run. May ignore the impact of fixed costs on decisions. Very expensive to install.Revenues Analysis: Revenues Analysis We nee to analyze the effect on the budgeted profit of: changes in selling prices changes in the volume of sales Allowing for changes in market size, and changes in market share if more than one product, changes in sales mix.Slide16: Revenue variances If more than one product, Sales activity variance breaks down into Sales mix variance Sales volume variance The sales volume variance breaks down into Market size variance Market share variance If only one product: Sales activity = Sales volumeSlide17: Example: Krueger Company The Krueger Company produces three kinds of folding chairs: #64, #65, and #66. Its budget for the accounting period was based on the following:Slide18: Example: Krueger Company Krueger Company anticipated a 20 percent market share and the actual total industry market was 70,000 units sold. Compute the following variances: Sales price variances: #64: $8 x 2,000 - $12,000 = $4,000 #65: $12 x 4,000 - $64,000 = $16,000 #66: $10 x 6000 - $78,000 = $18,000 Total = $30,000 U F F FSlide19: Example: Krueger Company Use budgeted contribution margins for the remaining variances: A weighted average CM WACM = $4x(3/15) + $3x(7.5/15) + $6x(4.5/15) Sales volume variance = (change in units sold) x WACM = (15000 - 12000) x $4.10 = $12,300 U WACM = $4.10 Or: Budgeted total contribution margin/budgeted sales WACM = $61,500/15,000 = $4.10Slide20: Example: Krueger Company Sales mix variance = (change in 64 sales) x ($4 - $4.10) + (change in 65 sales) x ($3 - $4.10) + (change in 66 sales) x ($6 - $4.10) = $6,800 FSlide21: Example: Krueger Company Sales volume variance = Total change in volume x WACM (15,000 - 12,000) x $4.10 = $12,300 U Sales activity variance = Sales mix + Sales volume $6,800 - $12,300 = -$5,500 U Sales activity variance = (3000 - 2000) x $4 + (7500 - 4000) x $3 + (4500 - 6000) x $6 = $5,500 USlide22: Example: Krueger Company Market size variance = (budgeted market size - actual market size) x budgeted market share x WACM = ((15,000/.2) - 70,000) x .2 x $4.10 = $4,100 U Market share variance = (budgeted market share - actual market share) x actual market size x WACM = (.2 - (12000/70000)) x 70,000 x $4.10 = $8,200 U