CVP Application Problem 4: Segmented Income Statements — Costs of Activities Hunter, Inc., manufactures and distributes three principal product lines: sporting goods, housewares, and hardware. The company has suffered reduced profitability in the past few quarters, and the top managers have taken a number of actions to try to improve the situation. The most recent quarterly income statement, segmented by product line, follows. Indirect, common fixed costs are allocated to the lines based on relative sales or labor content. Hunter, Inc.Income Statement, Second Quarter(in thousands of dollars) Total Sporting Goods Housewares Hardware Sales $3,337.0 $650.0 $921.0 $1,766.0 Cost of Sales $1,928.8 $357.3 $545.7 $1,025.8 Gross Margin $1,408.2 $292.7 $375.3 $ 740.2 Operating Expenses: Selling Expenses $ 787.6 $157.1 $225.9 $ 404.6 Administrative Expenses $514.6 $94.2 $135.6 $284.8 Total Operating Expenses $1,302.2 $251.3 $361.5 $ 689.4 Income Before Taxes $ 106.0 $ 41.4 $ 13.8 $ 50.8 The managers are still not happy with the 3.2 percent return on sales (ROS), but the $106 thousand pretax profit was a bit higher than the previous quarter's profit. The consensus of the managers is that they should concentrate on sporting goods and hardware because their ROS's are higher than that of housewares. One manager even wants to ignore housewares because its ROS was only 1.5 percent: "If we keep only a cent and a half from a dollar's sales, why even bother with it?" When asked to confirm the judgments about relative profitabilities, the controller said that some indirect costs are allocated to the product lines and that some distortions might result from those allocations. Therefore, her assistant has been asked to prepare an alternative income statement. The assistant's analysis of Hunter's cost structure reveals the following (in thousands of dollars). Sporting goods Housewares Hardware Variable Costs, Unit and Batch Percentage of Sales: Cost of Sales 28.00% 32.00% 35.00% Selling Expenses 2.00% 1.50% 1.80% Administrative Expenses 0.90% 0.70% 2.00% Product-Line-Sustaining Costs Cost of Sales $158 $141 $197 Selling Expenses 56 87 133 Administrative Expenses 13 22 43 The assistant evaluated the costs by examining the activities that generate them. For example, sporting goods line requires relatively more attention from manufacturing support personnel, such as engineers, than hardware, and so it is assigned relatively higher direct fixed manufacturing costs. By the same token, hardware consumes considerably more relative administrative time than sporting goods, giving it relatively more cost. All remaining costs are company-sustaining, and the controller believes they should not be assigned to product lines. Required Prepare a new segmented income statement using the assistant's findings. Show company-sustaining costs only in the total column, not allocated to each product line. Comment on the differences between your statement and the one above. Indicate, for example, which decisions are easier, or more difficult, to make with your statement.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
CVP Application Problem 4: Segmented Income Statements — Costs of Activities
Hunter, Inc., manufactures and distributes three principal product lines: sporting goods, housewares, and hardware. The company has suffered reduced profitability in the past few quarters, and the top managers have taken a number of actions to try to improve the situation. The most recent quarterly income statement, segmented by product line, follows. Indirect, common fixed costs are allocated to the lines based on relative sales or labor content.
| Hunter, Inc. Income Statement, Second Quarter (in thousands of dollars) |
||||
|---|---|---|---|---|
| Total | Sporting Goods | Housewares | Hardware | |
| Sales | $3,337.0 | $650.0 | $921.0 | $1,766.0 |
| Cost of Sales | $1,928.8 | $357.3 | $545.7 | $1,025.8 |
| Gross Margin | $1,408.2 | $292.7 | $375.3 | $ 740.2 |
| Operating Expenses: | ||||
| Selling Expenses | $ 787.6 | $157.1 | $225.9 | $ 404.6 |
| Administrative Expenses | $514.6 | $94.2 | $135.6 | $284.8 |
| Total Operating Expenses | $1,302.2 | $251.3 | $361.5 | $ 689.4 |
| Income Before Taxes | $ 106.0 | $ 41.4 | $ 13.8 | $ 50.8 |
The managers are still not happy with the 3.2 percent return on sales (ROS), but the $106 thousand pretax profit was a bit higher than the previous quarter's profit. The consensus of the managers is that they should concentrate on sporting goods and hardware because their ROS's are higher than that of housewares. One manager even wants to ignore housewares because its ROS was only 1.5 percent: "If we keep only a cent and a half from a dollar's sales, why even bother with it?"
When asked to confirm the judgments about relative profitabilities, the controller said that some indirect costs are allocated to the product lines and that some distortions might result from those allocations. Therefore, her assistant has been asked to prepare an alternative income statement. The assistant's analysis of Hunter's cost structure reveals the following (in thousands of dollars).
| Sporting goods | Housewares | Hardware | |
|---|---|---|---|
| Variable Costs, Unit and Batch Percentage of Sales: | |||
| Cost of Sales | 28.00% | 32.00% | 35.00% |
| Selling Expenses | 2.00% | 1.50% | 1.80% |
| Administrative Expenses | 0.90% | 0.70% | 2.00% |
| Product-Line-Sustaining Costs | |||
| Cost of Sales | $158 | $141 | $197 |
| Selling Expenses | 56 | 87 | 133 |
| Administrative Expenses | 13 | 22 | 43 |
The assistant evaluated the costs by examining the activities that generate them. For example, sporting goods line requires relatively more attention from manufacturing support personnel, such as engineers, than hardware, and so it is assigned relatively higher direct fixed
Required
- Prepare a new segmented income statement using the assistant's findings. Show company-sustaining costs only in the total column, not allocated to each product line.
- Comment on the differences between your statement and the one above. Indicate, for example, which decisions are easier, or more difficult, to make with your statement.
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