Differential Analysis for a Discontinued Product A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year: Sales $390,000 Cost of goods sold 184,000 Gross profit $206,000 Operating expenses 255,000 Loss from operations $(49,000) It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.
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.
Differential Analysis for a Discontinued Product
A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year:
| Sales | $390,000 |
| Cost of goods sold | 184,000 |
| Gross profit | $206,000 |
| Operating expenses | 255,000 |
| Loss from operations |
$(49,000)
|
It is estimated that 20% of the cost of goods sold represents fixed
a. Prepare a differential analysis dated January 21 to determine whether to Continue Star Cola (Alternative 1) or Discontinue Star Cola (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.
| Differential Analysis |
| Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) |
| January 21 |
| Continue Star | Discontinue Star | Differential Effects | |
| Cola (Alternative 1) | Cola (Alternative 2) | (Alternative 2) |
| Revenues | $ | $ | $ |
| Costs: | ----------------- | ----------------- | ----------------- |
| Variable cost of goods sold | |||
| Variable operating expenses | |||
| Fixed costs | |||
b. Should Star Cola be retained? Explain. _____
As indicated by the differential analysis in part (a), the income would ____ by $____ if the product is discontinued.
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