$750,000 $1,250,000 Less: Variable expenses 425,000 460,000 885,000 Contribution margin $ 75,000 $290,000 $ 365,000 Less: Direct fixed expenses 85,000 110,000 195,000 Segment margin $ (10,000) $180,000 $ 170,000 Less: Common fixed expenses
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.
Segmented Income Statements: Analysis of Proposals to Improve Profits
Shannon, Inc., has two divisions. One produces and sells paper party supplies (napkins, paper plates, invitations); the other produces and sells cookware. A segmented income statement for the most recent quarter is given below:
| Party Supplies Division | Cookware Division | Total | |||||||
| Sales | $500,000 | $750,000 | $1,250,000 | ||||||
| Less: Variable expenses | 425,000 | 460,000 | 885,000 | ||||||
| Contribution margin | $ 75,000 | $290,000 | $ 365,000 | ||||||
| Less: Direct fixed expenses | 85,000 | 110,000 | 195,000 | ||||||
| Segment margin | $ (10,000) | $180,000 | $ 170,000 | ||||||
| Less: Common fixed expenses | 130,000 | ||||||||
| Operating income | $ 40,000 |
On seeing the quarterly statement, Madge Shannon, president of Shannon, Inc., was distressed and discussed her disappointment with Bob Ferguson, the company's vice president of finance.
MADGE: "The Party Supplies Division is killing us. It's not even covering its own fixed costs. I'm beginning to believe that we should shut down that division. This is the seventh consecutive quarter it has failed to provide a positive segment margin. I was certain that Paula Kelly could turn it around. But this is her third quarter, and she hasn't done much better than the previous divisional manager."
BOB: "Well, before you get too excited about the situation, perhaps you should evaluate Paula's most recent proposals. She wants to spend $10,000 per quarter for the right to use familiar cartoon figures on a new series of invitations, plates, and napkins and at the same time increase the advertising budget by $25,000 per quarter to let the public know about them. According to her marketing people, sales should increase by 10 percent if the right advertising is done—and done quickly. In addition, Paula wants to lease some new production machinery that will increase the rate of production, lower labor costs, and result in less waste of materials. Paula claims that variable costs will be reduced by 30 percent. The cost of the lease is $95,000 per quarter."
Upon hearing this news, Madge calmed considerably and, in fact, was somewhat pleased. After all, she was the one who had selected Paula and had a great deal of confidence in Paula’s judgment and abilities.
Required:
1. Assuming that Paula's proposals are sound, should Madge Shannon be pleased with the prospects for the Party Supplies Division? Yes, because it will increase the segment margin of the Party Supplies Division by $fill in the blank
Prepare a segmented income statement for the next quarter that reflects the implementation of Paula's proposals. Assume that the Cookware Division's sales increase by 5 percent for the next quarter and that the same cost relationships hold. In your computations, do not round percentages used when revising the revenues and expenses.
| Party Supplies Division | Cookware Division | Total | |
|---|---|---|---|
|
|
$Sales | $Sales | $Sales |
|
|
Less: Variable expenses | Less: Variable expenses | Less: Variable expenses |
|
|
$Contribution margin | $Contribution margin | $Contribution margin |
|
|
Less: Direct fixed expenses | Less: Direct fixed expenses | Less: Direct fixed expenses |
|
|
$Segment margin | $Segment margin | $Segment margin |
|
|
Less: Common fixed expenses | ||
|
|
$Net income |
2. Suppose that everything materializes as Paula projected except for the 10 percent increase in sales—no change in sales revenues takes place. Are the proposals still sound?
The proposals
sound if the increase in revenues does not take place. The division and company would
an extra $fill in the blank 010a1e00704ff9c_3.
What if the variable costs are reduced by 40 percent instead of 30 percent with no change in sales?
The proposals will
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