For This Assignment Develop A 4 To 6 Page Response Containin

For This Assignment Develop A 4 To 6 Page Response Containing Writte

For this assignment, develop a 4- to 6-page response containing written narrative, figures, and charts. View the Written Paper Grading Rubric. Provide general discussion on predetermined variable overhead criterion and its possible dependence on the activity for which it is used. Provide a variable costing income statement in which variable overhead is divided among different activities, and that each activity has its own predetermined variable overhead criterion. The following is a partially completed lower section of a departmental expense allocation for Cozy Bookstore. It reports the total amounts of direct and indirect expenses allocated to its five (5) departments. Allocate the expenses of the two service departments (advertising and purchasing) to the three operating departments and provide the complete income statement. Advertising and purchasing department expenses are allocated to operating departments on the basis of dollar sales and purchase orders, respectively. Information about the allocation bases for the three operating departments follows. Phoenix Company’s 2019 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units. Classify all items listed in the fixed budget as variable or fixed. Also, determine their amounts per unit or their amounts for the year, as appropriate. Identify the unit variable costs in the format of variable costing, according to your findings in part a. Organize a template for variable costing income statements in which the sales volume is a variable. Test your template for 15,000 units sales volume to see if you get the same income as stated above. Find the breakeven point and provide the income statement at break-even. Provide income statements at sales volumes of 12,000, 14,000, 16,000, and 18,000 units.

Paper For Above instruction

The complex landscape of managerial accounting necessitates a nuanced understanding of how overhead costs are allocated and analyzed within an organization. In particular, the use of predetermined variable overhead criteria tied to specific activities is a critical aspect of effective cost management. This paper explores the concept of predetermined variable overhead criteria, their dependence on activity bases, and the development of variable costing income statements, including detailed analysis and financial projections for a hypothetical bookstore, Cozy Bookstore, and Phoenix Company.

Understanding Predetermined Variable Overhead Criteria

Predetermined variable overhead criteria are standard rates established before the period begins, based on expected activity levels. These rates serve as benchmarks for allocating variable overhead costs to various departments or activities. The primary purpose of such criteria is to enable managers to estimate costs and prepare budgets accurately. The criteria are often tied to activity bases that influence overhead consumption, such as direct labor hours, machine hours, or number of purchase orders.

The possible dependence of variable overhead on activity stems from the fact that different activities consume overhead resources at varying rates. For example, advertising expense may be linked to sales volume, while procurement costs depend on purchase orders. Establishing activity-specific predetermined overhead rates allows for more precise cost control and performance evaluation by assigning costs directly to the activities that generate them.

Developing a Variable Costing Income Statement

A variable costing income statement isolates variable costs, including variable manufacturing overhead, to determine contribution margin and assess profit stability in relation to sales volume changes. In this context, the total variable overhead is partitioned among different activities, each with its own predetermined overhead rate. This approach provides a clearer picture of how changes in activity levels influence overall costs and profitability.

For Cozy Bookstore, the allocation of variable overhead involves assigning costs based on activity measures such as sales dollars and purchase orders for service departments. The income statement under variable costing subtracts variable costs from sales to arrive at contribution margin, then deducts fixed costs to determine net income.

Allocation of Expenses and Departmental Analysis

The $5,000 of total expenses allocated to five departments include direct and indirect costs. Service department expenses—advertising and purchasing—must be allocated to the operating departments based on their respective activity bases: dollar sales for advertising and number of purchase orders for purchasing. The allocation process involves calculating the proportion of service costs attributable to each department according to these bases.

Once expenses are allocated, the comprehensive income statement can be constructed. For example, if the advertising expense is $10,000 and allocated based on sales, departments with higher sales will absorb more of these costs. Similarly, the purchasing expenses are apportioned based on purchase order volume.

Classifying Budget Items as Variable or Fixed

Phoenix Company’s 2019 budget includes various items, some variable, some fixed. Typically, raw materials and direct labor costs are variable, fluctuating with production volume. Fixed manufacturing overhead, salaries, and depreciation are fixed costs, remaining unchanged in total regardless of output within the relevant range.

Per-unit variable costs are calculated by dividing total variable costs by expected units—15,000 in this case. This informs pricing, profit planning, and break-even analysis.

Template and Analysis of Variable Costing Income Statements

A flexible template for variable costing income statements adjusts for different sales volumes. It starts with sales revenue, deducts variable costs (materials, labor, variable overhead), and yields contribution margin. Fixed costs are then subtracted to find net income. For a sales volume of 15,000 units, the income statement should match the budgeted figures.

Calculating the breakeven point involves setting total contribution margin equal to fixed costs and solving for sales volume. The formula considers the contribution margin per unit and total fixed costs. Once determined, the income statement at breakeven shows a zero net income, illustrating the sales level necessary to cover all costs.

Analyses at sales volumes of 12,000, 14,000, 16,000, and 18,000 units provide insights into how profit margins change with sales fluctuations. Higher volumes increase contribution margins and profits, while lower volumes risk losses below the breakeven point.

Conclusion

Predicting costs through predetermined overhead criteria and utilizing variable costing techniques enhance managerial decision-making. By allocating costs based on activity-specific rates, organizations like Cozy Bookstore and Phoenix Company can better understand cost behavior, improve budgeting accuracy, and optimize operational performance. The analyses presented demonstrate the importance of flexible income statement models and the critical role of activity-based costing in modern managerial accounting.

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