ANALYTICAL SUMMARY
The Relevant Range and Nonlinear costs
Companies formulate assumptions to estimate costs and profits margin projections for their businesses. As a manager, this is essential data, especially when engaging in mass production on high seasons or when awarded a production contract. As demand and production increases, the cost per unit of a product rises under the influence of additional labor that would require reasonable salaries and extra overtime pay. Subsequently, when purchasing high volumes of materials from suppliers, the unit cost drops due to discounts offered.
As a manager, it is vital to use the relevant range, which determines behavioral patterns from data used to highlight the trends over the period that the accounts office would monitor anomalies on the production range. Every company has its relevant range that is determined and analyzed for accurate figures. This information is relevant when projecting the company’s production capacity. As a manager of a landscaping company, I use this data when considering increasing size within a pertinent range by checking the production cost, as seen in the table below.
There are instances where production slugs at the beginning then accelerate as time goes by, and the workers gain experience for faster production. Under these circumstances, efficiency on speed and saving materials, increased labor, and capacity are increased; hence the variable cost becomes nonlinear.
The contribution margin income statement
The income statement is simply the cost of goods plus the selling and administration cost used in external financial reporting. A detailed income statement called the contribution margin income statement has operating profits left after deducting the variable cost from the total sales.
| sales | 6,000,000 | |
| Variable cost: cost of goods sold Selling & admin cost | 1,000,000 | 2,000,000
(6,000,000-3,000,000) |
| Contribution margin | 3,000,000 | |
| Fixed cost: cost of goods sold Selling & admin Total fixed cost | 1,000,000
1,200,000 | 200,000 (3000000-1,200,000) |
| Operating profits | 2,800,000 |
Conclusion
In conclusion, it is essential to note that the income statement is used for external financial reporting. In contrast, the contribution margin income statement is used for internal reporting, which details trends in production that is used for deliberations and decision making.
References
The contribution margin income statement. (n.d.). GitHub Pages. https://saylordotorg.github.io/text_managerial-accounting/s09-03-the-contribution-margin-income.html
The relevant range and nonlinear costs. (n.d.). GitHub Pages. https://saylordotorg.github.io/text_managerial-accounting/s09-04-the-relevant-range-and-nonline.html