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Erwin Susanto,SE dot Com

Erwin Susanto

Koleksi Jurnal

Balanced Scorecard


Responbility Accounting

Cost Quality Report

Profitability Analysis


Kirim Jurnal Akuntansi


Jurnal Akuntansi

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Clearly, firms are interested in measuring profit. In fact, firm are classified according to whether or not profit is primary objective-they are either for profit or not profit entities.

Profit can be used to measure managerial performance. In this sense, profit indicates efficiency in the use of resources, because the costs are kept below the benefits. Assessing performance is complicated, but profit, because it is measured in dollars, simplifies scorekeeping. Top Management is usually evaluated on the basis of profit and/or return on investment. Both measures require benefit to exceed costs.

Regulated firms must keep profits within certain limits. The profitability of a regulated monopoly is monitored to ensure that the public is served by this structure and that prices do not escalate to the level of an unregulated monopoly.


Profit is a measure of the difference between what a firm puts into making and selling a product or service and what it receives. The desire of firms to measure the increase in wealth has led to numerous definitions of profit. Some are used for external reporting, some for internal reporting.

Absorption Costing Approach to Measure Profit

Absorption costing or full costing, is required for external financial reporting. According to GAAP, profit is a long-run concept and depends on the difference between revenues and expenses.

Absorption costing assigns all manufacturing costs, direct materials, direct labor, variable overhead, and a share of fixed overhead to each unit of product. In this way, each unit of product absorbs some of the fixed factory overhead in addition to the variable costs incurred.  It is absorption  costing that is used to calculate three measures of profit: gross profit, operating income, and net income.

 The difference between revenue and cost of goods sold is gross profit (or gross margin) This is not equal to operating income, because the marketing and administrative expenses remain to be covered. Additionally, research and development, also an expense subtracted form gross profit to yield operating income, is increasingly important.

Disadvantages of Absorption Costing

In general, a company manufactures a product in order to sell it. As a result usefulness of operating or net income as a measure of profitability is weakened. Companies that use absorption costing as a measure of profitability may institute rules regarding production. The second disadvantages of absorption costing is that it is not useful for decision making.

Variable Costing Approach to Measuring Profit

An approach to measuring profitability that avoids the problems inherent in making fixed overhead a variable cost is variable costing. Variable Costing assigns only unit-level variable manufacturing cost to the product; these cost include direct labor, and variable overhead.

The variable costing income statement is set up a little difference from the absorption costing income statement. As we can see, variable costing operating income cannot be manipulated through overproduction, since fixed factory overhead is not carried into inventory.

To summarize, when inventories change from the beginning to the end of the period, the two costing approaches will give different net incomes.

Changes in inventory Under Absorption and Variable Costing 

 If                                   Then

1. Production > Sales            Absorption costing income > Variable costing income

2. Production < Sales            Absorption costing income < Variable costing income

3. Production = Sales            Absorption costing income = Variable costing income

The Variable costing income statement has an advantage in addition to providing better signals regarding performance. It also provides more useful information for management decision making. The key insight of variable costing is that fixed expenses do not change as units produced and sold change. Therefore, while the variable costing income statement cannot be used for external reporting, it is a variable tool for some management decisions.


Managers frequently want to compare actual profit earned with expected profit. Profit variances center on the difference between budgeted and actual prices, volume, and contribution margin. Profit variances can be calculated for each individual product as well for all products taken together.

Recall that the difference between actual and expected revenue can be analyzed in term of the sales price and price volume variances. The sales price variance is the difference between expected and actual price multiplied by actual volume sold. The price volume variance is the difference between actual and expected volume sold multiplied by the expected price.

Contribution Margin Variance

The contribution margin variance is simply the difference between actual and budgeted contribution margin.

Contribution margin variance = Actual contribution margin –

                                                   Budgeted contribution margin

This variance is favorable if the actual contribution margin earned is higher than the budgeted amount.

The Sales volume variance is the difference between the actual quantity sold and the budgeted quantity sold multiplied by budgeted average unit contribution margin.

Therefore, the sales volume variance gives management information about gained or lost profit due to change in the quantity of sales.

Sales volume variance = (Actual quantity sold – Budgeted quantity sold) x

                                        Budgeted average unit contribution margin


The Sales Mix Variance represent the proportion of total sales yielded by each product. A company which produces only one product obviously has a sales mix of 100 percent for that product.

We can define the sales mix variance as the sum of the change in units for each product multiplied by the difference between the budgeted contribution margin.

Sales mix variance = [( Product 1 actual units – Product 1 budgeted units) x

( product 1 budgeted unit contribution margin – Budgeted       average unit contribution margin)] + [(Product 2 actual units – product 2 budgeted units) x (product 2 budgeted unit contribution margin – Budget average unit contribution margin)]

Market Share and Size Variance

Market share gives the proportion of the industry sales accounted for by a company. Market Share is the total revenue for the industry. Clearly, both market size and market share have an impact on a company’s profits.

The Market share variance is the difference between the actual share percentage and the budgeted market share unit contribution margin. The market size Variance is the difference between actual and budgeted industry sales in units multiplied by the budgeted market share percentage times the budgeted average unit contribution margin.

Market share variance = [(Actual market share percentage – Budget market share percentage) x (actual industry sales in units)] x (budgeted average unit contribution margin)

Market size variance = [(Actual industry sales in units – budgeted industry sales in units) x ( Budgeted market share percentage)] x (Budgeted average unit contribution margin)



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