Untitled Document

Notice how the first rows of the report have changed from the original. The original report listed gross sales, subtracted several items, and arrived at net sales. The solution you received in class starts with gross sales and counts all sales deductions as an expense. The purpose of this arrangement is to emphasize that any item returned or any discount given reduces the bottom line. Additionally, a manager has responsibility for each of these items and must approve each one before it enters the accounting system. This makes some individual responsible for watching the level of every sales deduction to make sure it is appropriate. Contrast this view with the one shown below it.

	Company
	Total	Plastics	Chemicals	Wood
Gross Customer Sales	$47,300,000	$800,000	$41,000,000	$5,500,000
Less Returns	215,400	400	145,000	70,000
Allowances	190,000	0	130,000	60,000

Net Gross Customer Sales	46,894,600	799,600	40,725,000	5,370,000
Less: Freight	728,000	8,000	550,000	170,000
Cash Disc	350,100	100	330,000	20,000

Net Customer Sales	45,816,500	791,500	39,845,000	5,180,000

Net Intercompany Sales				4,500,000
	---------	---------	---------	---------
Net Sales	50,316,500	791,500	39,845,000	9,680,000

New format with sales deductions shown as expenses instead of deductions from sales.

	Company
	Total	Plastics	Chemicals	Wood
Gross Customer Sales	$47,300,000	$800,000	$41,000,000	$5,500,000
Net Intercompany Sales	4,500,000	0	0	4,500,000
	---------------	---------------	---------------	---------------
Total Sales	47,300,000	800,000	41,000,000	5,500,000

Variable costs
Sales Returns	215,400	400	145,000	70,000
Allowances	190,000	0	130,000	60,000
Freight	728,000	8,000	550,000	170,000
Cash Discount	350,100	100	330,000	20,000
Materials	25,050,000	300,000	20,000,000	4,750,000
Supplies	3,255,000	35,000	2,300,000	920,000
Direct Labor and Fringes	4,400,000	100,000	3,200,000	1,100,000
Variable Overhead	1,460,000	60,000	1,000,000	400,000
Inventory change	-19,500	500	-30,000	10,000
Intercompany charge	-4,500,000		-4,500,000
	---------------	---------------	---------------	---------------
Total variable cost	31,129,000	504,000	23,125,000	7,500,000

The blue line shows where the intercompany sale is deducted from the costs for the Chemicals Division. Originally the sale appeared in the Wood Division revenue and in the Chemicals Division material costs. In order to show the full picture for the company, we had to eliminate this sale to avoid overstating sales and costs. After removing the internal sale, the Wood Division shows a negative margin. This may mean the company should get rid of the Wood Division, but it may not. If customers buy from the Chemicals Division because the company also provides products from the Wood Division, then the company should keep the Wood Division because it causes customers to purchase very profitable products from the Chemicals Division.

The inventory change (the green line) represents the difference between beginning and ending inventory. Beginning materials inventory + Materials Purchases - Ending Inventory = cost of materials used. Or Materials Purchases combined with the change in inventory equals cost of materials used.

The second inventory change in the original schedule refers to the finished goods inventory. Cost of Goods Sold = Beginning Finished Goods inventory + Cost of Goods Produced - Ending Finished Goods Inventory; so, Cost of Goods Produced combined with the change in Finished Goods inventory equals Cost of Goods Sold.