Chapter 20 CostVolumeProfit Analysis and Variable Costing Belverd
Chapter 20 Cost-Volume-Profit Analysis and Variable Costing Belverd E. Needles, Jr. Marian Powers Sherry K. Mills Henry R. Anderson -----Multimedia Slides by: Dr. Paul J. Robertson New Mexico State University Steve Leask New Mexico State University Copyright Houghton Mifflin Company. All rights reserved. 20 -1
The Behavior of Variable Costs OBJECTIVE 2 Identify specific types of variable and fixed cost behavior, and define and discuss the relationships of operating capacity and relevant range to cost behavior. 20 -2 Copyright Houghton Mifflin Company. All rights reserved.
Cost Behavior » Cost behavior refers to how costs change in relation to volume or activity. · Some costs vary with volume or operating activity. · Others remain fixed as volume changes. · Some costs exhibit characteristics between these two extremes. 20 -3 Copyright Houghton Mifflin Company. All rights reserved.
Variable Costs » Total costs that change in direct proportion to changes in productive output are called variable costs. · On a per unit basis, however, variable costs remain constant as volume changes. 20 -4 Copyright Houghton Mifflin Company. All rights reserved.
Variable Costs · Examples of variable costs: - Direct materials. - Direct and indirect labor (hourly). - Operating supplies. - Sales commissions. 20 -5 Copyright Houghton Mifflin Company. All rights reserved.
Examples of Variable, Fixed, and Mixed Costs 20 -6 Copyright Houghton Mifflin Company. All rights reserved.
Examples of Variable, Fixed, and Mixed Costs 20 -7 Copyright Houghton Mifflin Company. All rights reserved.
Examples of Variable, Fixed, and Mixed Costs 20 -8 Copyright Houghton Mifflin Company. All rights reserved.
Capacity » Capacity can be expressed in several ways, including: · Total labor hours. · Total machine hours. · Total units of output. 20 -9 Copyright Houghton Mifflin Company. All rights reserved.
Capacity » Operating Capacity: Maximum productive output and related costs, given existing resources. » Theoretical Capacity: Maximum productive output possible over a given period of time. » Practical Capacity: Theoretical capacity reduced by normal, expected work stoppages. 20 -10 Copyright Houghton Mifflin Company. All rights reserved.
Capacity » Excess Capacity: Extra machinery and equipment available when regular facilities are being repaired or when expected volume is greater. » Normal Capacity: Average annual operating capacity needed to satisfy expected sales demand. 20 -11 Copyright Houghton Mifflin Company. All rights reserved.
Measures of Capacity » Each variable cost should be related to an appropriate measure of capacity, but often more than one measure of capacity applies. 20 -12 Copyright Houghton Mifflin Company. All rights reserved.
A Common Variable-Cost Behavior Pattern: Linear Relationship Labor Cost $20 $15 $2. 50 per unit $10 $5 0 0 1 2 3 4 Units 5 6 7 8 20 -13 Copyright Houghton Mifflin Company. All rights reserved.
Nonlinear Variable Costs » Many costs vary with operating activity in a nonlinear fashion. · Costs of computer usage. · Costs of power consumption. » Cost behavior of nonlinear costs can be approximated within the relevant range using a linear approximation technique. 20 -14 Copyright Houghton Mifflin Company. All rights reserved.
Relevant Range » The relevant range is the volume range within which actual operations are likely to occur. 20 -15 Copyright Houghton Mifflin Company. All rights reserved.
The Relevant Range and Linear Approximation $ Relevant Range Total Cost Linear Approximation True Behavior Pattern 0 Volume 20 -16 Copyright Houghton Mifflin Company. All rights reserved.
Fixed Costs » Fixed costs are costs that remain constant within a relevant range of volume or activity. Examples of fixed costs are: · Depreciation. · Rent. · Supervisory salaries. · Property taxes. » Unit fixed costs vary inversely with changes in volume. 20 -17 Copyright Houghton Mifflin Company. All rights reserved.
A Common Fixed-Cost Behavior Pattern Fixed Overhead Cost New Relevant Range $8, 000 $6, 000 Original Relevant Range Fixed Cost Pattern $4, 000 $2, 000 0 0 200, 000 400, 000 600, 000 Units of Output 800, 000 20 -18 Copyright Houghton Mifflin Company. All rights reserved.
Mixed Costs OBJECTIVE 3 Define mixed cost, and use the high-low method to separate the variable and fixed components of a mixed cost. 20 -19 Copyright Houghton Mifflin Company. All rights reserved.
Mixed Costs » Mixed costs have both variable and fixed cost components. » Part of the cost changes with volume or usage, and part of the cost is fixed over time. 20 -20 Copyright Houghton Mifflin Company. All rights reserved.
Behavior Patterns of Mixed Costs: Telephone Costs Total Telephone Cost $ Long Distance Calls 20 -21 Copyright Houghton Mifflin Company. All rights reserved.
Behavior Patterns of Mixed Costs: Maintenance Costs Total Maintenance Cost $ Maintenance Hours 20 -22 Copyright Houghton Mifflin Company. All rights reserved.
High-Low Method » A scatter diagram is a chart of plotted points that helps determine if there is a linear relationship between a cost item and its related activity measure. 20 -23 Copyright Houghton Mifflin Company. All rights reserved.
Cost-Volume-Profit Analysis OBJECTIVE 4 Define cost-volume-profit analysis and discuss how managers use this analysis. 20 -24 Copyright Houghton Mifflin Company. All rights reserved.
Cost-Volume-Profit Analysis » Cost-volume-profit analysis is used primarily as a planning and control tool. · Projecting net income at different activity levels. · Measuring the performance of a department within a company. · Assisting in the analysis of decision alternatives. 20 -25 Copyright Houghton Mifflin Company. All rights reserved.
Cost-Volume-Profit Analysis The C-V-P Formula S = VC + FC + Net Income S Sales Revenue VC Total Variable Costs FC Fixed Costs 20 -26 Copyright Houghton Mifflin Company. All rights reserved.
Breakeven Analysis OBJECTIVE 5 Compute a breakeven point in units of output and in sales dollars, and prepare a breakeven graph. 20 -27 Copyright Houghton Mifflin Company. All rights reserved.
The Breakeven Point » The breakeven point is the point of zero profit. · Breakeven units equal fixed costs divided by contribution margin per unit. · Breakeven dollars equal breakeven units times the selling price per unit. 20 -28 Copyright Houghton Mifflin Company. All rights reserved.
The Breakeven Graph » A standard breakeven graph has five components. · The horizontal axis (volume). · The vertical axis (dollars). · The fixed cost line. · The total revenue line. 20 -29 Copyright Houghton Mifflin Company. All rights reserved.
The Breakeven Graph » Normally, a loss area, profit area, and breakeven point will result. » At zero volume, net loss equals fixed costs. 20 -30 Copyright Houghton Mifflin Company. All rights reserved.
Dollars (in thousands) Graphic Breakeven Analysis: Dakota Products, Inc. Total Revenue Line $60 Sales Breakeven Net Income Area $50 Total Cost Line $40 $30 Variable Costs a $20 L $10 0 s s o e Ar Unit Breakeven Fixed Costs 200 400 Units of Output 600 20 -31 Copyright Houghton Mifflin Company. All rights reserved.
Contribution Margin OBJECTIVE 6 Define contribution margin and use the concept to determine a company’s breakeven point for a single product and for multiple products. 20 -32 Copyright Houghton Mifflin Company. All rights reserved.
Contribution Margin » Contribution margin equals sales minus total variable costs. CM = S - VC » Contribution margin per unit equals selling price minus variable cost per unit. 20 -33 Copyright Houghton Mifflin Company. All rights reserved.
Contribution Margin » The breakeven point (in units) equals fixed costs divided by the contribution margin per unit. BE units = FC / CM per unit » A sales mix is used to calculate the breakeven point for each product when an organization sells more than one product. 20 -34 Copyright Houghton Mifflin Company. All rights reserved.
Planning Future Sales OBJECTIVE 7 Apply cost-volume-profit analysis to estimated levels of future sales and to changes in costs and selling prices. 20 -35 Copyright Houghton Mifflin Company. All rights reserved.
Cost-Volume-Profit » The contribution approach is extremely useful for profit planning. » Target sales in units = (FC + NI) / (CM per unit). » Projected net income can be calculated, assuming changes in volume, selling price, and/or costs. 20 -36 Copyright Houghton Mifflin Company. All rights reserved.
Assumptions Underlying C-V-P Analysis 1. The behavior of variable and fixed costs can be measured accurately. 2. Costs and revenues have a close linear approximation. 3. Efficiency and productivity hold steady within the relevant range of activity. 20 -37 Copyright Houghton Mifflin Company. All rights reserved.
Assumptions Underlying C-V-P Analysis 4. Cost and price variables hold steady during the period being planned. 5. The product sales mix does not change during the period being planned. 6. Production and sales volume are roughly equal. 20 -38 Copyright Houghton Mifflin Company. All rights reserved.
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