Welcome Back Atef Abuelaish 1 Welcome Back Time
Welcome Back Atef Abuelaish 1
Welcome Back Time for Any Question Atef Abuelaish 2
CHAPTER # 04 REVIEW Atef Abuelaish 3
Chapter 04 Activity- Based Costing and Analysis Atef Abuelaish 4
Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the Activity-Based Costing method. Atef Abuelaish 5
Assigning Overhead Costs Indirect Materials Direct Indirect Factory Allocate Overhead Labor Direct Goods in Process Finished Goods Cost of Goods Sold
Assigning Overhead Costs Overhead can be assigned to production in one of three ways: Single plantwide overhead rate C 1 Departmental overhead rates Activity-based - costing
1) Plantwide Overhead Rate Method (Exhibit 4. 2) Indirect Costs Overhead Cost Allocation Base Single Plantwide Overhead Rate Cost Objects P 1 Product 2 Product 3
Plantwide Overhead Rate Method Illustration (exhibits 4. 3 & 4. 4) P 1
Plantwide Overhead Rate Method Illustration Plantwide Total budgeted overhead costs overhead = Total budgeted DLH rate P 1
Plantwide Overhead Rate Method Illustration Plantwide overhead = rate = $4, 800, 000 100, 000 DLH $48/DLH Overhead allocated to each unit produced = $48 x DLH per unit P 1
Plantwide Overhead Rate Method Illustration P 1
Plantwide Overhead Rate Method Advantages and Disadvantages Advantages • Information is readily available • Easy to implement • Consistent with GAAP and can be used for external reporting needs A 1 Atef Abuelaish Disadvantages • Overhead costs may not bear any relationship with direct labor hours • All products may not use overhead costs in the same proportion 13
2) Departmental Overhead Rate Method (exhibit 4. 5) Overhead Cost Department A Overhead Rate P 2 Product 1 Department B Overhead Rate Product 2 Product 3 Indirect Costs Cost Pools Cost Allocation Base Cost Objects
Departmental Overhead Rate Method: First Step Overhead Cost $4, 800, 000 Machining Dept. $4, 200, 000 P 2 Assembly Dept. $600, 000
Departmental Overhead Rate Method: Second Step Machining Dept. Overhead Rate based on machine hours (MH) Product 1 P 2 Assembly Dept. Overhead Rate based on direct labor hours (DLH) Product 2 Product 3
Departmental Overhead Rate Method: Second Step P 2
Departmental Overhead Rate Method: Third Step (Exhibit 4. 6) Departmental Overhead = Rate P 2 Total budgeted departmental overhead costs Total amount of departmental allocation base
Departmental Overhead Rate Method: Third Step Machining Department = Overhead Rate Assembly Department = Overhead Rate P 2 $4, 200, 000 = $60/MH 70, 000 MH $600, 000 30, 000 DLH = $20/DLH
Departmental Overhead Rate Method: Fourth Step P 2
NEED-TO-KNOW A manufacturer reports the following budgeted data for its two production departments. Manufacturing overhead costs Machine hours to be used (MH) Direct labor hours to be used (DLH) Machining $600, 000 20, 000 Assembly $300, 000 0 5, 000 1. What is the company’s single plantwide overhead rate based on direct labor hours? Total Plant Overhead Costs Total Direct Labor Hours $900, 000 25, 000 DLH $36 per DLH 2. What are the company’s departmental overhead rates if the machining department assigns overhead based on machine hours and the assembly department assigns overhead based on direct labor hours? Overhead Costs - Machining Dept. Machine Hours - Machining Dept. $600, 000 20, 000 MH $30 per MH Overhead Costs - Assembly Dept. Direct Labor Hours - Assembly Dept. $300, 000 5, 000 DLH $60 per DLH 3. Using the departmental overhead rates from part 2, how much overhead should be assigned to a job that uses 16 machine hours in the machining department and 5 direct labor hours in the assembly department? Overhead Costs - Machining Dept. Overhead Costs - Assembly Dept. Total Overhead Cost assigned to Job P 2 Atef Abuelaish 16 MHs x $30 per MH = 5 DLHs x $60 per DLH = $480 300 $780 21
Departmental Overhead Rate Method Advantages and Disadvantages Advantages • More accurate overhead allocations • More refined than the plantwide overhead rate method A 1 Disadvantages • Can distort product costs • Assumes that products are similar in volume, complexity, batch size • Assumes that departmental overhead costs are proportional to the allocation base
3) Cost Flows Under Activity-Based Costing Method (Exhibit 4. 9) Overhead Cost Activity Cost Pool X Activity Overhead rate Product 1 C 2 Activity Cost Pool Y Activity Overhead rate Product 2 Indirect Costs Activity Cost Pool Z Activity Overhead rate Product 3 Cost Pools Cost Allocation Base Cost Objects
Applying Activity-Based Costing 4 STEPS: 1. Identify activities and the costs they cause. 2. Trace overhead costs to cost pools. 3. Determine activity rates. 4. Assign overhead costs to cost objects (products). P 3
Step One: Identify Activities and the Costs They Cause Machine setup Machine repair Factory maintenance P 3 Engineer salaries Assembly line power Heating and lighting
Step One: Identify Activities and the Costs They Cause P 3
Step Two: Trace Overhead Costs to Cost Pools Overhead Cost Activity Cost Pool (Craftsmanship) P 3 Activity Cost Pool (Setup) Activity Cost Pool (Design Modification) Activity Cost Pool (Plant Services)
Step Two: Trace Overhead Costs to Cost Pools P 3
Step Three: Determine Activity Rates Activity Cost Pool (Setup) (Craftsmanship) Activity Overhead rate ? Activity Overhead Rate ? Activity Cost Pool (Design Modification) Activity Overhead rate ? Activity Cost Pool (Plant Services) Activity Overhead rate ? Step 3 is to compute the activity rates used to assign overhead costs to final cost objects such as products. P 3
Step Three: Determine Activity Rates Cost Pool Activity Rate = Overhead costs assigned to pool Expected activity level For example: Craftsmanship cost pool activity rate= $600, 000 / 30, 000 DLH = $20 per DLH P 3
Step Three: Determine Activity Rates P 3 =
Step Four: Assign Overhead Costs to Cost Objects Activity Overhead rate Product 1 Activity Overhead rate Product 2 Activity Overhead rate Product 3 Step 4 is to assign overhead costs in each activity cost pool to final cost objects using activity rates. P 3
Step Four: Assign Overhead Costs to Cost Objects • To illustrate, the overhead costs in the craftsmanship pool are allocated to standard gokarts as follows: Overhead allocated from craftsmanship pool to standard go-kart = Activities consumed X Activity rate 25, 000 DLH x $20 per DLH = $500, 000 P 3
Step Four: Assign Overhead Costs to Cost Objects P 3
Step Four: Assign Overhead Costs to Cost Objects P 3
Activity-Based Costing Advantages and Disadvantages Advantages: • Advantages (Continued) • More accurate overhead cost allocation • Costs of Quality • More effective overhead cost control Disadvantages: • Focus on relevant factors • Costs to implement and maintain • Better management of activities A 2 • Uncertainty with decisions remains Not acceptab le under GAAP
Comparison of Overhead Allocations by Method (Exhibit 4. 15) P 3
NEED-TO-KNOW A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6, 000 Basic snowmobiles and 2, 000 Deluxe snowmobiles. Activity Cost Pool Machine setup Materials handling Machine depreciation Activity Cost Driver Cost Assigned to Pool Basic Number of setups $150, 000 200 setups Number of parts 250, 000 10 parts per unit Machine hours (MH) 720, 000 1 MH per unit $1, 120, 000 Deluxe 300 setups 20 parts per unit 1. 5 MH per unit 1. Compute overhead activity rates for each cost pool using ABC. Machine setup costs Number of setups (200 + 300) $150, 000 500 setups $300. 00 per setup Materials handling costs Number of parts (6, 000 x 10) + (2, 000 x 20) $250, 000 100, 000 parts $2. 50 per part Depreciation cost Number of MHs (6, 000 x 1) + (2, 000 x 1. 5) $720, 000 9, 000 MHs $80. 00 per MH 2. Compute the total amount of overhead cost to be allocated to each of the company’s product lines using ABC. Activity Cost Pool Machine setup Materials handling Machine depreciation Totals A 2 Atef Abuelaish Activity Pool Rate $300 per setup $2. 50 per part $80 per MH Basic Deluxe 200 setups x $300 $60, 000 300 setups x $300 $90, 000 60, 000 parts x $2. 50 150, 000 40, 000 parts x $2. 50 100, 000 6, 000 MHs x $80 480, 000 3, 000 MHs x $80 240, 000 $690, 000 $430, 000 38
NEED-TO-KNOW A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6, 000 Basic snowmobiles and 2, 000 Deluxe snowmobiles. 3. Compute the overhead cost per unit for each product line using ABC. Activity Cost Pool Machine setup Materials handling Machine depreciation Totals A 2 Atef Abuelaish Activity Pool Rate $300 per setup $2. 50 per part $80 per MH Basic Deluxe 200 setups x $300 $60, 000 300 setups x $300 $90, 000 60, 000 parts x $2. 50 150, 000 40, 000 parts x $2. 50 100, 000 6, 000 MHs x $80 480, 000 3, 000 MHs x $80 240, 000 $690, 000 $430, 000 Units produced 6, 000 2, 000 Cost per unit $115/unit $215/unit 39
Four types of activities that cause overhead costs Unit-level Batch-level Product-level C 3 Atef Abuelaish Facility-level 40
Chapter 05 Cost Behavior and Atef Abuelaish 41
Chapter 05 Cost Behavior and Cost-Volume. Profit Analysis Atef Abuelaish 42
Fixed Costs Atef Abuelaish 43
Identifying Cost Behavior Cost-Volume-Profit analysis is used to answer questions such as: o How much does income increase if we install a new machine to reduce labor costs? o What is the change in income if selling prices decline and sales volume increases? o How will income change if we change the sales mix of our products or services? C 1 o What sales volume is needed to earn a target Atef Abuelaish income? 44
Fixed Costs C 1 Atef Abuelaish 45
Variable Costs C 1 Atef Abuelaish 46
Mixed Costs C 1 Atef Abuelaish 47
Step-Wise Costs Total cost increases to a new higher cost for the next higher range of activity, but remains constant within a range of activity. C 1 Atef Abuelaish 48
Curvilinear Costs C 1 Atef Abuelaish Costs that increase when activity increases, but in a nonlinear manner. 49
NEED-TO-KNOW Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinear cost with respect to product units. Rubber used to manufacture tennis balls $0. 50 per tennis ball Depreciation (straight-line method) Electricity cost Supervisory salaries A salesperson’s commission is 7% for sales of up to $100, 000, and 10% of sales for sales above $100, 000 Variable cost $0. 50 per tennis ball - Variable $6, 000 Total Cost $5, 000 $4, 000 $3, 000 $2, 000 $1, 000 $0 0 2, 000 4, 000 6, 000 8, 000 10, 000 Units Produced C 1 Atef Abuelaish 50
NEED-TO-KNOW Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinear cost with respect to product units. Rubber used to manufacture tennis balls $0. 50 per ball Depreciation (straight-line method) $2, 000 per month Electricity cost Supervisory salaries A salesperson’s commission is 7% for sales of up to $100, 000, and 10% of sales for sales above $100, 000 Variable cost Fixed cost $2, 000 per month - Fixed $2, 500 Total Cost $2, 000 $1, 500 $1, 000 $500 $0 0 2, 000 4, 000 6, 000 8, 000 10, 000 Units Produced C 1 Atef Abuelaish 51
NEED-TO-KNOW Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinear cost with respect to product units. Rubber used to manufacture tennis balls $0. 50 per ball Depreciation (straight-line method) $2, 000 per month Electricity cost $500 + $0. 10 per ball Supervisory salaries A salesperson’s commission is 7% for sales of up to $100, 000, and 10% of sales for sales above $100, 000 Variable cost Fixed cost Mixed cost $500 + $0. 10 per unit- Mixed $1, 600 $1, 400 Total Cost $1, 200 $1, 000 $800 $600 $400 $200 $0 0 2, 000 4, 000 6, 000 8, 000 10, 000 Units Produced C 1 Atef Abuelaish 52
NEED-TO-KNOW Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinear cost with respect to product units. Rubber used to manufacture tennis balls $0. 50 per ball Depreciation (straight-line method) $2, 000 per month Electricity cost $500 + $0. 10 per ball Supervisory salaries 4, 000 units per shift $5, 000 per mo. per supervisor A salesperson’s commission is 7% for sales of up to $100, 000, and 10% of sales for sales above $100, 000 Variable cost Fixed cost Mixed cost Step-wise cost $5, 000 per supervisor per month - Step-wise $16, 000 $14, 000 $12, 000 Total Cost $10, 000 $8, 000 $6, 000 $4, 000 $2, 000 $0 0 2, 000 4, 000 6, 000 8, 000 10, 000 Units Produced C 1 Atef Abuelaish 53
NEED-TO-KNOW Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinear cost with respect to product units. Rubber used to manufacture tennis balls $0. 50 per ball Depreciation (straight-line method) $2, 000 per month Electricity cost $500 + $0. 10 per ball Supervisory salaries 4, 000 units per shift $5, 000 per mo. per supervisor A salesperson’s commission is 7% for sales of up to $100, 000, and 10% of sales for sales above $100, 000 Variable cost Fixed cost Mixed cost Step-wise cost Curvilinear cost Sales Commissions - Curvilinear $30, 000 $25, 000 Total Cost $20, 000 $15, 000 $10, 000 $5, 000 $0 $0 $50, 000 $100, 000 $150, 000 $200, 000 $250, 000 $300, 000 Sales $ C 1 Atef Abuelaish 54
Measuring Cost Behavior Atef Abuelaish 55
Measuring Cost Behavior The objective is to classify all costs as either fixed or variable. We will look at three methods: 1. Scatter diagrams. 2. The high-low method. 3. Least–squares regression. A scatter diagram is a plot of cost data points on a graph. It is almost always helpful to plot cost data to be able to observe a visual picture of the relationship between cost and activity. P 1 Atef Abuelaish 56
Scatter Diagrams P 1 Atef Abuelaish 57
The High-Low Method The following relationships between units produced and total cost are observed: Using these two levels of activity, compute: the variable cost per unit. the total fixed cost. P 1 Atef Abuelaish 58
The High-Low Method P 1 Total cost = $17, 525 + $0. 17 per unit produced Atef Abuelaish 59
Least-Squares Regression Least-squares regression is usually covered in advanced cost accounting courses. It is commonly used with spreadsheet programs or calculators. The objective of the cost analysis remains the same: determination of total fixed cost and the variable unit cost. P 1 Atef Abuelaish 60
Comparison of Cost Estimation Methods P 1 Atef Abuelaish 61
NEED-TO-KNOW Using the information below, use the high-low method to determine the cost equation (total fixed costs plus variable costs per unit). Activity Level Lowest Highest Units Total Cost Produced 1, 600 $9, 800 4, 000 17, 000 Variable Cost = Cost at high point - Cost at low point Units at high point - Units at low point ($17, 000 - $9, 800) (4, 000 - 1, 600) $7, 200 2, 400 $3 per unit produced Fixed Costs (at high point) Total cost = Fixed costs + $3 per unit $17, 000 = Fixed costs + ($3 x 4, 000) $5, 000 = Fixed costs Fixed Costs (at low point) Total cost = Fixed costs + $3 per unit $9, 800 = Fixed costs + ($3 x 1, 600) $5, 000 = Fixed costs Total costs = $5, 000 + $3 per unit P 1 Atef Abuelaish 62
NEED-TO-KNOW Slope = Variable Cost $3 per unit y-intercept = Fixed Costs $5, 000 Total Cost = $5, 000 + $3 per unit $18, 000 $16, 000 (4, 000 units, $17, 000) Total Cost $14, 000 $12, 000 $10, 000 (1, 600 units, $9, 800) $8, 000 $6, 000 (0 units, $5, 000) $4, 000 $2, 000 $0 0 500 1, 000 1, 500 2, 000 2, 500 3, 000 3, 500 4, 000 4, 500 Units Produced P 1 Atef Abuelaish 63
Contribution Margin and Its Measures Atef Abuelaish 64
Contribution Margin and Its Measures A 1 Atef Abuelaish 65
Computing the Break-Even Point Atef Abuelaish 66
Using Break-Even Analysis The break-even point (expressed in units of product or dollars of sales) is the unique sales level at which a company earns neither a profit nor incurs a loss. P 2 Atef Abuelaish 67
Computing the Break-Even Point P 2 Atef Abuelaish 68
Computing the Margin of Safety P 2 Atef Abuelaish 69
NEED-TO-KNOW A manufacturer predicts fixed costs of $400, 000 for the next year. Its one product sells for $170 per unit, and it incurs variable costs of $150 per unit. The company predicts total sales of 25, 000 units for the next year. 1. Compute the contribution margin per unit. $20 per unit 2. Compute the break-even point (in units). 3. Compute the margin of safety (in dollars). Contribution margin per unit, or unit contribution margin, is the amount by which a product’s unit selling price exceeds its total variable cost per unit. Sales Variable costs Contribution margin P 2 Atef Abuelaish $170 per unit 150 per unit $ 20 per unit 70
NEED-TO-KNOW A manufacturer predicts fixed costs of $400, 000 for the next year. Its one product sells for $170 per unit, and it incurs variable costs of $150 per unit. The company predicts total sales of 25, 000 units for the next year. 1. Compute the contribution margin per unit. $20 per unit 2. Compute the break-even point (in units). 20, 000 units 3. Compute the margin of safety (in dollars). Break-even point in units = Fixed costs Contribution margin per unit $400, 000 $20 per unit 20, 000 units to break-even Sales Variable costs Contribution margin Fixed costs Net income P 2 Atef Abuelaish Units 20, 000 per unit Total $170 $3, 400, 000 $150 3, 000 $20 400, 000 $0 71
NEED-TO-KNOW A manufacturer predicts fixed costs of $400, 000 for the next year. Its one product sells for $170 per unit, and it incurs variable costs of $150 per unit. The company predicts total sales of 25, 000 units for the next year. 1. Compute the contribution margin per unit. $20 per unit 2. Compute the break-even point (in units). 20, 000 units 3. Compute the margin of safety (in dollars). $850, 000 The excess of expected sales over the break-even sales level is called a company’s margin of safety Expected sales Break-even sales Margin of safety P 2 Atef Abuelaish Units 25, 000 20, 000 per unit Total $170 $4, 250, 000 $170 3, 400, 000 $850, 000 72
Preparing a Cost. Volume-Profit Chart Atef Abuelaish 73
Preparing a CVP Chart P 3 Atef Abuelaish 74
Working with Changes in Estimates P 3 Atef Abuelaish 75
Applying Cost. Volume-Profit Analysis Atef Abuelaish 76
Computing Income from Sales and Costs C 2 Atef Abuelaish 77
Computing Sales for a Target Income C 2 Atef Abuelaish 78
Computing Sales for a Target Income C 2 Atef Abuelaish 79
Computing Sales for a Target Income C 2 Atef Abuelaish 80
NEED-TO-KNOW A manufacturer predicts fixed costs of $502, 000 for the next year. Its one product sells for $180 per unit, and it incurs variable costs of $126 per unit. Its target income (pretax) is $200, 000. 1. Compute the contribution margin ratio. 30% 2. Compute the dollar sales needed to yield the target income. 3. Compute the unit sales needed to yield the target income. The contribution margin ratio is the percent of a unit’s selling price that exceeds total unit variable cost. Contribution margin ratio = Contribution margin per unit Selling price per unit $180 - $126 $180 $54 $180 30% Sales Variable costs Contribution margin C 2 Atef Abuelaish per unit $180 126 $54 Ratio 100% 70% 30% 81
NEED-TO-KNOW A manufacturer predicts fixed costs of $502, 000 for the next year. Its one product sells for $180 per unit, and it incurs variable costs of $126 per unit. Its target income (pretax) is $200, 000. 1. Compute the contribution margin ratio. 30% 2. Compute the dollar sales needed to yield the target income. $2, 340, 000 3. Compute the unit sales needed to yield the target income. Dollar sales to achieve target income = Fixed costs + Pretax Income Contribution margin ratio $502, 000 + $200, 000. 30 $2, 340, 000 Sales Variable costs Contribution margin Fixed costs Net income C 2 Atef Abuelaish per unit $180 $126 $54 Ratio 100% 70% 30% Total $2, 340, 000 1, 638, 000 702, 000 502, 000 $200, 000 82
NEED-TO-KNOW A manufacturer predicts fixed costs of $502, 000 for the next year. Its one product sells for $180 per unit, and it incurs variable costs of $126 per unit. Its target income (pretax) is $200, 000. 1. Compute the contribution margin ratio. 30% 2. Compute the dollar sales needed to yield the target income. $2, 340, 000 3. Compute the unit sales needed to yield the target income. 13, 000 units (or $2, 340, 000 / $180) Units to yield target income Break-even point in units == Fixed costs target (pretax) income Fixed +costs Contribution margin unit Contribution margin perper unit $502, 000 + $200, 000 $180 - $126 $702, 000 $54 13, 000 units Sales Variable costs Contribution margin Fixed costs Net income C 2 Atef Abuelaish Units 13, 000 per unit $180 $126 $54 Total $2, 340, 000 1, 638, 000 702, 000 502, 000 $200, 000 83
Using Sensitivity Analysis C 2 Atef Abuelaish 84
Computing a Multiproduct Break. Even Point Atef Abuelaish 85
Computing a Multiproduct Break-Even Point The CVP formulas can be modified for use when a company sells more than one product. § The unit contribution margin is replaced with the contribution margin for a composite unit. § A composite unit is composed of specific numbers of each product in proportion to the product sales mix. § Sales mix is the ratio of the volumes of the various products. P 4 Atef Abuelaish 86
Computing a Multiproduct Break-Even Point The resulting break-even formula for composite unit sales is: Break-even point in composite units = Fixed costs Contribution margin per composite unit Continue P 4 Atef Abuelaish 87
Computing a Multiproduct Break-Even Point Hair-Today offers three cuts as shown below. Annual fixed costs are $192, 000. Compute the break-even point in composite units and in number of units for each haircut at the given sales mix. P 4 Atef Abuelaish 88
Computing a Multiproduct Break-Even Point P 4 Atef Abuelaish 89
Computing a Multiproduct Break-Even Point P 4 Atef Abuelaish 90
Computing a Multiproduct Break-Even Point = Fixed costs Contribution margin per composite unit Break-even point in composite units = $192, 000 $64. 00 per composite unit Break-even point in composite units = 3, 000 composite units Break-even point in composite units P 4 Atef Abuelaish 91
Computing a Multiproduct Break-Even Point P 4 Atef Abuelaish 92
Multiproduct Break-Even Income Statement P 4 Atef Abuelaish 93
NEED-TO-KNOW The sales mix of a company’s two products, X and Y, is 2: 1. Unit variable costs for both products are $2, and unit selling prices are $5 for X and $4 for Y. The company has $640, 000 of fixed costs. 1. What is the contribution margin per composite unit? $8 2. What is the break-even point in composite units? 3. How many units of X and how many units of Y will be sold at the break-even point? Selling price per composite unit Product X Product Y Total Units 2 1 3 per unit $5 $4 Total $10 4 $14 Variable cost per composite unit Product X Product Y Total Units 2 1 3 per unit $2 $2 Total $4 2 $6 Contribution margin per composite unit ($14 - $6) P 4 Atef Abuelaish $8 94
NEED-TO-KNOW The sales mix of a company’s two products, X and Y, is 2: 1. Unit variable costs for both products are $2, and unit selling prices are $5 for X and $4 for Y. The company has $640, 000 of fixed costs. 1. What is the contribution margin per composite unit? $8 2. What is the break-even point in composite units? 80, 000 composite units 3. How many units of X and how many units of Y will be sold at the break-even point? Break-even point in composite units = Fixed costs Contribution margin per composite unit $640, 000 $8 per composite unit 80, 000 composite units to break even P 4 Atef Abuelaish 95
NEED-TO-KNOW The sales mix of a company’s two products, X and Y, is 2: 1. Unit variable costs for both products are $2, and unit selling prices are $5 for X and $4 for Y. The company has $640, 000 of fixed costs. 1. What is the contribution margin per composite unit? $8 2. What is the break-even point in composite units? 80, 000 composite units 3. How many units of X and how many units of Y will be sold at the break-even point? Units of each product at break-even Product X 80, 000 composite units x 2 units per composite unit Product Y 80, 000 composite units x 1 unit per composite unit Total Sales Product X Product Y Total Units 160, 000 80, 000 240, 000 per unit $5 $4 Total $800, 000 320, 000 $1, 120, 000 Total Variable Costs Product X Product Y Total Units 160, 000 80, 000 240, 000 per unit $2 $2 Total $320, 000 160, 000 $480, 000 Composite units 80, 000 per unit $14 $6 $8 Total $1, 120, 000 480, 000 640, 000 $0 Sales Variable costs Contribution margin Fixed costs Net income P 4 Total 160, 000 80, 000 240, 000 Atef Abuelaish 96
Global View Over 90 percent of German companies surveyed report their cost accounting systems focus on contribution margin. This focus helps German companies like Volkswagen control costs and plan their production levels. Atef Abuelaish 97
Degree of Operating Leverage Atef Abuelaish 98
Degree of Operating Leverage A measure of the extent to which fixed costs are being used in an organization. A measure of how a percentage change in sales will affect profits. A 2 Atef Abuelaish 99
Operating Leverage If Rydell increases sales by 10 percent, what will the percentage increase in income be? A 2 Atef Abuelaish 100
Appendix 5 A: Using Excel to Estimate Least-Squares Regression Atef Abuelaish 101
Homework assignment Ø Using Connect – 7 Questions for 60 Points; Chapter 5. 5 Ø Prepare chapter 6 “Variable Costing and Analysis. ” Happiness is having all homework up to date Atef Abuelaish 102
Thank you and See You Next Week at the Same Time, Take Care Atef Abuelaish 103
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