Lecture financial and managerial accounting (4:e) chapter 18 wild, shaw, chiappetta

Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc All Chapter 18 Cost Behavior and Cost-Volume-Profit Analysis Conceptual Learning Objectives C1: Describe different types of cost behavior in relation to production and sales volume C2: Describe several applications of costvolume-profit analysis 18-3 Analytical Learning Objectives A1: Compute the contribution margin and describe what it reveals about a company’s cost structure A2: Analyze changes in sales using the degree of operating leverage 18-4 Procedural Learning Objectives P1: Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs P2: Compute the break-even point for a single product company P3: Graph costs and sales for a single product company P4: Compute the break-even point for a multiproduct company 18-5 C2 Questions Addressed by Cost-Volume-Profit Analysis CVP CVPanalysis analysisis isused used to to answer answerquestions questions such suchas: as:   What Whatsales salesvolume volumeis isneeded needed to to earn earn aa target targetincome? income?   What Whatis isthe the change change in inincome income ififselling selling prices pricesdecline declineand and sales salesvolume volume increases? increases?   How How much muchdoes doesincome income increase increase ifif we we install installaanew newmachine machine to to reduce reduce labor labor costs? costs?   What Whatis isthe the income income effect effectifif we wechange change the the sales salesmix mixof ofour ourproducts productsor or services? services? 18-6 C1 Cost Behavior Summary Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Changes as activity level changes Remains the same over wide ranges of activity Fixed Remains the same even when activity level changes Dereases as activity level increases 18-7 C1 Mixed Costs Mixed costs contain a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage Example: monthly electric utility charge  Fixed service fee  Variable charge per kilowatt hour used 18-8 C1 Step-Wise Costs Cost Total cost remains constant within a narrow range of activity Activity 18-9 P2 Computing The Break-Even Point Exh 22-8 We have just seen one of the basic CVP relationships – the break-even computation Fixed costs Break-even point in units = Contribution margin per unit Unit sales price less unit variable cost 18-10 P3 Preparing a CVP Chart Costs and Revenue in Dollars Sales Total fixed costs Total costs Breakeven Point Volume in Units 18-11 C1 Assumptions of CVP Analysis  A limited range of activity called the relevant range, where CVP relationships are linear  Unit selling price remains constant  Unit variable costs remain constant  Total fixed costs remain constant  Production = sales (no inventory changes) 18-12 C2 Computing Sales for a Target Income Break-even Break-even formulas formulas may may be be adjusted adjusted to to show show the the sales sales volume volume needed needed to to earn earn any any amount amount of of income income Unit sales = Fixed costs + Target income Contribution margin per unit Fixed costs + Target income Dollar sales = Contribution margin ratio 18-13 P4 Computing Multiproduct Break-Even Point The CVP formulas may 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 18-14 End of Chapter 18 18-15 .. .Chapter 18 Cost Behavior and Cost-Volume-Profit Analysis Conceptual Learning Objectives C1: Describe different types of cost behavior in relation to production and sales volume... the product sales mix  Sales mix is the ratio of the volumes of the various products 18- 14 End of Chapter 18 18-15 ... sales price less unit variable cost 18- 10 P3 Preparing a CVP Chart Costs and Revenue in Dollars Sales Total fixed costs Total costs Breakeven Point Volume in Units 18- 11 C1 Assumptions of CVP Analysis