Accounting principles 8th weygars kieso kimmel chapter 22

Chapter 22-1 CHAPTER 22 COST - VOLUME PROFIT Accounting Principles, Eighth Edition Chapter 22-2 Study Study Objectives Objectives Chapter 22-3 Distinguish between variable and fixed costs Explain the significance of the relevant range Explain the concept of mixed costs List the five components of cost-volume-profit analysis Indicate what contribution margin is and how it can be expressed Identify the three ways to determine the break-even point Study Study Objectives Objectives Chapter 22-4 Give the formulas for determining sales required to earn target net income Define margin of safety, and give the formulas for computing it Describe the essential features of a cost-volumeprofit income statement Preview Preview of of Chapter Chapter To manage any business, you must understand: How costs respond to changes in sales volume and The effect of costs and revenues on profit To understand cost-volume-profit (CVP), you must know how costs behave Chapter 22-5 Cost-Volume-Profit Cost-Volume-Profit Chapter 22-6 Cost CostBehavior Behavior Analysis Analysis Cost-VolumeCost-VolumeProfit ProfitAnalysis Analysis Variable costs Fixed costs Basic components CVP income statement Relevant range Mixed costs Break-even analysis Target net income Identifying variable and fixed costs Margin of safety Changes in business environment CVP income statement revisited Cost Cost Behavior Behavior Analysis Analysis Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity Some costs change; others remain the same Helps management plan operations and decide between alternative courses of action Applies to all types of businesses and entities Chapter 22-7 LO 1: Distinguish between variable and fixed costs Cost Cost Behavior Behavior Analysis Analysis continued continued Starting point is measuring key business activities Activity levels may be expressed in terms of: Sales dollars (in a retail company) Miles driven (in a trucking company) Room occupancy (in a hotel) Dance classes taught (by a dance studio) Many companies use more than one measurement base Chapter 22-8 LO 1: Distinguish between variable and fixed costs Cost Cost Behavior Behavior Analysis Analysis continued continued For an activity level to be useful: Changes in the level or volume of activity should be correlated with changes in costs The activity level selected is called the activity or volume index The activity index: Identifies the activity that causes changes in the behavior of costs Allows costs to be classified according to their response to changes in activity as either: Variable Costs Chapter 22-9 Fixed Costs Mixed Costs LO 1: Distinguish between variable and fixed costs Variable Variable Costs Costs Costs that vary in total directly and proportionately with changes in the activity level Example: If the activity level increases 10 percent, total variable costs increase 10 percent Example: If the activity level decreases by 25 percent, total variable costs decrease by 25 percent Variable costs remain constant per unit at every level of activity Chapter 22-10 LO 1: Distinguish between variable and fixed costs Contribution Contribution Margin Margin Technique Technique When the BEP in units is desired, contribution margin per unit is used in the following formula which shows the computation for Vargo Video: When the BEP in dollars is desired, contribution margin ratio is used in the following formula which shows the computation for Vargo Video: Chapter 22-42 LO 6: Identify the three ways to determine the break-even point Break-Even Break-Even Analysis: Analysis: Graphic Graphic Presentation Presentation A cost-volume profit (CVP) graph shows costs, volume and profits Used to visually find the break-even point To construct a CVP graph: Plot the total sales line starting at the zero activity level Plot the total fixed cost using a horizontal line Plot the total cost line (starts at the fixed-cost line at zero activity Determine the break-even point from the intersection of the total cost line and the total sales line Chapter 22-43 LO 6: Identify the three ways to determine the break-even point Break-Even Break-Even Analysis: Analysis: Graphic Graphic Presentation Presentation Chapter 22-44 LO 6: Identify the three ways to determine the break-even point Let’s Let’s Review Review Gossen Company is planning to sell 200,000 pliers for $4 per unit The contribution margin ratio is 25% If Gossen will break even at this level of sales, what are the fixed costs? a $100,000 $100,000 b $160,000 c $200,000 d $300,000 Chapter 22-45 LO 6: Identify the three ways to determine the break-even point Break-Even Break-Even Analysis: Analysis: Target Target Net Net Income Income Level of sales necessary to achieve a specified income Can be determined from each of the approaches used to determine break-even sales/units: from a mathematical equation, by using contribution margin, or from a cost-volume profit (CVP) graph Expressed either in sales units or in sales dollars Chapter 22-46 LO 7: Give the formulas for determining sales required to earn target net income Break-Even Break-Even Analysis: Analysis: Target Target Net Net Income Income Mathematical Equation Using the formula for the break-even point, simply include the desired net income as a factor The computation for Vargo Video is as follows: Chapter 22-47 LO 7: Give the formulas for determining sales required to earn target net income Break-Even Break-Even Analysis: Analysis: Target Target Net Net Income Income Contribution Margin Technique To determine the required sales in units for Vargo Video: To determine the required sales in dollars for Vargo Video: Chapter 22-48 LO 7: Give the formulas for determining sales required to earn target net income Let’s Let’s Review Review The mathematical equation for computing required sales to obtain target net income is: Required sales = a Variable costs + Target net income income b Variable costs + Fixed costs + Target net income c Fixed costs + Target net income d No correct answer is given Chapter 22-49 LO 7: Give the formulas for determining sales required to earn target net income Break-Even Break-Even Analysis: Analysis: Margin Margin of of Safety Safety Difference between actual or expected sales and sales at the break-even point Measures the “cushion” that management has if expected sales fail to materialize May be expressed in dollars or as a ratio To determine the margin of safety in dollars for Vargo Video assuming that actual/expected sales are $750,000: Chapter 22-50 LO 8: Define margin of safety, and give the formulas for computing it Break-Even Break-Even Analysis: Analysis: Margin Margin of of Safety Safety Margin of Safety Ratio  Computed by dividing the margin of safety in dollars by the actual or expected sales  To determine the margin of safety ratio for Vargo Video assuming that actual/expected sales are $750,000:  The higher the dollars or the percentage, the greater the margin of safety Chapter 22-51 LO 8: Define margin of safety, and give the formulas for computing it CVP CVP Income Income Statement Statement Revisited Revisited Chapter 22-52 LO 9: Describe the essential features of a cost-volumeprofit income statement Let’s Let’s Review Review Marshall Company had actual sales of $600,000 when break-even sales were $420,000 What is the margin of safety ratio? a 25% 25% b 30% c 33 1/3% d 45% Chapter 22-53 LO 8: Define margin of safety, and give the formulas for computing it Chapter Chapter Review Review Brief Brief Exercise Exercise 22-4 22-4 Deines Company accumulates the following data concerning a mixed cost, using miles as the activity level Miles Driven January 8,000 February 7,500 Total Cost $14,150 $13,600 Miles Driven March 8,500 April 8,200 Total Cost $15,000 $14,490 Compute the variable and fixed cost elements using the highlow method Chapter 22-54 Chapter Chapter Review Review Brief Brief Exercise Exercise 22-4 22-4 High Level of Activity: Low Level of Activity: March February Difference $15,000 13,600 $ 1,400 8,500 miles 7,500 miles 1,000 miles Step 1: Variable Cost per Unit = $1,400 ÷ 1,000 miles = $1.40 variable cost per mile Step 2: Total Cost: Variable Cost: 8,500 X $1.40 7,500 X $1.40 Total Fixed Costs Chapter 22-55 High $15,000 11,900 $ 3,100 Low $13,600 10,500 $ 3,100 Copyright Copyright Copyright © 2008 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 22-56 .. .CHAPTER 22 COST - VOLUME PROFIT Accounting Principles, Eighth Edition Chapter 22- 2 Study Study Objectives Objectives Chapter 22- 3 Distinguish between variable... understand cost-volume-profit (CVP), you must know how costs behave Chapter 22- 5 Cost-Volume-Profit Cost-Volume-Profit Chapter 22- 6 Cost CostBehavior Behavior Analysis Analysis Cost-VolumeCost-VolumeProfit... the clocks is $100,000 (10,000 X $10) Chapter 22- 11 LO 1: Distinguish between variable and fixed costs Variable Variable Costs Costs –– Graphs Graphs Chapter 22- 12 LO 1: Distinguish between variable