Survey of accounting 6e chapter 11

Cost Behavior and CostVolume-Profit Analysis Chapter 11 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objectives After studying this chapter, you should be able to: • Classify costs as variable costs, fixed costs, or mixed costs • Compute the contribution margin, the contribution margin ratio, and the unit contribution margin • Determine the break-even point and sales necessary to achieve a target profit • Using a cost-volume-profit chart and a profit-volume chart, determine the break-even point and sales necessary to achieve a target profit • Compute the break-even point for a company selling more than one product, the operating leverage, and the margin of safety ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Classify costs as variable costs, fixed costs, or mixed costs ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost Behavior • Refers to the manner in which a cost changes as a related _ changes Can be , _, or _ • Two factors to consider: • _ – activities thought to relate to the cost incurred (e.g., food service costs change with the number of hospital patients) • _ – changes in cost are of interest ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost Behavior: Variable Costs • Costs that in proportion to changes in the activity level ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost Behavior: Variable Costs Exhibit 1: Variable Cost Graphs ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost Behavior: Fixed Costs • Costs that remain the same in _ over the relevant range of activity, but changes with the level of activity ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost Behavior: Fixed Costs Exhibit 2: Fixed Cost Graphs ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost Behavior: Mixed Costs • Mixed costs share characteristics of both a and a _ cost: fixed over a range, then increasing based on Exhibit 3: Mixed Cost ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part High-Low Method • Total maintenance costs during the last five months • Total maintenance cost at highest and lowest levels of production ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Using a cost-volume-profit chart and a profitvolume chart, determine the break-even point and sales necessary to achieve a target profit ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost-Volume-Profit (CVP) Chart • Cost-volume-profit charts assist management in understanding relationships among costs, sales, and operating profit or loss • We’ll construct a CVP chart assuming: • • • • $50 selling price $30 unit variable cost $20 unit contribution margin $100,000 in fixed costs ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost-Volume-Profit (CVP) Chart Exhibit 5: Cost-Volume-Profit Chart ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Cost-Volume-Profit (CVP) Chart Exhibit 6: Revised Cost-Volume-Profit Chart When fixed costs decrease by $20,000, break-even decreases to 4,000 units ($200,000) ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Profit-Volume Chart • Focuses on • Plots the difference between total _ and total • We’ll construct a profit-volume chart assuming: • • • • $50 selling price $30 unit variable cost $20 unit contribution margin $100,000 in fixed costs Maximum loss is $100,000 in fixed costs (if no sales) Assume maximum profit is $100,000 (based on 10,000 maximum sales) ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Profit-Volume Chart Exhibit 7: Profit-Volume Chart ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Calculate the break-even point for a business selling more than one product, the operating leverage, and margin of safety ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Sales Mix Considerations • Most businesses sell more than one product, and each product contributes differently to overall profit • Sales mix is the relative distribution of sales among the various products sold • The sales volume necessary to break even when more than one product is sold depends on the sales mix ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Sales Mix Assume Burr Company sold 8,000 units of Product A and 2,000 units of Product B last year ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Sales Mix • Combining individual unit information to represent one single product – Product E • Assuming fixed costs are $200,000, 8,000 units of Product E are needed to break even ($200,000/$25) But how many of Products A and B does that mean? ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Sales Mix • Product A: 8,000 × 80% = 6,400 units • Product B: 8,000 × 20% = 1,600 units Break-even point ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Operating Leverage • The relative mix of _ and _ costs is measured by operating leverage Operating Leverage = • Companies with high fixed costs (capital intensive) have operating leverage • Companies with low fixed costs (labor intensive) have _ operating leverage • Managers use operating leverage to measure how changes in _ affect changes in income from operations ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Operating Leverage Operating Leverage 50% Increase in _ 10% Operating Leverage = _ Operating Leverage Increase in _ Increase in _ 20% 10% Operating Leverage = ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Margin of Safety • Margin of safety measures how much _ revenue can drop before an operating loss occurs – Margin of Safety (%)are = $250,000 and break-even sales • Assume current sales are $200,000 The margin of safety is 20%: (250,000200,000)/250,000 • Sales would have to drop by more than 20% before an operating loss would result ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part End of Chapter 11 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part ... necessary to achieve a target profit • Using a cost-volume-profit chart and a profit-volume chart, determine the break-even point and sales necessary to achieve a target profit • Compute the break-even... or in part Cost-Volume-Profit Analysis • The systematic examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits • Provides management... Behavior: Fixed Costs • Costs that remain the same in _ over the relevant range of activity, but changes with the level of activity ©2013 Cengage Learning All Rights Reserved May not be scanned,