Chapter 18
Download
1 / 34

CHAPTER 18 - PowerPoint PPT Presentation


  • 69 Views
  • Uploaded on
  • Presentation posted in: General

CHAPTER 18. Cost Behavior & Cost-Volume-Profit Analysis. Cost Behavior. In planning, we must understand how costs behave. For example, do costs change as production activity changes or do they stay the same?

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha

Download Presentation

CHAPTER 18

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


CHAPTER 18

Cost Behavior & Cost-Volume-Profit Analysis


Cost Behavior

  • In planning, we must understand how costs behave.

    • For example, do costs change as production activity changes or do they stay the same?

  • __________– costs that increase as production activity increases (direct materials, direct labor)

  • __________– costs that stay the same over a range of activity levels (depreciation, rent) within a given time period.


Variable Costs

Total Variable Cost Graph

Unit Variable Cost Graph

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$20

$15

$10

$5

Cost per Unit

Total Costs

0

102030

Units Produced (000)

0

102030

Units Produced (000)

Units Total Cost

Produced Cost per Unit

5,000 $ 50,000 $10

10,000 100,000 10

15,000 150,000 10

20,000 200,000 10

25,000 250,000 10

30,000 300,000 10


Fixed Costs

Total Fixed Cost Graph

Unit Fixed Cost Graph

$150,000

$125,000

$100,000

$75,000

$50,000

$25,000

$1.50

$1.25

$1.00

$.75

$.50

$.25

Total Costs

Cost per Unit

0

0

100200300

100200300

Units Produced (000)

Units Produced (000)

Units Total Cost

Produced Cost per Unit

50,000 $75,000 $1.500

100,000 75,000 .750

150,000 75,000 .500

200,000 75,000 .375

250,000 75,000 .300

300,000 75,000 .250


Relevant Range

  • Cost relationships remain stable only over some range of production activity.

  • Outside that range the relationships may change.

  • __________is the expected range of activity we are interested in.

    • We estimate the cost relationships within that range.

    • We cannot extrapolate outside the range.


Cost Behavior

  • __________Costs

    • include both fixed and variable costs; we separate fixed from variable costs when perform cost-volume profit analysis.

  • __________Costs

    • fixed within a relevant range, but if total production increases significantly, total costs increase by a lump sum amount

  • __________Costs

    • increase at a non-constant rate as volume increases.


Mixed Costs

  • Some costs have a _______component and a __________component.

  • We can separate mixed costs into the two components using the ________________.

$

Total costs

Equation of line : y = a + bx

Slope = VC/unit

FC

activity


Mixed Costs

Total Mixed Cost Graph

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

Mixed costs are sometimes called semivariable or semifixed costs.

Total Costs

Mixed costs are usually separated into their fixed and variable components for management analysis.

0

10203040

Total Machine Hours (000)


Identifying and MeasuringCost Behavior

The objective is to classifyall costs as either fixed or variable.


Measuring Cost Behavior: Scatter Diagram …

20

*

*

*

*

*

*

*

*

Total Cost in1,000’s of Dollars

*

*

10

0

0 1 2 3 4

Activity, 1,000s of Units Produced

  • A __________of past cost behavior may be helpful in analyzing mixed costs.

Draw a line through the plotted data points so that about equal numbers of points fall above and below the line.

Estimated fixed cost = 10,000


Measuring Cost Behavior: Scatter Diagram …

Δin costΔin units

20

*

*

*

*

*

*

*

*

Total Cost in1,000’s of Dollars

*

*

10

0

0 1 2 3 4

Activity, 1,000s of Units Produced

Variable Cost unit= Slope =

Vertical distance is the change in cost.

Horizontal distance is the change in activity.


Measuring Cost BehaviorHigh/Low Method

  • Determine the __________by finding the slope

    • change in ____÷ change in _____

    • (see prev. slide)

  • Determine the __________component

    • Using the high (or the low) point, plug in the cost (y), the activity (x), and the slope (VC/unit).

    • Solve for the y- intercept.

  • Given the equation of the cost line, we can now use it to predict cost over some range of activity.


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level

Lowest level

Difference


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level

Difference


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level75041,250

Difference


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level75041,250

Difference1,350$20,250

Difference in total cost

Difference in production

Variable cost

per unit

1

=


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level75041,250

Difference1,350$20,250

Difference in total cost

Difference in production

$20,250

1,350 units

Variable cost

per unit

1

=

=

=

$15


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level75041,250

Difference1,350$20,250

Difference in total cost

Difference in production

$20,250

1,350 units

Variable cost

per unit

1

=

=

=

$15

Total

cost

Fixed

cost

Variable cost

per unit

Units of

production

2

=

x


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level75041,250

Difference1,350$20,250

Difference in total cost

Difference in production

$20,250

1,350 units

Variable cost

per unit

1

=

=

=

$15

Total

cost

Fixed

cost

Variable cost

per unit

Units of

production

2

=

x

=

=

Highest level:

$61,500

( $15 x 2,100 )

$30,000


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level75041,250

Difference1,350$20,250

Difference in total cost

Difference in production

$20,250

1,350 units

Variable cost

per unit

1

=

=

=

$15

Total

cost

Fixed

cost

Variable cost

per unit

Units of

production

2

=

x

=

=

Highest level:

$61,500

( $15 x 2,100 )

$30,000

=

=

Lowest level:

$41,250

( $15 x 750 )

$30,000


Mixed Costs: High-Low Method

Actual costs incurred

Highest and lowest levels

ProductionTotal

UnitsCost

ProductionTotal

UnitsCost

June1,000$45,550

July1,50052,000

August2,10061,500

September1,80057,500

October75041,250

Highest level2,100$61,500

Lowest level75041,250

Difference1,350$20,250

Difference in total cost

Difference in production

$20,250

1,350 units

Variable cost

per unit

1

=

=

=

$15

Total

cost

Fixed

cost

Variable cost

per unit

Units of

production

2

=

x

=

=

Highest level:

$61,500

( $15 x 2,100 )

$30,000

=

=

Lowest level:

$41,250

( $15 x 750 )

$30,000


Cost-Volume-Profit & Breakeven Analysis

  • Given our fixed and variable costs, we can use CVP techniques to help predict our profit at various activity levels.

  • We define

    • __________= Sales – VC

    • __________= SP/unit – VC/unit

    • __________= CM/SP


Related Questions

  • We can use this set of techniques to answer the following types of questions.

    • How many units do we need to sell to break even?

    • How much profit will we generate at a given level of sales?

    • If we want to earn a target profit, how many units do we need to sell?

    • If we change our sales price, what happens to our profitability?


Computing Break-Even Point

Contribution margin is amount by which revenue exceeds the variable costsof producing the revenue.


Computing Break-Even Point

P2

How much contribution margin must this company have to cover its fixed costs (break even)?

Answer: $24,000


Computing Break-Even Point

P2

How many units must this company sell to cover its fixed costs (i.e. to break even)?

Answer: $24,000 ÷ $30 per unit = 800 units


Breakeven Sales

  • Sales = VC + FC + profit or

  • Profit = Sales – VC – FC

  • At breakeven, profit = 0

    • 0 = (Sales – VC) – FC

    • 0 = CM - FC

    • CM = FC or

    • (CM/unit)(units) = FC

    • And Breakeven Units = FC/(CM/unit)

    • Or Breakeven in $ = FC/(CM ratio)


Target Net Income

  • You can use the CVP idea to determine how much we can sell to earn a desired profit.

    • Profit = Sales – VC – FC

    • Profit + FC = Sales – VC = CM = CM/unit(units)

    • Target Salesunits= (FC + Profit) / CM/unit

    • Target Sales$ = (FC + Profit) / CM ratio


__________is the amount by which sales can drop before the company incurs a loss.

Margin of safety may be expressed as a percentage of expected sales.

Margin of Safety

Margin of safety Expected sales - Break-even salespercentage Expected sales

=

C3

Exh.

22-17


Breakeven for Multiple Products

  • BEunits= FC/(CMcomposite), where

  • CMcomposite = [(%A)CMA+ (%B) CMB]

    • The number of units that we get will be a combined unit of A and B together.

    • You then have to determine the number of A and B each that are actually sold.


Breakeven for Multiple Products - Example

  • If FC = $100,000 and CM(a) = $40 and CM(b) = $20, and we sell 3 times as many units of B as A, what is the BE point?

  • BEunits= 100,000/[(0.25)($40) + (0.75)($20)]

    = 4,000 units

  • A = (0.25)(4,000) or 1,000 units of A

  • B = (0.75)(4,000) or 3,000 units of B


Operating Leverage

Contribution margin

Net income

Degree of ____________________=

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.


Contribution Margin Reporting

  • We can recast the income statement to highlight the contribution margin.

  • Sales

  • - VC

  • = CM

  • - FC

  • = operating income

For Internal Reporting purposes only


The End!!

Now, let’s look at the quick studies!


ad
  • Login