Chapter 6 Cost Behavior Analysis

1. Chapter 6Cost Behavior Analysis Fall 2007 Crosson Use only with permission of Susan Crosson

2. Learning Objectives: Cost Formula Y=a+bX Cost Behavior: Fixed, Variable, or Mixed Methods to Split Mixed Cost into its Fixed and Variable components CVP Income Statement and Assumptions Finding Breakeven in units and dollars What Ifs using CVP Sales Mix and CVP Use only with permission of Susan Crosson

3. Cost Formula Y=a+bX Fixed Costs: Y=a Graph Examples: Rent, Depreciation, Salaries Variable Costs: Y=bX Graph Examples: DM, DL, Sales Commissions Use only with permission of Susan Crosson

4. Mixed Cost Behavior Mixed Costs: Y=a+bX Graph Examples: Water bill, Rent at the Mall What about your telephone costs? Use only with permission of Susan Crosson

5. Methods to Split Mixed Costs into their Fixed and Variable components Engineering method Scattergraph or Visual Fit method High-Low method Least Squares method Simple and Multiple Regression methods Use only with permission of Susan Crosson

6. What Do You Know? Mixed Costs E3 C3 Look and listen to SE3 Use only with permission of Susan Crosson

7. CVP Assumptions • Within a Relevant Range: • Costs and Revenues have close linear relationship. • Behavior of fixed and variable costs can be measured accurately. • Efficiency and productivity remain steady. • Cost and price variables remain steady. • The sales mixed does not change. • Production and sales volumes are roughly equal. Use only with permission of Susan Crosson

8. CVP Income Statement Sales -Variable Costs Contribution Margin -Fixed Costs Net Income Use only with permission of Susan Crosson

9. CVP Income Statement-Finding Breakeven in Units sold S= SP x units sold -VC=Variable rate x units sold CM=(CM/unit) x units sold -Fixed Costs Net Income Use only with permission of Susan Crosson

10. What Do You Know?CVP using Units sold SE6 SE4 E5 Use only with permission of Susan Crosson

11. CVP Income Statement-Finding Breakeven in Sales dollars S= 100% Sales in dollars -VC= (VC/S) x Sales in dollars CM=(CM/S) x Sales in dollars -Fixed Costs Net Income Use only with permission of Susan Crosson

12. CVP using Sales dollars Total revenue for February was $400,000 and total costs were $320,000; total revenue in March was $480,000 and total cost were $380,000.  Given these CVP relationships: (a) what is the breakeven point in sales and (b) what is income if sales are $460,000? Use only with permission of Susan Crosson

13. More CVP using Sales dollars A company has fixed costs of $20,000 per period and variable costs equal to 60% of sales.  What sales volume is necessary (a) to breakeven  (b) to earn $8,000 per period Use only with permission of Susan Crosson

14. What Do You Know?CVP E6 P6 C5 Use only with permission of Susan Crosson

15. What Do You Know?Sales Mix: What Ifs using CVP SE8 E10 Use only with permission of Susan Crosson

16. Homework P2 Use only with permission of Susan Crosson