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1. CHAPTER 12 Managerial Accounting andCost-Volume-Profit Relationships

2. Managerial accountingsupports the internalplanning (future-oriented)decisions made by management. Financial accounting hasmore of a scorekeeping,historical orientationthat provides informationto owners and othersoutside the organization. Managerial Accounting versus Financial Accounting

3. Managerial Accounting versus Financial Accounting

4. Revisit plans Implement plans Data collection andperformance feedback Decision Making Strategic, Operational,and Financial Planning Planning and control cycle Performance analysis: Plans vs. actual results (Controlling) Executing operational activities (Managing)

5. Relationship of Total Costto Volume of Activity How a cost will react to changes in the level of business activity. • Total variable costschange when activity changes. • Total fixed costsremain unchanged when activity changes.

6. Total Variable Cost Your total long distance telephone bill is based on how many minutes you talk. Total Long DistanceTelephone Bill Minutes Talked

7. Variable Cost Per Unit The cost per long distance minute talked is constant. For example, 10 cents per minute. Per MinuteTelephone Charge Minutes Talked

8. Total Fixed Cost Your monthly basic telephone billprobably does not change whenyou make more local calls. Monthly Basic Telephone Bill Number of Local Calls

9. Fixed Cost per Unit The average cost per local call decreases as more local calls are made. Monthly Basic Telephone Bill per Local Call Number of Local Calls

10. Relationship of Total Costto Volume of Activity

11. Relationship of Total Costto Volume of Activity Fixed costs are usually characterized by: a. Unit costs that remain constant. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

12. Relationship of Total Costto Volume of Activity Fixed costs are usually characterized by: a. Unit costs that remain constant. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

13. Relationship of Total Costto Volume of Activity Variable costs are usually characterized by: a. Unit costs that decrease as activity increases. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

14. Relationship of Total Costto Volume of Activity Variable costs are usually characterized by: a. Unit costs that decrease as activity increases. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

15. Relationship of Total Costto Volume of Activity Economist’sCurvilinear Cost Function Total Cost Activity

16. Relationship of Total Costto Volume of Activity Economist’sCurvilinear Cost Function Total Cost Accountant’s Straight-Line Approximation (constant unit variable cost) Activity

17. Relationship of Total Costto Volume of Activity A straight line closely approximates a curvilinear variable cost line within the relevant range. Economist’sCurvilinear Cost Function RelevantRange Total Cost Accountant’s Straight-Line Approximation (constant unit variable cost) Activity

18. Example: Office space is available at a rental rate of \$30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the total cost. Continue Fixed Costs andthe Relevant Range

19. Fixed Costs andthe Relevant Range 90 Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity. Relevant Range 60 Rent Cost in Thousands of Dollars 30 0 0 1,000 2,000 3,000 Rented Area (Square Feet)

20. Relationship of Total Costto Volume of Activity • Typical variable costs • Raw materials • Direct labor • Factory utilities • Sales commissions • Shipping costs • Typical fixed costs • Real estate taxes • Insurance • Supervisory salaries • Depreciation • Advertising

21. A semivariable cost has both fixed and variablecomponents. Relationship of Total Costto Volume of Activity Consider thefollowing electric utility example.

22. Y Total semivariable cost Semivariable Costs Variable Utility Charge Total Utility Cost Fixed MonthlyUtility Charge X Activity (Kilowatt Hours)

23. Semivariable Costs Y Total semivariable cost Variable Utility Charge Total Utility Cost Fixed MonthlyUtility Charge X Activity (Kilowatt Hours)

24. Semivariable Costs Y Total semivariable cost Y = a + bX Variable Utility Charge Total Utility Cost Fixed MonthlyUtility Charge X Activity (Kilowatt Hours)

25. Estimating Cost Behavior Patterns The high-low method isused to determine the fixedand variable componentsof a semivariable cost.

26. The High-low Method Beetle Co. recorded the following productionactivity and maintenance costs for two months: Using these two levels of activity, compute: • the variable cost per unit; • the fixed cost; and then • express the costs in equation form Y = a + bX.

27. The High-low Method Change in costChange in units • Unit variable cost =

28. The High-low Method • Unit variable cost = \$3,600 ÷ 4,000 units = \$0.90 per unit

29. The High-low Method • Unit variable cost = \$3,600 ÷ 4,000 units = \$0.90 per unit • Fixed cost = Total cost – Total variable cost • Fixed cost = \$9,700 – (\$0.90 per unit × 9,000 units) • Fixed cost = \$9,700 – \$8,100 = \$1,600

30. The High-low Method • Unit variable cost = \$3,600 ÷ 4,000 units = \$0.90 per unit • Fixed cost = Total cost – Total variable cost • Fixed cost = \$9,700 – (\$0.90 per unit × 9,000 units) • Fixed cost = \$9,700 – \$8,100 = \$1,600 • Total cost = Fixed cost + Variable cost (Y = a + bX) Y = \$1,600 + \$0.90X

31. The High-low Method If sales salaries and commissions are \$10,000 when 80,000 units are sold and \$14,000 when 120,000 units are sold, what is the variable portion of sales salaries and commission? a. \$0.08 per unit b. \$0.10 per unit c. \$0.12 per unit d. \$0.125 per unit

32. \$4,000 ÷ 40,000 units = \$0.10 per unit The High-low Method If sales salaries and commissions are \$10,000 when 80,000 units are sold and \$14,000 when 120,000 units are sold, what is the variable portion of sales salaries and commission? a. \$0.08 per unit b. \$0.10 per unit c. \$0.12 per unit d. \$0.125 per unit

33. The High-low Method If sales salaries and commissions are \$10,000 when 80,000 units are sold and \$14,000 when 120,000 units are sold, what is the fixed portion of sales salaries and commissions? a. \$ 2,000 b. \$ 4,000 c. \$10,000 d. \$12,000

34. The High-low Method If sales salaries and commissions are \$10,000 when 80,000 units are sold and \$14,000 when 120,000 units are sold, what is the fixed portion of sales salaries and commissions? a. \$ 2,000 b. \$ 4,000 c. \$10,000 d. \$12,000

35. Let’s put our knowledge of cost behavior to work by preparing a contribution format income statement. A Modified IncomeStatement Format

36. The contribution marginformat emphasizes cost behavior.Contribution margincovers fixed costsand provides for income. The Contribution Margin Format

37. Used primarily forexternal reporting. Used primarily bymanagement. The Contribution Margin Format

38. Contribution margin ratio The Contribution Margin Format

39. The Contribution Margin Format At Evans, each \$1.00 increase in sales revenue results in a total contribution margin increase of 40¢. If sales increase by \$60,000, what will be the increase in total contribution margin? \$60,000 × 0.40 = \$24,000

40. Contribution Margin in Action What is income if sales increase by 2,000 units?

41. Contribution Margin in Action Note that fixed expenses do not increase when sales volume increases.

42. Contribution Margin in Action What is the effect on income if a \$1.00 per unitprice cut results in a 4,000 unit increase in volume?

43. Contribution Margin in Action Contribution margin is increased without anincrease in fixed expenses, so income increases.

44. Contribution Margin in Action What is the effect on income if a \$1.00 per unitprice cut, combined with a \$10,000 increase inadvertising, results in an 8,000 unit increasein volume?

45. Contribution Margin in Action Contribution margin is increased more than the \$10,000 increase in fixed expenses, so income increases.

46. Break-Even Point Analysis How manyunits must Evans sell to cover its fixed costs (break even)? Answer: \$30,000 ÷ \$4 per unit = 7,500 units

47. Fixed costs Break-even point in units = Contribution margin per unit Break-Even Point Analysis We have just seen one of the basic CVP relationships – the break-evencomputation. Unit sales price less unit variable cost(\$4 for Evans company)

48. Unit contribution margin Unit sales price Break-Even Point Analysis The break-even formula may also be expressed in sales dollars. Fixed costs Break-even point in dollars = Contribution margin ratio

49. Break-Even Point Analysis ABC Co. sells product XYZ at \$5.00 per unit. If fixed costs are \$200,000 and variable costs are \$3.00 per unit, how many units must be sold to break even? a. 100,000 units b. 40,000 units c. 200,000 units d. 66,667 units

50. Break-Even Point Analysis ABC Co. sells product XYZ at \$5.00 per unit. If fixed costs are \$200,000 and variable costs are \$3.00 per unit, how many units must be sold to break even? a. 100,000 units b. 40,000 units c. 200,000 units d. 66,667 units Unit contribution = \$5.00 - \$3.00 = \$2.00 Fixed costsUnit contribution \$200,000\$2.00 per unit = = 100,000 units