Transcript MGT430 LECTURE 28.ppt

• Chapter 17: Accounting Systems For
Measuring Costs
• Cost Accounting Systems
• Basic Cost Accounting Procedures
• Job Order Costing
• The Job Cost Sheet
• Job Order Costing : Document Flow Summary
• Flow of Costs in Job Costing
• Closing Under- or Over applied Manufacturing
Overhead
• Flow of Costs in Job Costing
• Process Costing
• Comparing Job and Process Costing
• Job and Process Costing
• Job and Process Costing Similarities
• Work in Process Accounts -The Key to Process
Costing
• Computing Unit Cost
• Computing and Using Equivalent Units of
Production
• Cost Per Equivalent Unit
• Equivalent Units
Chapter
19
Cost-Volume-Profit
Analysis
4
Questions Addressed by
Cost-Volume-Profit Analysis
CVP analysis is used to answer questions
such as:
– How much must I sell to earn my desired income?
– How will income be affected
if I reduce selling prices to
increase sales volume?
– What will happen to
profitability if I expand
capacity?
5
Cost Behavior
6
Variable Cost
Jason Inc. produces stereo sound systems
under the brand name of J-Sound. The parts
for the stereo are purchased from an outside
supplier for $10 per unit (a variable cost).
7
Variable Cost
Total Costs
Total Variable Cost Graph
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
0 10 20 30
Units Produced
(in thousands)
8
Variable Cost
Unit Variable Cost Graph
Cost per Unit
$20
$15
$10
$5
0
10 20 30
Units Produced
(000)
9
Cost per Unit
Total Costs
Variable Cost
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
0
$20
$15
$10
$5
0
10
20
30
Units Produced (000)
10
20
30
Units Produced (000)
Number of
Units
Produced
5,000 units
10,000
15,000
20,000
25,000
30,000
Direct
Materials
Cost per Unit
Total Direct
Materials
Cost
$10
10
10
10
10
10
$ 50,000
l00,000
150,000
200,000
250,000
300,000
10
Fixed Costs
The production
supervisor for Minton
Inc.’s Los Angeles plant
is Jane Sovissi. She is
paid $75,000 per year.
The plant produces from
50,000 to 300,000
bottles of perfume.
La Fleur
11
Fixed Costs
Number of
Bottles
Produced
Total Salary
for Jane
Sovissi
50,000 bottles
100,000
150,000
200,000
250,000
300,000
$75,000
75,000
75,000
75,000
75,000
75,000
$75,000
/50,000
= $1.5
Salary per
Bottle
Produced
$1.500
0.750
0.500
0.375
0.300
0.250
12
Fixed Costs
Unit Fixed Cost Graph
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
0
Cost per Unit
Total Costs
Total Fixed Cost Graph
100
200
0
300
Bottles Produced (000)
Number of
Bottles
Produced
50,000 bottles
100,000
15,000
20,000
25,000
30,000
$1.50
$1.25
$1.00
$.75
$.50
$.25
100
200
300
Units Produced (000)
Total Salary
for Jane
Sovissi
Salary per
Bottle
Produced
$75,000
75,000
75,000
75,000
75,000
75,000
$1.500
0.750
0.500
0.375
0.300
0.250
13
Simpson Inc. manufactures
sails using rented equipment.
The rental charges are
$15,000 per year, plus $1 for
each machine hour used over
10,000 hours.
14
Mixed Costs
Total Mixed Cost Graph
Total Costs
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,0000
10 20 30 40
$5,000Total Machine Hours
(000)
Mixed costs are
sometimes called
semivariable or
semifixed costs.
Mixed costs are
usually separated into
their fixed and
variable components
for management
analysis.
15
Mixed Costs
The high-low method is a simple way
to separate mixed costs into their
fixed and variable components.
16
High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June
July
August
September
October
1,000 $45,550
1,500 52,000
2,100 61,500
1,800 57,500
750 41,250
What month has
the highest level
of activity in
terms of cost?
Highest level of activity ($) minus
lowest level of activity ($)
Variable cost per unit =
Highest level of activity (n) minus
lowest level of activity (n) 17
High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June
July
August
September
October
1,000 $45,550
1,500 52,000
2,100 61,500
1,800 57,500
750 41,250
What month has
the highest level
of activity in
terms of cost?
$61,500 minus lowest level of
activity ($)
Variable cost per unit =
Highest level of activity (n) minus
lowest level of activity (n) 18
High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June
July
August
September
October
1,000 $45,550
1,500 52,000
2,100 61,500
1,800 57,500
750 41,250
For the highest
level of cost,
what is the level
of production?
$61,500 minus lowest level of
activity ($)
Variable cost per unit =
Highest
of activity
(n) minus
2,100level
minus
lowest level
of
lowest activity
level of (n)
activity (n) 19
High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June
July
August
September
October
1,000 $45,550
1,500 52,000
2,100 61,500
1,800 57,500
750 41,250
Variable cost per unit =
What month has
the lowest level of
activity in terms
of cost?
$61,500 minus lowest level of
$57,500
– $41,250
activity
($)
2,100 minus
2,100lowest
– 750level of
activity (n)
20
High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June
July
August
September
October
1,000 $45,550
1,500 52,000
2,100 61,500
1,800 57,500
750 41,250
What is the
variable cost per
unit?
$20,250
$57,500 – $41,250
Variable cost per unit = $15
1,350
2,100
– 750
21
High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June
July
August
September
October
1,000 $45,550
1,500 52,000
2,100 61,500
1,800 57,500
750 41,250
Variable cost per unit = $15
What is the total
fixed cost (using the
highest level)?
Total cost = (Variable cost per unit x Units of production)
+ Fixed cost
$61,500 = ($15 x 2,100) + Fixed cost
$61,500 = ($15 x 2,100) + $30,000
22
High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June
July
August
September
October
1,000 $45,550
1,500 52,000
2,100 61,500
1,800 57,500
750 41,250
Variable cost per unit = $15
The fixed cost is
the same at the
lowest level.
Total cost = (Variable cost per unit x Units of production)
+ Fixed cost
$41,250 = ($15 x 750) + Fixed cost
$41,250 = ($15 x 750) + $30,000
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Unit costs remain the
same per
unitUnits
regardless
Total
Review
ofProduced
activity.
Total costs
increase and
Per Unit Cost
decreases
proportionately
Unit Variable
Costs
with activity level.
Total Units Produced
Total Fixed Costs
Total Costs
Total Costs
Total Variable Costs
Fixed Costs
Total costs increase
and decreases with
activity level.
Total Units Produced
Unit
Unitcosts
Fixedremain
Costs the
same regardless of
activity.
Per Unit Cost
Variable Costs
Total Units Produced
24
Stair-Step Costs
Cost
Total cost remains
constant within a
narrow range of
activity.
Activity
25
Stair-Step Costs
Cost
Total cost increases to a
new higher cost for the
next higher range of
activity.
Activity
26
Curvilinear Costs
Total Cost
Curvilinear
Cost Function
Relevant Range
Volume of Output
A straight line
closely (constant
unit variable cost)
approximates a
curvilinear variable
cost line within
the relevant range.
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Cost Behavior Summary
Summary of Variable and Fixed Cost Behavior
Cost
In Total
Per Unit
Variable
Changes as activity level
changes.
Remains the same over wide
ranges of activity.
Fixed
Remains the same even
when activity level changes.
Dereases as activity level
increases.
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29
Contribution Margin Income Statement
Sales (50,000 units)
Variable costs
Contribution margin
Fixed costs
Income from operations
The contribution
margin is
available to cover
the fixed costs
and income from
operations.
Contribution
$1,000,000
600,000
$ 400,000
300,000
$ 100,000
margin
FIXED
COSTS
Income from
Operations
30
Contribution Margin Income Statement
Sales (50,000 units)
Variable costs
Contribution margin
Fixed costs
Income from operations
Sales
Sales
=
Variable
costs
–
Variable
costs
$1,000,000
600,000
$ 400,000
300,000
$ 100,000
Income
from
operations
+
Fixed
costs
=
Contribution
margin
+
31
Contribution Margin Ratio
Sales (50,000 units)
Variable costs
Contribution margin
Fixed costs
Income from operations
$1,000,000
600,000
$ 400,000
300,000
$ 100,000
100%
60%
40%
30%
10%
Sales – Variable costs
Contribution margin ratio =
Sales
$1,000,000 – $600,000
Contribution margin ratio =
$1,000,000
Contribution margin ratio = 40%
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Contribution Margin Ratio
Sales (50,000 units)
Variable costs
Contribution margin
Fixed costs
Income from operations
$1,000,000
600,000
$ 400,000
300,000
$ 100,000
100%
60%
40%
30%
10%
$20
12
$ 8
The contribution margin can be expressed three ways:
1. Total contribution margin in dollars.
3. Contribution margin ratio (percentage).
3. Unit contribution margin (dollars per unit).
33
Cost-Volume-Profit
(CVP) Analysis
Let’s extend our
knowledge of
cost behavior to
CVP analysis.
34
Computing Break-Even Point
The break-even point (expressed in units of
product or dollars of sales) is the unique sales
level at which a company neither earns a profit
nor incurs a loss.
35
Computing Break-Even Point
Sales Revenue (2,000 units)
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating income
Total
$ 100,000
60,000
$ 40,000
30,000
$ 10,000
Unit
$ 50
30
$ 20
Contribution margin is amount by which revenue
exceeds the variable costs of producing the revenue.
36
Computing Break-Even Point
Sales Revenue (2,000 units)
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating income
Total
$ 100,000
60,000
$ 40,000
30,000
$ 10,000
Unit
$ 50
30
$ 20
How much contribution margin must this company
have to cover its fixed costs (break even)?
37
Computing Break-Even Point
Sales Revenue (2,000 units)
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating income
Total
$ 100,000
60,000
$ 40,000
30,000
$ 10,000
Unit
$ 50
30
$ 20
How much contribution margin must this company
have to cover its fixed costs (break even)?
Answer: $30,000
38
Computing Break-Even Point
Sales Revenue (2,000 units)
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating income
Total
$ 100,000
60,000
$ 40,000
30,000
$ 10,000
Unit
$ 50
30
$ 20
How many units must this company sell to cover its
fixed costs (break even)?
39
Computing Break-Even Point
Sales Revenue (2,000 units)
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating income
Total
$ 100,000
60,000
$ 40,000
30,000
$ 10,000
Unit
$ 50
30
$ 20
How many units must this company sell to cover its
fixed costs (break even)?
Answer: $30,000 ÷ $20 per unit = 1,500 units
40
Formula for Computing
Break-Even Sales (in Units)
We have just seen one of the basic CVP
relationships – the break-even computation.
Break-even point in units =
Fixed costs
Contribution margin per unit
Unit sales price less unit variable cost
($20 in previous example)
41
Formula for Computing
Break-Even Sales (in Dollars)
The break-even formula may also be
expressed in sales dollars.
Break-even point in dollars =
Fixed costs
Contribution margin ratio
Unit sales price
Unit variable cost
42
Computing Break-Even Sales
Question 1
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
43
Computing Break-Even Sales
Question 1
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
Unit contribution = $5.00 - $3.00 = $2.00
b. 40,000 units
c. 200,000 unitsFixed costs
$200,000
= $2.00 per unit
Unit
contribution
d. 66,667 units
= 100,000 units
44
Computing Break-Even Sales
Question 2
Use the contribution margin ratio formula to
determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a.
b.
c.
d.
$200,000
$300,000
$400,000
$500,000
45
Computing Break-Even Sales
Question 2
Use the contribution margin ratio formula to
determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
Unit contribution = $5.00 - $3.00 = $2.00
a.
b.
c.
d.
$200,000
Contribution margin ratio = $2.00 ÷ $5.00 = .40
$300,000
Break-even revenue = $200,000 ÷ .4 = $500,000
$400,000
$500,000
46
Preparing a CVP Graph
 Starting at the origin, draw the total revenue
Costs and Revenue
in Dollars
line with a slope equal to the unit sales price.
Revenue
 Total fixed cost
extends horizontally
from the vertical axis.
Total fixed cost
Volume in Units
47
Preparing a CVP Graph
 Draw the total cost line with a slope
Revenue
Costs and Revenue
in Dollars
equal to the unit variable cost.
Breakeven
Point
Profit
Total cost
Loss
Total fixed cost
Volume in Units
48
Computing Sales Needed to
Achieve Target Operating Income
Break-even formulas may be adjusted to show
the sales volume needed to earn
any amount of operating income.
Unit sales =
Fixed costs + Target income
Contribution margin per unit
Fixed costs + Target income
Dollar sales =
Contribution margin ratio
49
Computing Sales Needed to
Achieve Target Operating Income
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 earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
50
Computing Sales Needed to
Achieve Target Operating Income
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 earn operating income of $40,000?
Unit contribution = $5.00 - $3.00 = $2.00
a. 100,000 units
Fixed costs + Target income
b. 120,000 units
Unit contribution
c. 80,000 units$200,000 + $40,000
= 120,000 units
d. 200,000 units $2.00 per unit
51
What is our Margin of Safety?
Margin of safety is the amount by which sales may
decline before reaching break-even sales:
Margin of safety = Actual sales - Break-even sales
Margin of safety provides a quick means of estimating
operating income at any level of sales:
Operating
Income
=
Margin
of safety
×
Contribution
margin ratio
52
What is our Margin of Safety?
Oxco’s contribution margin ratio is 40 percent. If
sales are $100,000 and break-even sales are
$80,000, what is operating income?
Operating
Income
Margin
of safety
=
Operating
Income
= $20,000 × .40 = $8,000
×
Contribution
margin ratio
53
What Change in Operating Income
Do We Anticipate?
Once break-even is reached, every additional dollar of
contribution margin becomes operating income:
Change in
operating income =
Change in
Contribution
sales volume × margin ratio
Oxco expects sales to increase by $15,000. How much will
operating income increase?
Change in
operating income
=
$15,000 × .40
=
$6,000
54
End of Today’s Session
55