ACTG 321 Agenda for Lecture 3

1. ACTG 321Agenda for Lecture 3 • Cost-Volume-Profit Analysis • Break • Flexible Budgeting

2. Cost-Volume-Profit Analysis • Contribution Margin • The Basic Profit Equation • Break-even Analysis • Solving for targeted profits

3. Contribution Margin • Contribution Margin • total sales revenue - total variable costs • Unit Contribution Margin • unit sales price - unit variable costs

4. The Basic Profit Equation profit = sales - costs

5. The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs

6. The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs profit + fixed costs = sales - variable costs

7. The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs profit + fixed costs = sales - variable costs profit + fixed costs = # of units x (unit selling price - unit variable cost)

8. The Basic Profit Equation profit = sales - costs  profit = sales - variable costs - fixed costs profit + fixed costs = sales - variable costs profit + fixed costs = # of units x (unit selling price - unit variable cost) P + FC = Q x (SP - VC)

9. Break-Even Analysis  P + FC = Q x (SP - VC) Set profit = 0, plug in total fixed costs, unit selling price and unit variable cost, and solve for # of units. This is break-even analysis.  FC = Q x (SP - VC)

10. Target Dollar Profits  P + FC = Q x (SP - VC) Plug in for profits, total fixed costs, unit selling price and unit variable cost, and solve for # of units (Q). This calculates unit sales to achieve a targeted profit.

11. Target Selling Prices  P + FC = Q x (SP - VC) Plug in for profits, total fixed costs, unit variable cost, and sales volume, and solve for targeted selling price. This calculates the unit sales price to achieve a targeted profit.

12. ACTG 321Agenda for Lecture 3 • Cost-Volume-Profit Analysis • Break • Flexible Budgeting

13. ACTG 321Agenda for Lecture 3 • Cost-Volume-Profit Analysis • Break • Flexible Budgeting

14. Flexible Budgeting Recall the three functions of management accounting: Planning Control Performance Evaluation Budgeting is normally a planning tool. However, flexible budgeting is a performance evaluation and control tool.

15. Flexible Budgeting Budgets are based on some measure of output; such as units sold or produced. The static budget is based on the original, projected level of activity. The flexible budget adjusts budgeted costs for the actual level of activity.

16. Flexible Budgeting Building a flexible budget involves the following steps: Obtain the flexible budget for fixed costs directly from the static budget. Use the static budget to calculate the variable cost per unit of activity. Multiply the variable cost per unit by the actual number of units

17. Flexible Budgeting Pro forma statements, for hypothetical levels of output, also use the same “flexible budgeting” technique.

18. Flexible Budgeting New Skeet Orphanage

19. The Convent at New Skeet runs an orphanage. Sister Sarah manages the orphanage and Sister Rachel is responsible for the accounting records. Sister Rachel prepared the following summary of actual and budgeted costs for 2001.

20. BudgetActual Number of children (all ages) 80 72 Fixed costs: Utilities $ 25,000 $ 27,250 Janitorial Services $ 14,000 $ 15,500 Repairs and Maintenance $ 17,500 $ 14,300 Salaries for non-Convent employees $ 85,000$ 92,000 Total fixed costs $141,500$149,050 Variable costs: Food $438,000 $409,968 Clothing $ 40,000 $ 39,600 Laundry & Linen Service $ 14,000 $ 13,040 Educational Costs $ 26,000 $ 25,480 Allowances $ 20,000$ 25,000 Total variable costs $538,000$513,088 Total costs $679,500$662,138

21. Sister Sarah is very concerned that the orphanage uses its funds efficiently. She is pleased that total costs were below budget for the year, but she wonders if this is partly due to the fact that the orphanage housed fewer children than expected for the year. Required: 1. Prepare a flexible budget for 2001, based (i.e., “flexed”) on the number of children actually housed in 2001. 2. Should Sister Sarah be satisfied with the orphanage’s cost management in 2001? Briefly explain.

22. Preparation of Flexible Budget: Static Flexible BudgetBudget Number of children (all ages) 80 72 Fixed costs: Utilities $ 25,000 $ 25,000 Janitorial Services $ 14,000 $ 14,000 Repairs and Maintenance $ 17,500 $ 17,500 Salaries for non-Convent employees $ 85,000$ 85,000 Total fixed costs $141,500$141,500 Variable costs: Food $438,000 $394,200 Clothing $ 40,000 $ 36,000 Laundry & Linen Service $ 14,000 $ 12,600 Educational Costs $ 26,000 $ 23,400 Allowances $ 20,000$ 18,000 Total variable costs $538,000$484,200 Total costs $679,500$625,700

23. Comparison of Flexible Budget Flexible to Actual ResultsBudgetActual Number of children (all ages) 72 72 Fixed costs: Utilities $ 25,000 $ 27,250 Janitorial Services $ 14,000 $ 15,500 Repairs and Maintenance $ 17,500 $ 14,300 Salaries for non-Convent employees $ 85,000$ 92,000 Total fixed costs $141,500$149,050 Variable costs: Food $394,200 $409,968 Clothing $ 36,000 $ 39,600 Laundry & Linen Service $ 12,600 $ 13,040 Educational Costs $ 23,400 $ 25,480 Allowances $ 18,000$ 25,000 Total variable costs $484,200$513,088 Total costs $625,700$662,138

24. Flexible Budgeting The Spring Valley Bicycle Company

25. The Spring Valley Bicycle Company planned to produce and sell 6,000 units of its sole product in 2007. The product is a mountain bike. The company planned to earn revenues during the year of $5,160,000. The budget calls for direct materials of $250 per bike, and direct labor of $114 per bike. Total fixed manufacturing overhead was budgeted at $1,100,000. Total variable overhead was budgeted at $402,000. The company budgeted a sales commission of $70 per unit. In addition to the sales commission, which is a variable cost, there are fixed S.G. & A. expenditures budgeted at $85 per unit when 6,000 units are produced and sold. Required: Complete the following table. Be sure to indicate if variances are favorable or unfavorable.

26. The Spring Valley Bicycle Company planned to produce and sell 6,000units of its sole product in 2007. The company planned to earn revenues during the year of $5,160,000. The budget calls for direct materials of $250 and direct labor of $114 per bike. Fixed mfg overhead was budgeted at $1,100,000. Total variable overhead was budgeted at $402,000. The company budgeted a sales commission of $70 per unit. In addition, there are fixed S.G. & A. expenditures budgeted at $85 per unit when 6,000 units are produced and sold.

27. The Spring Valley Bicycle Company planned to produce and sell 6,000units of its sole product in 2007. The company planned to earn revenues during the year of $5,160,000. The budget calls for direct materials of $250 and direct labor of $114 per bike. Fixed mfg overhead was budgeted at $1,100,000. Total variable overhead was budgeted at $402,000. The company budgeted a sales commission of $70 per unit. In addition, there are fixed S.G. & A. expenditures budgeted at $85 per unit when 6,000 units are produced and sold.