Student Version

1. Student Version • Repetition is an important component, a key part of learning. In memory, the more times patterns of thought are repeated, the more likely you will be able to recall information. • These PowerPoint slides have been modified from the lecture decks by making them fill-in-the-blank. Why? So that you get an opportunity to repeat a visual cue (from the lecture or the book) via completing text here. • In addition, most text book exhibits have been removed as they are available in your text directly.

2. Cost Behavior and Cost-Volume-Profit Analysis Chapter 21

3. Learning Objective 1 Classify costs as variable costs, fixed costs, or mixed costs.

4. Cost Behavior • _____ _____ is the manner in which a cost changes as a _____ activity changes. Understanding the behavior of a cost depends on: • Identifying the activities that cause the cost to change, called _____ _____ (or _____ _____ ). • Specifying the range of activity over which the changes in the cost are of interest. This range of activity is called the _______ ________.

5. Variable Costs • _____ costsare costs that vary in _______ to changes in the level of _____. • Jason Sound Inc. produces stereo systems. The parts for the stereo systems are purchased from suppliers for $10 per unit (a variable cost) and are assembled by Jason Sound Inc. For Model JS-12, the direct materials costs for the relevant range of 5,000 to 30,000 units of production are shown.

6. Variable Costs

7. Variable Costs • As noted, the variable costs have the following characteristics: • _____ ___ _____ remains the _____ regardless of changes in the activity base. • _____ _____ changes in _____ to changes in the activity base.

8. Variable Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $20 $15 $10 $5 Cost per Unit Total Direct Materials Cost 0 10 20 30 Units Produced (000) 0 10 20 30 Units Produced (000) Number of Units of Model JS-12 Produced Direct Materials Cost per Unit Total Direct Materials Cost 5,000 units $10 $ 50,000 10,000 10 l00,000 15,000 10 150,000 20,000 10 200,000 25,000 10 250,000 30,000 10 300,000

9. Fixed Costs • _____ _____ are costs that remain the _____ in _____ dollar amount as the activity base _____. • Minton Inc. manufactures, bottles, and distributes perfume. The production supervisor is Jane Sovissi. She is paid $75,000 per year. The plant produces from 50,000 to 300,000 bottles of perfume.

10. Fixed Costs The _____ units produced, the _____ the _____ cost per unit.

11. Fixed Costs • _____ costs have the following characteristics: • _____ __ _____ changes _____ to changes in the activity base. • _____ _____ remains the _____ regardless of _____ in the activity base.

12. Fixed Costs $1.50 $1.25 $1.00 $.75 $.50 $.25 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 Total Salary Salary per Unit 100 200 300 0 0 100 200 300 Units Produced (000) Units Produced (000) Salary per Bottle of Perfume Produced Total Salary for Jane Sovissi Number of Bottles of Perfume Produced 50,000 bottles $75,000 $1.500 100,000 75,000 0.750 150,000 75,000 0.500 200,000 75,000 0.375

13. Mixed Costs • _____ _____ have characteristics of both a _____ and a _____ cost. Mixed costs are sometimes called _______ or _______ costs. • Over one range of activity, the _____ mixed cost may _____ the _____ . Over another range of activity, the mixed cost may change in _____ to changes in the _____ of _____.

14. Mixed Costs • 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.

15. Mixed Costs • The rental charges for various hours used within the relevant range of 8,000 hours to 40,000 hours are as follows:

16. Mixed Costs • The high-low_____ is a cost _____ method that may be used to separate _____ costs into their _____ and _____ components.

17. Mixed Costs • The Equipment Maintenance Department of Kason Inc. incurred the following costs during the past five months:

18. Mixed Costs • The number of units produced is the activity base, and the relevant range is the units produced between June and October. The following illustrate how the high-low method is used to determine the fixed and variable costs.

19. Variable Cost per Unit = _____ Costs Production Total (Units) Cost _____ costs incurred June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 First, select the highest and lowest levels of activity.

20. $20,250 Difference in Total Cost Variable Cost per Unit = Difference in Production Mixed Costs Production Total (Units) Cost Next, fill in the formula for _____ in _____ cost. June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 $61,500 41,250 $20,250

21. Difference in Total cost $20,250 Variable Cost per Unit = Difference in Production Mixed Costs Production Total (Units) Cost Then, fill in the formula for _____ in _________. June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 2,100 750 1,350 1,350

22. $20,250 Variable Cost per Unit = 1,350 Mixed Costs Production Total (Units) Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Variable cost per unit is $15 = $15

23. Mixed Costs • The _____ cost is estimated by subtracting the _____ _____ costs from the _____ _____ for the units produced as shown below: Fixed Cost = _____ _____ – (_____ _____ _____ _____ x _____ _____)

24. Mixed Costs • The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc. Highest Level Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced) Fixed Cost = $61,500 – ($15 x 2,100 units) Fixed Cost = $61,500 – $31,500 Fixed Cost = $30,000

25. Mixed Costs • The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc. Lowest Level Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced) Fixed Cost = $41,250 – ($15 x 750 units) Fixed Cost = $41,250 – $11,250 Fixed Cost = $30,000

26. Mixed Costs • With fixed costs and variable costs estimated at $30,000 plus $15 per unit, a formula is in place to estimate production at any level. If the company is expected to produce 2,000 units in November, the estimated total cost would be calculated as follows: Total Cost = ($15 x Units Produced) + $30,000 Total Cost = ($15 x 2,000) + $30,000 Total Cost = $30,000 + $30,000 Total Cost = $60,000

27. Per-unit _____ costs _____ the _____ ________ of activity level. Total variable costs _____ and _____ ___________ with activity level. Summary of Cost Behavior Concepts _____ _____ Costs Total Costs Total Units Produced _____ _____ Costs Per-Unit Cost Total Units Produced

28. Per-unit _____ _____ _____ as activity level _____ . Total fixed costs _____ the _____ _____ of activity level. Summary of Cost Behavior Concepts _____ _____ Costs Total Costs Total Units Produced _____ _____ Costs Per-Unit Cost Total Units Produced

29. Summary of Cost Behavior Concepts • One method of reporting _____ and _____ costs is called _____ _____ or direct _____ . • Under _____ costing, only the _____ manufacturing costs are included in the _____ cost. • The _____ factory _____ is treated as an _____ of the _____ in which it is incurred.

30. Learning Objective 2 Compute the contribution margin, the contribution margin ratio, and the unit contribution margin.

31. Cost-Volume-Profit Relationships • _____ - _____ - _____ analysis is the examination of the relationships among _____ _____ , sales and production volume, _____ , _____ , and _____.

32. Cost-Volume-Profit Relationships • Some of the ways cost-volume-profit analysis may be used include the following: • __________________________________________ • __________________________________________ • __________________________________________ • __________________________________________ • __________________________________________ • __________________________________________

33. Contribution Margin • _____ _____ is the _____ of _____ over variable costs, as shown in the formula below. ______________ _____ = _____ – _____ _____

34. Contribution Margin Ratio = Contribution Margin Ratio • The contribution margin _____ , sometimes called the profit-volume _____ , indicates the _____ of each _____ _____ available to cover _____ _____ and to provide _____ from operations. It is computed as follows:

35. $400,000 $1,000,000 Contribution Margin Ratio = Contribution Margin Sales Contribution Margin Ratio= Contribution Margin Ratio • The contribution margin ratio is 40% for Lambert Inc., computed as follows: Contribution Margin Ratio = 40%

36. Change in Income from Operations = $80,000 x 40% = $32,000 Contribution Margin Ratio • If Lambert Inc. adds $80,000 in sales from the sale of an additional 4,000 units, its income will increase by $32,000, as computed below. Change in Sales Dollars x Contribution Margin Ratio Change in Income from Operations =

37. Contribution Margin Ratio Proof

38. Unit Contribution Margin __________ _____________ = – _____ Contribution Margin • The _____ contribution margin is useful for analyzing the _____ _____ of proposed decisions. The _____ _____ _____ is computed as follows:

39. Change in Income from Operations ______________ ___________ x = Unit Contribution Margin • The unit contribution margin is most useful when the _____ or _____ in _____ _____ is measured in sales _____ (quantities). • The change in income from operations can be determined using the following formula:

40. Unit Contribution Margin Change in Income from Operations Change in Sales Units x = Change in Income from Operations 15,000 units x $8 = $ _____ = Unit Contribution Margin • Lambert Inc.’s sales could be increased by 15,000 units, from 50,000 to 65,000 units. Lambert’s income from operations would increase by $ _____ (15,000 x $8), as shown below.

41. Learning Objective 3 Determine the break-even point and sales necessary to achieve a target profit.

42. _____ - _____ Point • The _____ - _____ point is the level of operations at which a company’s _____ and _____ are equal.

43. Effect of Changes in Fixed Costs

44. Break-Even Sales (units) = _____ additional advertising: 30,000 units 35,000 units = = $600,000 $20 Break-Even Sales (units) = _____ additional advertising: $700,000 $20 Break-Even Sales (units) = Effect of Changes in Fixed Costs

45. Effect of Changes in Unit Variable Costs

46. Break-Even Sales (units) = _____ additional 2% commission: $840,000 $105 8,000 units Break-Even Sales (units) = = _____ additional 2% commission: $840,000 $100 8,400 units = Break-Even Sales (units) = $250 – [$145 + ($250 x 2%)] = $100 Effect of Changes in _____ _____ Costs

47. Effect of Changes in Unit Selling Price

48. _____ price increase: $600,000 $20 30,000 units = Break-Even Sales (units) = _____ price increase: $600,000 $30 = 20,000 units Break-Even Sales (units) = Effect of Changes in Unit Selling Price Break-Even Sales (units) =

49. Summary of Effects of Changes on B/E Point

50. Sales (units) = Target Profit • The _____ _____ required to earn a _____ _____ is determined by modifying the _____ - _____ equation.