1 / 34

CHAPTER 18

CHAPTER 18. Cost Behavior & Cost-Volume-Profit Analysis. Cost Behavior. In planning, we must understand how costs behave. For example, do costs change as production activity changes or do they stay the same?

zelenia-melton
Download Presentation

CHAPTER 18

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 18 Cost Behavior & Cost-Volume-Profit Analysis

  2. Cost Behavior • In planning, we must understand how costs behave. • For example, do costs change as production activity changes or do they stay the same? • __________– costs that increase as production activity increases (direct materials, direct labor) • __________– costs that stay the same over a range of activity levels (depreciation, rent) within a given time period.

  3. Variable Costs Total Variable Cost Graph Unit Variable Cost Graph $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $20 $15 $10 $5 Cost per Unit Total Costs 0 10 20 30 Units Produced (000) 0 10 20 30 Units Produced (000) Units Total Cost Produced Cost per Unit 5,000 $ 50,000 $10 10,000 100,000 10 15,000 150,000 10 20,000 200,000 10 25,000 250,000 10 30,000 300,000 10

  4. Fixed Costs Total Fixed Cost Graph Unit Fixed Cost Graph $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $1.50 $1.25 $1.00 $.75 $.50 $.25 Total Costs Cost per Unit 0 0 100 200 300 100 200 300 Units Produced (000) Units Produced (000) Units Total Cost Produced Cost per Unit 50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250

  5. Relevant Range • Cost relationships remain stable only over some range of production activity. • Outside that range the relationships may change. • __________is the expected range of activity we are interested in. • We estimate the cost relationships within that range. • We cannot extrapolate outside the range.

  6. Cost Behavior • __________Costs • include both fixed and variable costs; we separate fixed from variable costs when perform cost-volume profit analysis. • __________Costs • fixed within a relevant range, but if total production increases significantly, total costs increase by a lump sum amount • __________Costs • increase at a non-constant rate as volume increases.

  7. Mixed Costs • Some costs have a _______component and a __________component. • We can separate mixed costs into the two components using the ________________. $ Total costs Equation of line : y = a + bx Slope = VC/unit FC activity

  8. Mixed Costs Total Mixed Cost Graph $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Mixed costs are sometimes called semivariable or semifixed costs. Total Costs Mixed costs are usually separated into their fixed and variable components for management analysis. 0 10 20 30 40 Total Machine Hours (000)

  9. Identifying and MeasuringCost Behavior The objective is to classifyall costs as either fixed or variable.

  10. Measuring Cost Behavior: Scatter Diagram … 20 * * * * * * * * Total Cost in1,000’s of Dollars * * 10 0 0 1 2 3 4 Activity, 1,000s of Units Produced • A __________of past cost behavior may be helpful in analyzing mixed costs. Draw a line through the plotted data points so that about equal numbers of points fall above and below the line. Estimated fixed cost = 10,000

  11. Measuring Cost Behavior: Scatter Diagram … Δin costΔin units 20 * * * * * * * * Total Cost in1,000’s of Dollars * * 10 0 0 1 2 3 4 Activity, 1,000s of Units Produced Variable Cost unit= Slope = Vertical distance is the change in cost. Horizontal distance is the change in activity.

  12. Measuring Cost BehaviorHigh/Low Method • Determine the __________by finding the slope • change in ____÷ change in _____ • (see prev. slide) • Determine the __________component • Using the high (or the low) point, plug in the cost (y), the activity (x), and the slope (VC/unit). • Solve for the y- intercept. • Given the equation of the cost line, we can now use it to predict cost over some range of activity.

  13. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost 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 Highest level Lowest level Difference

  14. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level Difference

  15. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference

  16. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production Variable cost per unit 1 =

  17. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15

  18. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x

  19. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x = – = Highest level: $61,500 ( $15 x 2,100 ) $30,000

  20. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x = – = Highest level: $61,500 ( $15 x 2,100 ) $30,000 = – = Lowest level: $41,250 ( $15 x 750 ) $30,000

  21. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total UnitsCost 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 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x = – = Highest level: $61,500 ( $15 x 2,100 ) $30,000 = – = Lowest level: $41,250 ( $15 x 750 ) $30,000

  22. Cost-Volume-Profit & Breakeven Analysis • Given our fixed and variable costs, we can use CVP techniques to help predict our profit at various activity levels. • We define • __________= Sales – VC • __________= SP/unit – VC/unit • __________= CM/SP

  23. Related Questions • We can use this set of techniques to answer the following types of questions. • How many units do we need to sell to break even? • How much profit will we generate at a given level of sales? • If we want to earn a target profit, how many units do we need to sell? • If we change our sales price, what happens to our profitability?

  24. Computing Break-Even Point Contribution margin is amount by which revenue exceeds the variable costsof producing the revenue.

  25. Computing Break-Even Point P2 How much contribution margin must this company have to cover its fixed costs (break even)? Answer: $24,000

  26. Computing Break-Even Point P2 How many units must this company sell to cover its fixed costs (i.e. to break even)? Answer: $24,000 ÷ $30 per unit = 800 units

  27. Breakeven Sales • Sales = VC + FC + profit or • Profit = Sales – VC – FC • At breakeven, profit = 0 • 0 = (Sales – VC) – FC • 0 = CM - FC • CM = FC or • (CM/unit)(units) = FC • And Breakeven Units = FC/(CM/unit) • Or Breakeven in $ = FC/(CM ratio)

  28. Target Net Income • You can use the CVP idea to determine how much we can sell to earn a desired profit. • Profit = Sales – VC – FC • Profit + FC = Sales – VC = CM = CM/unit(units) • Target Salesunits= (FC + Profit) / CM/unit • Target Sales$ = (FC + Profit) / CM ratio

  29. __________is the amount by which sales can drop before the company incurs a loss. Margin of safety may be expressed as a percentage of expected sales. Margin of Safety Margin of safety Expected sales - Break-even salespercentage Expected sales = C3 Exh. 22-17

  30. Breakeven for Multiple Products • BEunits= FC/(CMcomposite), where • CMcomposite = [(%A)CMA+ (%B) CMB] • The number of units that we get will be a combined unit of A and B together. • You then have to determine the number of A and B each that are actually sold.

  31. Breakeven for Multiple Products - Example • If FC = $100,000 and CM(a) = $40 and CM(b) = $20, and we sell 3 times as many units of B as A, what is the BE point? • BEunits= 100,000/[(0.25)($40) + (0.75)($20)] = 4,000 units • A = (0.25)(4,000) or 1,000 units of A • B = (0.75)(4,000) or 3,000 units of B

  32. Operating Leverage Contribution margin Net income Degree of ____________________= A measure of the extent to which fixed costs are being used in an organization. A measure of how a percentage change in sales will affect profits.

  33. Contribution Margin Reporting • We can recast the income statement to highlight the contribution margin. • Sales • - VC • = CM • - FC • = operating income For Internal Reporting purposes only

  34. The End!! Now, let’s look at the quick studies!

More Related