Accoutning+Lecture+3+CVP,+Break+Even+and+Operating+Leverage+Post

Accoutning+Lecture+3+CVP,+Break+Even+and+Operating+Leverage+Post

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1 1/10/11 Cost Behavior, Break Even &  CVP Analysis
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2 1/10/11
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3 1/10/11
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5
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6 So… What can the income statements tell us about the difference in their businesses???
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7 1/10/11  GAAP Income Statement  Costs Are Organized By Function
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8 1/10/11 Management is about the  future Need methodology to  predict costs For internal use, companies  look at costs based on how  they behave, not where the  costs were incurred Managerial Accounting GAAP Income Statement  Costs Are Organized By Function
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9 Cost Behavior Relative to Changes in Revenue Variable costs  change when revenue  changes Incremental Costs Direct causal relationship Fixed costs  remain unchanged when  revenue changes Change constantly, but not automatically
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10 Fixed vs. Variable Example Cell phone bill:  Monthly costs $9.90 per month  base fee $.05  per minute  for calls
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11 Total Variable Cost    Minutes Talked $ Total Minutes Bill Part of cost is based on how many  minutes you talk The cost per minute talked is constant  @ $.05  per minute,  regardless of how many minutes you talk
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12 Total Fixed Cost     The monthly base fee part of the bill doesn’t change  when you make more calls .   Number of Minutes $ Total monthly base fee $9.90
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13 Fixed Cost Per Unit Number of minutes used $ Monthly base fee per minutes used The average  cost   per call  for the  base fee decreases   as more minutes are used. Limited by total  minutes
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14 Fixed vs. Variable Example Cell phone bill:               $9.90 per month  base fee           $.05  per minute  If you use 2 minutes in January What's your total cost? What’s your cost per minute? If you use 10,000 minutes in February What’s your total cost? What's your cost per minute?      
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15 1/10/11 Fixed Monthly Basic Fee Activity - Minutes $ Total Phone Cost Total Cell Phone Bill Total Monthly Phone Cost 
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16 1/10/11 Cost Classifications for Predicting Cost Behavior Obj10
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17 Examples  Normally variable Retailers: Costs of goods sold, shipping Manufacturer: Materials, direct labor, commissions Service Organizations: Supplies, travel Normally fixed Building rent, Advertising, Insurance, Marketing,  Executives, Factory costs, Depreciation
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18 1/10/11 Mix of Fixed and Variable  Differs  Across Companies A public utility with large investments in equipment will tend to have fewer variable costs. A manufacturing company will often have many variable costs. A retailer usually will have a high proportion of variable costs.
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19 Quiz   Which of the following costs would be variable  with respect to the number of cones sold at  Arnold’s Ice Cream shop?  A. The cost of lighting the store B. The rental cost of the freezer C. The cost of ice cream D. $20 per hour paid to the store manager
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Accoutning+Lecture+3+CVP,+Break+Even+and+Operating+Leverage+Post

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