Chapter 6 Breakeven AnalysisIntroductionThis week we look at sales and costs in terms of their relevancy to decision-making. We consider the break-even model and it’s useful in determining how changes in sales volume affect cost and profit. Cost Categories & FlowsTo review how these costs are reported on the income statement, let's look at the illustration below. Note that from the financial statement presentation we can work to arrive at managerial accounting information on the sales price, COGS, and contribution margin per unit, by simply dividing the number of units into the total dollar values on the left to arrive at the per unit values on the right. As you work future exercises, understanding whether you need to be working in total dollar values, total units, or per unit values will determine your success in calculations, so always consider this. Product Costs (in Green)– Cost of Goods Sold - direct material costs, direct labor costs, and manufacturing overhead or indirect costs related to activities that support the manufacturing process. Often variable in nature. Period Costs (in Yellow)- Costs of Selling & Admin, rent, interest, taxes, losses on the sale of equipment. Often fixed in nature.
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