Chapter 4 - Chapter 4 Cost-Volume-Profit Analysis...

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1 Chapter 4 Cost-Volume-Profit Analysis Instructor: Dr. George Drymiotes Office: 390J Melcher Hall Phone: (713) 743-4853 E-mail: [email protected] OFFICE HOURS: Tuesday and Thursday 1:00-2:00pm 390J Melcher Hall (or by appointment) ACCT 2332 - Managerial Accounting - Dr. George Drymiotes 2 Objectives 1. Identify common cost behavior patterns. 2. Estimate the relation between cost and activity using account analysis and the high-low method. 3. Perform cost-volume-profit-analysis for single products. 4. Perform cost-volume-profit-analysis for multiple products. 5. Discuss the effect of operating leverage. 6. Use the contribution margin per unit of the constraint to analyze situations involving a resource constraint.
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2 ACCT 2332 - Managerial Accounting - Dr. George Drymiotes 3 …“In Virginia Mason's collaboration with employers, they agreed to look together at how changes were affecting everyone's bottom line. The medical center's finance director, Brad Senstra, showed Starbucks' Ms. King the spine clinic numbers. "It was pretty clear right away, we couldn't let that happen," she says. Ms. King pushed Aetna to come up with a solution, and the insurer agreed to increase Virginia Mason's physical-therapy reimbursements by about 16% -- from about $42 to $49 for each 15 minutes of therapy. Virginia Mason says it also is able to see five times the patients it used to, with fewer staff, under the new system. The hospital says it now breaks even and hopes the rising volume will push it more and more into the black . The moves have created some tension. Building up the spine clinic shifted resources away from the hospital's state-of-the-art chronic pain center that treated fewer but more complex cases, and 15 of the medical staff left.”…. (WSJ, Jan 12 th 2007) ACCT 2332 - Managerial Accounting - Dr. George Drymiotes 4 Common Cost Behavior Patterns Variable Costs are costs that change proportional to units produced. Fixed Costs are costs that do not change at all when the number of units produced is increased or decreased. Mixed Costs are costs that can be analyzed into fixed and variable components. Step Costs are fixed for a range of volume but then increase to a higher level for the next range etc. They increase by steps. Important: cost classification depends on how cost changes in response to changes in activity (volume)
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3 ACCT 2332 - Managerial Accounting - Dr. George Drymiotes 5 Variable Cost Variable costs change in response to changes in volume or activity Managers typically assume variable costs change in proportion to activity The slope measures the change in cost per unit change in activity ACCT 2332 - Managerial Accounting - Dr. George Drymiotes 6 Fixed Cost Fixed costs do not change in response to changes in activity levels Discretionary Fixed Costs : management can easily change in the short run Committed Fixed Costs : cannot be easily changed in the short run
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4 ACCT 2332 - Managerial Accounting - Dr. George Drymiotes
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This note was uploaded on 02/27/2011 for the course ACCT 102 taught by Professor Jetson during the Spring '11 term at Texas A&M.

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Chapter 4 - Chapter 4 Cost-Volume-Profit Analysis...

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