Wey_AP_9e_Ch22_Edited

Wey_AP_9e_Ch22_Edited - Chapter 22 Cost-Volume-Profit...

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Unformatted text preview: Chapter 22 Cost-Volume-Profit Chapter 22-1 Accounting Principles, Ninth Edition Preview of Chapter To m anageany busine you m unde ss, ust rstand: How costs respond to changes in sales volume and The effect of costs and revenues on profit To unde rstand cost-volum -profit (C e VP), you m know how costs ust To be have be Chapter 22-2 Cost Behavior Analysis C Be ost havior Analysis is the study of how specific costs respond to changes in the level of business activity. changes S ecosts change othe re ain thesam om ; rs m e He m lps anage e plan ope m nt rations and de be e alte cide twe n rnative He course of action s course Applie to all type of busine s and e s s sse ntitie s Chapter 22-3 LO 1: Distinguish between variable and fixed costs. Cost Behavior Analysis - continued S tarting point is m asuring ke busine activitie e y ss s Activity le ls m bee sse in te s of: ve ay xpre d rm S s dollars (in a re com ale tail pany) Mile drive (in a trucking com s n pany) Roomoccupancy (in a hote l) Danceclasse taught (by a dancestudio) s Many com s ore Many panie usem than onem asure e base e m nt t han Chapter 22-4 LO 1: Distinguish between variable and fixed costs. Cost Behavior Analysis - continued For an activity le l to beuse ve ful: For Changes in the level or volume of activity should be correlated with changes in costs should Theactivity le l se cte is calle the ve le d d activity or volume index Theactivity inde x: I de ntifie theactivity that cause change in thebe s s s havior of costs costs Allows costs to beclassifie according to the re d ir sponseto Allows change in activity as e r: s ithe change Variable Costs Chapter 22-5 Fixed Costs Mixed Costs LO 1: Distinguish between variable and fixed costs. Variable Costs C that vary in total dire and proportionate with change osts ctly ly s in in theactivity le l ve in Exam : I f theactivity le l incre s 10 pe nt, total variable ple ve incre ase rce Exam costs incre 10 pe nt ase rce incre Exam : I f theactivity le l de ase by 25 pe nt, total variable ple ve de cre s rce costs de aseby 25 pe nt cre rce de Variablecosts remain constant per unit at every level Variable of activity. of Chapter 22-6 LO 1: Distinguish between variable and fixed costs. Variable Costs – Example Dam C pany m on anufacture radios that s Dam om contain a $10 clock contain Activity inde is thenum r of radios produce x be d For e radio produce thetotal cost of the clocks incre s by d, ase For ach $10: $10: I f 2,000 radios arem , thetotal cost of theclocks is $20,000 (2,000 X ade $10) $10) I f 10,000 radios arem , thetotal cost of theclocks is $100,000 ade (10,000 X $10) (10,000 Chapter 22-7 LO 1: Distinguish between variable and fixed costs. Variable Costs – Graphs Illustration 22-1 Chapter 22-8 LO 1: Distinguish between variable and fixed costs. Fixed Costs C that remain the same in total re osts gardle of change in ss s theactivity le l. ve t he Pe unit cost varie inversely with activity: r s varie with As volume increases, unit cost declines, and vice versa Exam s include ple : Prope taxe rty s I nsurance Re nt De ciation on buildings and e pre quipm nt e Chapter 22-9 LO 1: Distinguish between variable and fixed costs. Fixed Costs - Example Dam C pany le s its productivefacilitie for $10,000 pe on ase s r Dam om m onth Total fixe costs of thefacilitie re ain constant d sm Total activity - $10,000 pe m r onth activity at all le ls of ve On a per unit basis, thecost of re de ase as nt cre s On per incre s and viceve ase rsa incre activity At 2,000 radios, theunit cost is $5 At $5 ($10,000 ÷ 2,000 units) 2,000 At 10,000 radios, theunit cost is $1 At $1 ($10,000 ÷ 10,000 units) 10,000 Chapter 22-10 LO 1: Distinguish between variable and fixed costs. Fixed Costs - Graphs Illustration 22-2 Chapter 22-11 LO 1: Distinguish between variable and fixed costs. Relevant Range Throughout therangeof possiblele ls of activity, a straight-line ve Throughout relationship usually does not exist f or e r variable ithe costs or fixe costs d There lationship be e variablecosts and change in activity le l twe n s ve is ofte curvilinear n For fixe costs, there lationship is also nonlinear – som fixe ed For d costs will not changeove thee r ntire rangeof activitie whileothe s r f ixe costs m d ay change change Chapter 22-12 LO 2: Explain the significance of the relevant range. Relevant Range - Graphs Illustration 22-3 Chapter 22-13 LO 2: Explain the significance of the relevant range. Relevant Range Relevant De d as therangeof activity ove which a com fine r pany expects to De operate during a year Within this range a straight-linere , lationship usually e xists for both variableand fixe costs d variable Illustration 22-4 Chapter 22-14 LO 2: Explain the significance of the relevant range. Mixed Costs C that have osts both a variablecost e m nt le e and a f ixe d cost e m nt le e Illustration 22-5 S e e calle om tim s d semivariable cost C hangein total but not proportionately with change in s with activity le l ve Chapter 22-15 LO 3: Explain the concept of mixed costs. Mixed Costs: High–Low Method Mixe costs m beclassifie into the fixed and variable d ust d ir Mixe e m nts le e Oneapproach to se paratethecosts is calle thehigh-low d One method Use thetotal costs incurre at both thehigh and thelow le ls of s d ve Use activity to classify m d costs ixe activity Thediffe ncein costs be e thehigh and low le ls re twe n ve The represents variable costs, since only variable costs change as activity levels change Chapter 22-16 LO 3: Explain the concept of mixed costs. Mixed Costs: Mixed Steps in High–Low-Method STEP 1: De rm variable cost per unit using the te ine f ollowing form ula: Illustration 22-6 STEP 2: De rm thefixed cost by subtracting te ine t hetotal variablecost at e r t hehigh ithe or thelow activity le l fromthetotal cost ve at that le l ve Chapter 22-17 LO 3: Explain the concept of mixed costs. Mixed Costs: Mixed High–Low-Method Example High–Low-Method Data for Metro Transit Company for 4 month period: Illustration 22-7 High Le l of Activity: April ve $63,000 50,000 m s ile April Low Le l of Activity: January 30,000 20,000 m s Low ve 20,000 ile Diffe nce re $33,000 30,000 m s ile Diffe Step 1: Using theform variablecosts pe unit are ula, r $33,000 ÷ 30,000 = $1.10 variable cost per mile $1.10 Chapter 22-18 LO 3: Explain the concept of mixed costs. Mixed Costs: Mixed High–Low-Method Example High–Low-Method Step 2: De rm thefixe costs by subtracting total te ine d variablecosts at either t hehigh or low activity fromthetotal cost at that sam le l e ve f rom le l ve Illustration 22-8 Chapter 22-19 LO 3: Explain the concept of mixed costs. Mixed Costs: High–Low-Method Example Mainte nancecosts: $8,000 pe m r ile $8,000 r onth plus $1.10 pe m To de rm m te ine ainte nancecosts at a particular activity le l: ve 1. multiply the activity level times the variable cost per unit 2. then add that total to the fixed cost EXAMPLE: I f theactivity le l is 45,000 m s, thee ate ve ile stim d m ainte nancecosts would be$8,000 fixe and $49,500 variable d ($1.10 X 45,000 m s) for a total of $57,500. ile ($1.10 Chapter 22-20 LO 3: Explain the concept of mixed costs. High–Low-Method BE22-4: De s C pany accum ine om ulate thefollowing data conce s rning a m d cost, using m s as theactivity le l. ixe ile ve Mile s Drive n January 8,000 Fe bruary 7,500 Total Cost $14,150 $13,600 March April 8,500 8,200 Mile s Drive n $15,000 $14,490 Total C ost Compute the variable and fixed cost elements using the high-low method. Chapter 22-21 LO 3: Explain the concept of mixed costs. High–Low-Method High Le l of Activity: ve Low Le l of Activity: Low ve March $15,000 8,500 m s ile March Fe bruary 13,600 7,500 m s Fe 3,600 7,500 ile Diffe nce $ 1,400 re 1,000 m s ile Diffe S p 1: te VariableCost pe Unit = $1,400 ÷ 1,000 m s r ile Variable = $1.40 variablecost pe m r ile $1.40 S p 2: te Total Cost: VariableCost: 8,500 X $1.40 8,500 7,500 X $1.40 7,500 Total Fixe Costs d Total Chapter 22-22 $15,000 $15,000 High $13,600 Low 11,900 10,500 $ 3,100 $ 3,100 LO 3: Explain the concept of mixed costs. Cost-Volume-Profit Analysis S tudy of theeffects of changes of costs and volume on a com pany’s profits A critical factor in m anage e de m nt cisions Im portant in profit planning Chapter 22-23 LO 4: List the five components of cost-volume-profit analysis. Cost-Volume-Profit Analysis C analysis conside theinte lationships am fivebasic VP rs rre ong com nts pone com Illustration 22-9 Chapter 22-24 LO 4: List the five components of cost-volume-profit analysis. Assumptions Underlying CVP Analysis Be havior of both costs and re nue is linear t hroughout therelevant ve s Be range of theactivity inde x All costs can beclassifie as e r variable or fixed with re d ithe asonable All accuracy accuracy C hange in activity aretheonly factors that affe costs s ct All units produced are sold Whe m than onetypeof product is sold, thesales mix will n Whe ore remain constant Chapter 22-25 LO 4: List the five components of cost-volume-profit analysis. LO CVP Income Statement A state e for internal use m nt C lassifie costs and e nse as fixe or variable s xpe s d Re ports contribution m argin in thebody of thestate e . m nt Contribution margin – am ount of re nue ve re aining afte m r de ducting variablecosts Re ports thesam ne et incom as a traditional e incom state e e m nt Chapter 22-26 LO 5: Indicate what contribution margin is and how it can be expressed. CVP Income Statement - Example Vargo Vide C pany produce DVD playe o om s rs. Vargo Re vant data for June2010: le Unit se r Unit lling priceof DVD playe Unit variablecosts Total m onthly fixe costs d Units sold $500 $300 $200,000 1,600 Illustration 22-11 Chapter 22-27 LO 5: Indicate what contribution margin is and how it can be expressed. Contribution Margin Per Unit C ontribution m argin is availableto cover fixed costs and to contribute to income Theform for contribution margin per unit and the ula The com putation for Vargo Vide are o: com Illustration 22-12 Chapter 22-28 LO 5: Indicate what contribution margin is and how it can be expressed. CVP Income Statement-CM effect Illustration 22-13 Illustration 22-14 Chapter 22-29 LO 5: Indicate what contribution margin is and how it can be expressed. Contribution Margin Ratio S hows thepe ntageof e sale dollar availableto apply toward rce ach s fixe costs and profits d f ixe Theform for contribution margin ratio and the ula com putation for Vargo Vide are o: com Illustration 22-15 Chapter 22-30 LO 5: Indicate what contribution margin is and how it can be expressed. Contribution Margin Ratio Ratio he to de rm thee ct of change in sale on ne incom lps te ine ffe s s t e Illustration 22-16 Chapter 22-31 LO 5: Indicate what contribution margin is and how it can be expressed. LO Contribution Margin Per Unit $1,000 (E) Chapter 22-32 $300 (C) $700 (F) $80 (A) 32% (B) 40% (D) LO 5: Indicate what contribution margin is and how it can be expressed. Break-Even Analysis Proce of finding thebreak-even point ss Proce lle l of activity at which total revenues equal e ve costs (both fixe and variable ) (both d total C becom d or de d an pute rive froma m athe atical e m quation, by using c ontribution m argin, or froma cost-volum profit (C e VP) graph Expre d e r in sale units or in sale dollars sse ithe s s Chapter 22-33 LO 6: Identify the three ways to determine the break-even point. Break-Even Analysis: Mathematical Equation Break-even occurs where total sales equal variable costs plus fixed costs; i.e., net income is zero. Theform for thebreak-even point and thecom ula putation for Vargo Vide are o: Vargo Illustration 22-18 To find sale dollars re s quire to bre ve d ak-e n: To sale 1000 units X $500 = $500,000 (bre ve dollars) ak-e n Chapter 22-34 LO 6: Identify the three ways to determine the break-even point. Break-Even Analysis: Contribution Margin Technique At thebre ve point, contribution margin must equal ak-e n total fixed costs (C = total re nue – variablecosts) M ve s Thebre ve point can becom d using e r contribution ak-e n pute ithe m argin pe unit or contribution m r argin ratio. Chapter 22-35 LO 6: Identify the three ways to determine the break-even point. Contribution Margin Technique Whe theBEP in units is de d, contribution m n sire argin pe unit is r use in thefollowing form which shows thecom d ula putation for Vargo Vide o: Illustration 22-19 Whe theBEP in dollars is de d, contribution m n sire argin ratio is use in thefollowing form which shows thecom d ula putation for Vargo Vide o: Illustration 22-20 Chapter 22-36 LO 6: Identify the three ways to determine the break-even point. Break-Even Analysis: Graphic Presentation A cost-volum profit (CVP) graph shows costs, volum and profits. e e Use to visually find thebre ve point d ak-e n To construct a C graph: VP Plot thetotal sale linestarting at theze s ro activity le l ve Plot thetotal fixe cost using a horizontal line d Plot thetotal cost line(starts at thefixe d-cost lineat ze ro activity De rm thebre ve point fromthe te ine ak-e n inte ction of the rse t otal cost lineand the t otal sale line s Chapter 22-37 LO 6: Identify the three ways to determine the break-even point. LO Break-Even Analysis: Graphic Presentation Illustration 22-21 Chapter 22-38 LO 6: Identify the three ways to determine the break-even point. Contribution Margin Technique BE22-6: Ham C pany has a unit se by om lling priceof $400, variablecosts pe r unit of $260, and fixe costs of $210,000. C putethebre ve point in units d om ak-e n using (a) them m athe atical e quation and (b) contribution m argin pe unit. r (a) $400Q = $260Q + $210,000 + $0 $140Q = $210,000 Q = 1,500 units (b) Contribution margin per unit $140, or ($400 – $260) X = $210,000 ÷ $140 X = 1,500 units Chapter 22-39 LO 6: Identify the three ways to determine the break-even point. Break-Even Analysis: Target Net Income Level of sales necessary to achieve a specified income C bede rm d frome of theapproache use to de rm bre an te ine ach sd te ine ake n sale ve s/units: froma m m athe atical e quation, by using contribution m argin, or froma cost-volum profit (C graph e VP) Expre d e r in sale units or in sale dollars sse ithe s s Chapter 22-40 LO 7: Give the formulas for determining sales required to LO earn target net income. earn Break-Even Analysis: Target Net Income Mathematical Equation Using theform for thebre ve point, simply include the ula ak-e n Using desired net income as a factor. Thecom putation for Vargo Vide is as follows: o Vide Illustration 22-23 Chapter 22-41 LO 7: Give the formulas for determining sales required to LO earn target net income. earn Break-Even Analysis: Target Net Income Contribution Margin Technique To de rm there te ine quire sale in units f or Vargo Vide ds o: Illustration 22-24 To de rm there te ine quire sale in dollars f or Vargo Vide ds o: Illustration 22-25 Chapter 22-42 LO 7: Give the formulas for determining sales required to LO earn target net income. earn Break-Even Analysis: Margin of Safety Diffe ncebe e actual or expected sales and sale at the re twe n s break-even point Me asure the“cushion” that m s anage e has if e cte sale fail to m nt xpe d s m rialize ate May bee sse in dollars or as a ratio xpre d To de rm themargin of safety in dollars f or Vargo Vide te ine o assum that actual/e cte sale are$750,000: ing xpe d s Illustration 22-26 Chapter 22-43 LO 8: Define margin of safety, and give the formulas for computing it. Break-Even Analysis: Margin of Safety Margin of Safety Ratio C pute by dividing them om d argin of safe in dollars by theactual or ty e cte sale xpe d s To de rm themargin of safety ratio f or Vargo Vide te ine o assum that actual/e cte sale are$750,000: ing xpe d s Illustration 22-27 Chapter 22-44 The higher the dollars or the percentage, the greater The the margin of safety the LO 8: Define margin of safety, and give the formulas for computing it. CVP Income Statement Revisited Illustration 22-33 Chapter 22-45 LO 9: Describe the essential features of a cost-volume-profit LO income statement. income Variable Costing Appendix Unde variable costing only dire m rials, dire labor, and r ct ate ct variablem anufacturing ove ad costs areconside d product costs. rhe re Com panie re s cognizefixe m d anufacturing ove ad costs as pe costs rhe riod (e nse whe incurre xpe s) n d. Illustration 22A-1 Chapter 22-46 LO 10: Explain the difference between absorption LO costing and variable costing. costing Variable Costing Appendix Illustration: Assum that Pre iumProducts C e m orporation m anufacture a s polyure thanese alant, calle Fix-I t, for car windshie Re vant data for d lds. le Fix-I t in January 2010, thefirst m onth of production, areas follows. Illustration 22A-2 Chapter 22-47 LO 10: Explain the difference between absorption LO costing and variable costing. costing Variable Costing Appendix Illustration: Thepe unit production cost of Fix-I t unde e costing r r ach approach is: Illustration 22A-3 Fixed manufacturing overhead Total unit cost 4* $13 0 $9 Base on the data, e unit sold and e unit re aining in inve d se ach ach m ntory is coste at $13 d unde absorption costing and at $9 unde variablecosting. r r * ($120,000 / 30,000 units produced) Chapter 22-48 LO 10: Explain the difference between absorption costing and LO variable costing. variable Variable Costing Appendix Effects of Variable Costing on Income Illustration 22A-4 Chapter 22-49 LO 10: Explain the difference between absorption costing and LO variable costing. variable Variable Costing Appendix Effects of Variable Costing on Income Illustration 22A-5 Chapter 22-50 Variable Costing Appendix Effects of Variable Costing on Income S m of e cts on incom fromope um ary ffe e rations. Chapter 22-51 Illustration 22A-6 LO 10: Explain the difference between absorption costing and LO variable costing. variable Variable Costing Appendix Rationale for Variable Costing Thepurposeof fixe m d anufacturing costs is to have productive facilities available for use. Theuseof variablecosting is acce ptable only for internal use by management. Chapter 22-52 ...
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This note was uploaded on 09/11/2011 for the course CIT 219 taught by Professor Staff during the Summer '08 term at Miami University.

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