Chapter _6 - PowerPoint.ppt revised

Chapter _6 - PowerPoint.ppt revised - Chapter 6 Business...

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Unformatted text preview: Chapter 6 Business Decisions Using Cost Behavior ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 6 ­ 1 Functional Income Statement LO1 Describe the differences between a traditional income statement and a contribution income statement. • The traditional income statement The separates costs as either product costs (COGS) or period costs costs (selling and administrative). (selling • An income statement that separates An product and period costs is sometimes called product a functional income statement. functional ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 2 LO1 The Contribution Income Statement • The contribution income statement The classifies costs by its behavior. Variable Fixed ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 3 LO1 Review of Traditional Format 3,000 T-shirts sold Selling price: $12.00 Purchase cost: $7.20 Selling expenses: $9,500 Administrative expenses: $7,900 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 4 LO1 Income Statement Using the Traditional Format BEACHSIDE T-SHIRT SHOP Income Statement For the Year Ended December 31, 2008 Sales Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Operating gain/(loss) $ 36,000 21,600 $ 14,400 $9,500 7,900 17,400 ($ 3,000) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 5 LO1 Income Statement Using the Traditional Format • The traditional format income statement The emphasizes gross profit or margin. Revenues – Cost of goods sold = Gross profit Gross profit – Operating expenses = Operating income ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 6 LO1 Absorption and Variable Costing • Under absorption costing product cost includes fixed and variable product costs. includes • Under variable costing only variable costs only are treated as product costs. are ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 7 Income Statement Using the Traditional Format LO2 Determine per unit amounts for sales, variable cost, and the contribution margin. BEACHSIDE T-SHIRT SHOP Income Statement For the Year Ended December 31, 2008 Sales Cost of goods sold Gross profit Operating expenses: Selling expenses $9,500 Administrative expenses 7,900 Operating gain/(loss) Product cost $ 36,000 21,600 $ 14,400 17,400 ($ 3,000) Period cost ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e 6 ­ 8 LO2 Beachside Cost Behavior • The expenses for Beachside have The the following behavior patterns: • Cost of goods sold: Cost all variable • Selling expense: Selling 40% variable, 60% fixed • Administrative expense: Administrative $6,300 fixed, $1,600 variable ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 9 LO2 Income Statement Using the Contribution Format BEACHSIDE T-SHIRT SHOP Contribution Income Statement For the Year Ended December 31, 2008 Sales (3,000 @ $12) Variable cost: Cost of goods sold $21,600 Variable selling expense ($9,500 × 40%) 3,800 Variable admin. expense ($7,900 – $6,300) 1,600 Contribution margin (sales less total variable cost) Fixed cost: Fixed selling expense ($9,500 × 60%) $ 5,700 Fixed administrative expense 6,300 Operating income/(loss) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones $ 36,000 27,000 $ 9,000 –12,000 ($ 3,000) 6 ­ 10 LO2 Beachside Cost Behavior Cost of goods sold per unit: $7.20 Selling expenses per unit: 40% variable × $9,500 ÷ 3,000 $1.27 Administrative expenses per unit: $1,600 ÷ 3,000 $0.53 Total variable expenses per unit $9.00 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 11 LO2 Income Statement Using the Contribution Format – – = – = Revenues Variable cost of goods sold Variable operating expense Contribution margin Fixed operating cost Operating income/(loss) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 12 LO2 Contribution Margin for Beachside • What is Beachside’s What contribution margin per unit? • Contribution margin per unit = Contribution Selling price – Variable expenses per unit • $12 – $9 = $3 contribution margin per unit $12 • What is the total contribution margin What when 3,000 units are sold? • 3,000 × $3 = $9,000 3,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 13 Contribution Margin Ratio LO3 Determine the contribution margin ratio and explain its importance as a management tool. • Contribution margin ratio (or Contribution contribution margin percentage) is the contribution margin per unit divided by the selling price. • What is Beachside’s contribution What margin ratio (CM%)? $3 ÷ $12 = 25% ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 14 Predicting Profits Using the Predicting Contribution Income Statement Contribution LO4 Prepare and analyze a contribution income statement for a merchandising firm. • Beachside expects to sell 7,500 Beachside units in 2009. • Assume no changes in selling Assume price and variable or fixed costs. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 15 LO4 Condensed 2009 Projected Condensed Contribution Income Statement Contribution BEACHSIDE T-SHIRT SHOP Projected Contribution Income Statement For the Year Ended December 31, 2009 Total Sales in units 7,500 Sales $90,000 Variable cost 67,500 Contribution margin $ 22,500 Fixed cost 12,000 Operating income $ 10,500 Per Unit 1 $12.00 9.00 $ 3.00 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones % of Sales 100% 75% 25% 6 ­ 16 Cost-Volume-Profit Analysis LO5 Describe cost-volume-profit (CVP) analysis and explain its importance as a management tool. • Cost-volume-profit analysis (CVP) is the study Cost-volume-profit of the relationships among selling prices, costs, and volumes, and the impact that changes in those factors have upon profits. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 17 LO5 Cost-Volume-Profit Formulas (Total fixed cost + Target profit) Contribution margin ratio • To determine the required sales in To dollars to achieve a target profit. dollars to ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 18 LO5 Cost-Volume-Profit Formulas (Total fixed cost + Target profit) Contribution margin per unit • To determine the required sales in To units to achieve a target profit. units to ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 19 LO5 Cost-Volume-Profit Formulas (Total fixed cost + Target profit) (Contribution margin – Target profit percentage) Target • To determine the required sales in dollars dollars to achieve a target profit expressed to as a percentage of sales. as ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 20 LO5 Break-even • The break-even point is the sales is volume that results in neither a profit nor a loss. • What is the break-even in What dollars for Beachside? • ($12,000 + $0) ÷ 25% = $48,000 ($12,000 sales to break even. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 21 LO5 Break-even • What is the breakeven What iin units for Beachside? n units • ($12,000 +$0) ÷ $3.00 = 4,000 ($12,000 T-shirts to break even. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 22 Determining Sales Required Determining Sales to Meet a Profit Objective LO6 Use CVP analysis to determine the amount of sales required to break even or to earn a target profit. (Total fixed cost + Target profit) Contribution margin ratio • For Beachside to earn $27,000: For ($12,000 + $27,000) ÷ 25% = $156,000 in sales dollars ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 23 LO6 Determining Units Required Determining Required to Meet a Profit Objective (Total fixed cost + Target profit) Contribution margin per unit • For Beachside to earn $27,000: For ($12,000 + $27,000) ÷ $3.00 = $13,000 T-shirts ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 24 CVP Graph – Beachside T-Shirt Shop LO6 Sales & Costs Sales Profit Cost Break-even point Loss T-Shirts Sold ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 25 Sensitivity Analysis LO7 Use CVP to perform sensitivity analysis. • Sensitivity analysis is applied to Sensitivity assess the changes in the CVP analysis when changes are made in the basic parameters. • It is also called “what-if” analysis. It ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 26 LO7 Condensed Contribution Income Statement BEACHSIDE T-SHIRT SHOP Projected Contribution Income Statement For the Year Ended December 31, 2009 Total Sales in units 11,286 Sales $135,432 Variable cost 101,574 Contribution margin $ 33,858 Fixed cost 12,000 Operating income $ 21,858 Per Unit % of Sales 1 $12.00 9.00 $ 3.00 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 100% 75% 25% 6 ­ 27 LO7 Change in Selling Price • If the only change is in the selling price, If then the contribution margin also changes in the same direction by the same amount. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 28 LO7 Change in Selling Price Example • Lets assume that Beachside decreases Lets the price from $12 to $11. • This results in a decrease in the CMU This from $3 to $2, and a decrease in the CM% from 25% to 18.1818%. • What is the required sales in What dollars to make a $27,000 profit? ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 29 LO7 Change in Selling Price Example • For Beachside to earn $27,000: For ($12,000 + $27,000) ÷ 18.1818% = $214,500 sales dollars • What is the required sales in What units to make a $27,000 profit? • ($12,000 + $27,000) ÷ $2.00 ($12,000 = 19,500 T-shirts ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 30 LO7 Change in Variable Cost and Fixed Cost • Cost of goods sold: $7.20 Cost • Selling expenses: $3,800 ÷ 3,000 = $1.27 Selling • Administrative expenses: $1,600 ÷ 3,000 = $.53 Administrative • Total variable expense or cost per unit = $9.00 Total ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 31 LO7 Change in Variable Cost and Fixed Cost Example • Assume the purchase price of T-shirts Assume decreases from $7.20 to $6.00. • This results in a decrease in variable This cost from $9.00 to $7.80. • The new contribution margin ratio is: The ($11.00 selling price – $7.80) ÷ $11 = 0.29091 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 32 LO7 Change in Variable Cost and Fixed Cost Example • In addition, Beachside can reduce fixed In costs from $12,000 to $9,000. • What is the required sales in dollars What to make a $27,000 profit? • ($9,000 + $27,000) ÷ 29.091% ($9,000 = $123,750 sales dollars ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 33 LO7 Change in Variable Cost and Fixed Cost Example • What is the required sales in What units to make a $27,000 profit? • ($9,000 + $27,000) ÷ $3.20 ($9,000 = 11,250 T-shirts ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 34 LO7 Multiple Products and CVP • Companies that sell more than Companies one product can use CVP analysis. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 35 LO7 Multiple Products and CVP MARGARET’S FRAME FACTORY Contribution Income Statement For the Year Ended December 31, 2007 Total Sales Variable cost Contribution margin Fixed cost Operating income $500,000 315,000 $185,000 143,000 $ 42,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones % of Sales 100% 63% 37% 6 ­ 36 LO7 Break-Even Point in a Multiproduct Situation • What is the required sales in dollars? What • ($143,000 + $0) ÷ 37% = $386,486 ($143,000 • What is the required sales in What dollars to make $80,000 profit? • ($143,000 + $80,000) ÷ 37% = $602,703 ($143,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 37 LO7 Determining Required Sales in a Multiproduct Situation • Assume that Margaret’s desires Assume a profit equal to 15% of sales. • $143,000 ÷ 37% - 15% = $650,000 $143,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 38 LO7 CVP Assumptions 1. All costs are either fixed or variable. 2. Fixed costs remain fixed throughout the relevant range. the 3. Variable costs per unit do not change. 4. Selling price per unit remains the same. 5. The average contribution margin ratio in a multiple product company remains the same. multiple ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 39 Absorption and Variable Costing LO8 Prepare income statements using absorption and variable costing and be able to explain the resulting differences. • Tim Chai produced and sold 600 units during 2007. Tim Inventory information: Beginning finished goods inventory Units produced Units available for sale Less units sold Ending finished goods inventory ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 0 600 600 600 0 6 ­ 40 LO8 Absorption and Variable Costing Cost information for Tim Chai Manufacturing for 2007: Variable costs per unit: Variable product cost: Direct material $7 Direct labor 12 Variable manufacturing overhead 3 Total variable manufacturing cost per unit $22 Variable selling and administrative expense $19 Fixed costs per year: Fixed manufacturing overhead cost Fixed selling and administrative expense ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones $6,600 $5,400 6 ­ 41 LO8 Absorption and Variable Costing Absorption cost per unit: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing cost: ($6,600 ÷ 600 units produced Total absorption cost per unit Variable cost per unit: Direct material Direct labor Variable manufacturing overhead Total variable cost per unit ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones $7 12 3 11 $33 $7 12 3 $22 6 ­ 42 LO8 Absorption and Variable Costing • Assume that in 2008 the company’s sales Assume remain constant at 600 units, but the remain company produced 660 units. • Then in 2009, the company produced 550. Then • Sales remained constant. Sales ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 43 LO8 Absorption and Variable Costing Tim Chai Manufacturing, Inc. Absorption Costing Income Statement For the Year Ended December 31, 2008 Sales revenue (600 units sold × $100) Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured (660 units produced × $32) Cost of goods available for sale Less: Ending finished goods inventory (60 units × $32) Cost of goods sold Gross profit Selling and administrative expense (600 units sold × $19) + $5,400 Operating income $60,000 $ 0 21,120 21,120 (1,920) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 19,200 $40,800 16,800 $24,000 6 ­ 44 LO8 Absorption and Variable Costing Variable Costing Income Statement For the Year Ended December 31, 2008 Sales revenue (600 units sold × $100) Variable cost of goods sold: Beginning finished goods inventory Variable cost of goods manufactured (660 units produced × $22) Cost of goods available for sale Less: Ending finished goods inventory (60 units × $22) Variable cost of goods sold Variable selling and administrative expense (600 units sold × $19) Total variable cost Contribution margin Fixed manufacturing overhead costs Fixed selling and administrative expense Total fixed costs Operating income $60,000 $ 0 14,520 14,520 (1,320) 13,200 11,400 24,600 35,400 6,600 5,400 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 12,000 $23,400 6 ­ 45 Absorption and Variable Costing Tim Chai Manufacturing, Inc. Absorption Costing Income Statement For the Year Ended December 31, 2009 Sales revenue (600 units sold × $100) Cost of goods sold: Beginning finished goods inventory (60 units × $32) Cost of goods manufactured (550 units produced × $34) Cost of goods available for sale Less: Ending finished goods inventory (10 units × $34) Cost of goods sold Gross profit Selling and administrative expense (600 units sold × $19) + $5,400 Operating income $60,000 $ 1,920 18,700 20,620 (340) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 20,280 $39,720 16,800 $22,920 6 ­ 46 Absorption and Variable Costing Variable Costing Income Statement For the Year Ended December 31, 2009 Sales revenue (600 units sold × $100) Variable cost of goods sold: Beginning finished goods inventory (60 units × $22) Variable cost of goods manufactured (550 units produced × $22) Cost of goods available for sale Less: Ending finished goods inventory (10 units × $22) Variable cost of goods sold Variable selling and administrative expense (600 units sold × $19) Total variable cost Contribution margin Fixed manufacturing overhead costs Fixed selling and administrative expense Total fixed costs Operating income $60,000 $ 1,320 12,100 13,420 (220) 13,200 11,400 24,600 35,400 6,600 5,400 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 12,000 $23,400 6 ­ 47 End of Chapter 6 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 6 ­ 6 ­ 48 ...
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This note was uploaded on 01/19/2012 for the course ACC 212 taught by Professor Quintanna during the Spring '08 term at University of Miami.

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