ACCT 102 Lecture Notes Chapter 18 SPR 2010

# ACCT 102 Lecture Notes Chapter 18 SPR 2010 - ACCT 102...

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ACCT 102 - Chapter 18 COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS Prof. Schmidt IDENTIFYING COST BEHAVIOR Background Managerial accountants play a large role in planning a company’s future activities. This involves forecasting future revenue volume, the costs expected with that revenue volume, and profits. Why is this important? A very important tool to help management forecast costs and profits is called cost-volume-profit (CVP) analysis. CVP starts with computing the break-even point. The break-even point is the sales level at which costs are equal to sales and no profit or loss is earned. CVP is a very powerful tool, and can be used to answer questions such as: What sales volume is needed to break-even for a new business? What sales volume is required to earn a target profit? How would the break-even point change is a company acquires new machinery? How would the break-even point change if additional employees are hired, or existing employees terminated? Identifying cost behavior The first step in learning CVP is to understand how costs change when the volume of activity, such as units produced, changes. Costs may be classified as either fixed, variable, mixed, or step-wise. Fixed costs: The total amount of fixed costs remains unchanged when volume changes, within a relevant range of operations. The relevant range of operations is the normal operating range for a business, with existing machinery. On a per unit basis, as the level of production changes the fixed cost per unit of output decreases as volume increases (and vice versa). When production volume and costs are graphed, units of product are usually plotted on the horizontal axis and dollars of cost are plotted on the vertical axis. a. Fixed costs are represented by a horizontal line with no slope. b. The horizontal line starts on the vertical axis at the fixed cost amount. Examples of fixed costs are factory rent, depreciation (straight-line method), and supervisors’ salaries. 1

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Variable costs: A variable cost increases or decreases as volume of activity increases or decreases. On a per unit basis, a variable cost per unit remains constant but the total amount of variable cost changes with the level of production. When production volume and variable costs are graphed, a. Variable cost is represented by a straight line starting at the zero cost level. b.
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ACCT 102 Lecture Notes Chapter 18 SPR 2010 - ACCT 102...

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