Analyzing a Special-Order Decision:
Woodchuck Corp. makes several varieties of wooden furniture. It has been approached
about producing a special order for rocking chairs. A local senior citizens group would
use the special-order chairs in a n
Assigning Activity Costs to Individual Products or Services
1. Select an Activity Cost Driver for Each Cost Pool
Activity Cost Driver A measure of the underlying activity that occurs in
each activity cost pool.
Non volume-Based Cost Drivers Measures that
Activity Based Management (ABM)
Activity Based Management (ABM) Encompasses all of the actions that managers take to
improve operations or reduce costs based on the ABC data.
Managers must use ABC to manage the underlying activities and identify areas tha
Cost Volume Profit Analysis:
Cost Volume Profit analysis - calculate break-even in both units and dollars.
Calculate CM and CM%.
Multiproduct break-even analysis, degree of operating leverage, margin of
1. Cost-Volume-Profit (CVP) analysis Is a ma
Assigning Indirect Costs to Activities:
Activities that support the entire company (all
products, customers, batches, and units)
Product or Customer
Activities that relate to a specific product line or
Total Quality Management (TQM)
Appraisal or Inspection Costs Incurred to identify defective products before they get
to the customer.
Internal Failure Costs Result from the defects that are caught before the product is
shipped to th
Unit Contribution Margin Method:
Unit Contribution Margin Method Tells us how much contribution margin is generated
by each additional unit sold.
Total Contribution Margin = Total
Fixed Costs + Profit (Zero at break-even point)
Unit Contribution Margin x
Margin of Safety
Margin of Safety Is the difference between actual or budgeted sales and the break-even
Think of the margin of safety as a buffer zone that identifies how much sales can
drop before the business will suffer a loss.
Margin of Saf
Activity Based Costing (ABC)
Break-even point in units = Fixed cost / Contribution margin per unit
Break-even point in $ = Fixed cost / Contribution margin ratio
Activity Based Costing - Calculate the activity rate and
Weighting the Unit Contribution Margin:
Since the two different products have two different Unit Contribution Margins we use the
weighted average unit contribution margin. Which is calculated as follows:
Unit Contribution Margin