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MK778
Chapter63.pdf
Chapter 6 Costing Approach
1
Purpose of Managerial Accounting
Planning
• Develop new products?
• Expand into new markets?
• Build a new factory?
Control
• Are costs too high?
• Are services profitable?
• Are customers satisfied?
2
Fixed Costs
3
Variable Costs
4
Mixed Costs
5
Step-Wise Costs
6
Curvilinear Costs
7
Measuring Cost Behavior
The objective is to classify all costs as either fixed or variable. We will look at three methods:
1. Scatter diagram
2. High-low method
3. Regression
8
Scatter Diagrams
9
The High-Low Method 1
The following relationships between units produced and total cost are observed:
Month Units Produced Total Cost
January 27,500 $21,500
February 22,500 20,500
March 25,000 25,000
April 35,000 21,500
May 47,500 25,500
June 17,500 18,500
Month Units Produced Total Cost
July 30,000 $23,500
August 52,500 28,500
September 37,500 26,000
October 62,500 29,000
November 67,500 31,000
December 57,500 26,000
Using these two levels of volume, compute: 1. The variable cost per unit. 2. The total fixed cost.
10
The High-Low Method 2
Change in cost $31, 000 $18, 500 $12, 500 $0.25 per unit
Change in units 67, 500 17, 500 50, 000
− = = =
−
Total cost Fixed cost (Variable cost per unit Units)
$31, 000 Fixed cost ($0.25 per unit 67.500 Units)
$31, 000 Fixed cost $16, 875
$14,125 Fixed cost
= +
= +
= +
=
Total cost = $14,125 + $0.25 per unit produced
11
Question: Calculate variable cost & fixed cost using high low method
12
•Highest output = 1,000 units
•Lowest output = 200 units
•Total cost at highest output = $ 3,000
•Total cost at lowest output = 1,400
Regression
It is commonly used with spreadsheet programs or calculators.
The objective of the cost analysis remains the same: determination of total fixed cost and the variable unit cost.
13
Contribution Margin and Its Measures
Contribution margin per unit = Selling price per unit Total variable cost per – unit
Contribution margin per unit Contribution margin ratio =
Selling price per unit
14
Break-Even Point
Sales level at which total sales equal total costs. Company neither earns a profit nor incurs a loss. Can be expressed in units or dollars of sales. Three methods to find break-even point: • Formula. • Contribution margin income statement. • Cost-volume-profit chart.
15
Formula Method
$24 000 $30
800 units per month
Fixed costs Break - even point in units =
Contribution margin per unit
,=
=
$24,000 30
$24 000 0 30
Fixed costs Break - even point in dollars =
Contribution margin ratio
%
, .
=
=
$80 000 of monthly sales,=
16
Contribution Margin Income Statement Method
17
Graphing—Cost-Volume-Profit Chart
18
Changes in Estimates Blank Selling Price per
Unit Variable Cost per
Unit Total Fixed
Costs
Optimistic $105 $68 $21,000
Most likely 100 70 24,000
Pessimistic 95 72 27,000
( ) $24,000
Revised break-even point in units 686 units rounded $35
= =
19
Computing the Margin of Safety
( )
$100,000 $80,000
$100,000
Expected sales Break - even sales Margin of safety in percent =
Expected sales
−
− =
$20 000 $100,000
20
,
%
=
=
20
Computing Sales for a Target Income 1
$24,000 + $12,000 $120,000
30
Fixed costs + Target income Dollar sales at target income =
Contribution margin ratio
% = =
21
Computing Sales for a Target Income 2
$24,000 + $12,000 1,200 units
$30
Fixed costs + Target income Unit sales at target income =
Contribution margin per unit
= =
22
Computing Sales for a Target Income 3
23
Sales Mix and Break-Even 3
Hair-Today offers three cuts as shown below. Annual fixed costs are $192,000. Compute the break-even point in composite units and in number of units for each haircut at the given sales mix.
24
Sales Mix and Break-Even 4
25
Sales Mix and Break-Even 5
Contribution margin per composite unit = Selling price per composite unit Variable cost per composite unit
$64 = $160
–
– $96
26
Computing a Multiproduct Break-Even Point 1
Fixed costs Break-even point in composite units =
Contribution margin per composite unit
$192, 000 = = 3, 000 composite units
$64
$192, 000 Break-even poi
composite composite
compont in units
Fixed costs Break
= $64.00 per
-even point in units = Contribution margin per unit
unit
Break-even po
site composite
compositeint in units = 3,00 composi0 ute nits
27
Computing a Multiproduct Break-Even Point 2
28
Assumptions in Cost-Volume-Profit Analysis
CVP analysis relies on several assumptions:
• Costs can be classified as variable or fixed.
• Costs are linear within the relevant range.
• All units produced are sold.
• Sales mix is constant.
29
Degree of Operating Leverage
A measure of the extent to which fixed costs are being used in an organization.
A measure of how a percentage change in sales will affect profits.
( )
$36 000 $12 000 3 0
DOL = Total contribution margin in margin Pretax income
DOL = , , .=
30
Operating Leverage
( )
=DOL = $36,000 $12,000 3.0
DOL = Total contribution margin in margin Pretax income
If Rydell increases sales by 10 percent, what will the percentage increase in income be?
( ) ( )Change in income % DOL Change in sales %
3.0 10% 30%
=
= =
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