22 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber...
-
Upload
junior-mccormick -
Category
Documents
-
view
214 -
download
1
Transcript of 22 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber...
22 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Chapter 22
Cost-Volume-Profit Analysis
22 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Identify differentcost behavior
patterns.
Objective 1
22 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Variable
Fixed
Mixed
Types of Costs
22 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Variable Costs Example
Consider Grand Canyon Railway. Assume that breakfast costs Grand Canyon
Railway $3 per person. If the railroad carries 2,000 passengers, it
will spend $6,000 for breakfast services.
22 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Variable Costs Example
0 1 2 3 4 5
$24 –
$18 –
$12 –
$6 –
– – ––
Volume(Thousands of passengers)
Tot
al V
aria
ble
Cos
ts(t
hous
ands
)
22 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Fixed Costs Example
0 1 2 3 4 5
$400 –
$300 –
$200 –
$100 –
– – ––Volume
(Thousands of passengers)
Tot
al F
ixed
C
osts
(tho
usan
ds)
22 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Mixed Costs Example
A mixed cost is part variable and part fixed. Assume a department of a company has fixed
costs of $50 per month ($600 per year). There are also variable costs of $3 per hour.
22 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Mixed Costs Example
0 125 250 375 500 625
$2,850 –
$2,100 –
$1,350 –
$600 –
– – ––Volume (hours)
Tot
al
Cos
ts VariableCost
FixedCost
22 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Relevant Range...
– is a band of volume in which a specific relationship exists between cost and volume.
Outside the relevant range, the cost either increases or decreases.
A fixed cost is fixed only within a given relevant range and a given time span.
22 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Relevant Range
Fix
ed
Cos
ts
Volume in Units
$160,000 –
$120,000 –
$80,000 –
$40,000
0 5,000 10,000 15,000 20,000 25,000
– – –
Relevant Range
22 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Use a contribution margin
income statement to makebusiness decisions.
Objective 2
22 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Conventional income statementConventional income statement
Contribution margin income statementContribution margin income statement
Two Approaches to Compute Profits
22 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Conventional Income Statement
Sales –Cost of
Goods Sold =
GrossMargin
–OperatingExpenses
=Net
Income
GrossMargin
22 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contribution Margin
Income Statement
Sales –VariableExpenses =
ContributionMargin
–Fixed
Expenses=
NetIncome
ContributionMargin
22 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contribution Margin Example
Luis and Tom manufacture a device that allows users to take a closer look at icebergs from a ship.
The usual price for the device is $100. Variable costs are $70. They receive a proposal from a company in
Newfoundland to sell 20,000 units at a price of $85.
22 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contribution Margin Example
There is sufficient capacity to produce the order.
How do we analyze this situation? $85 – $70 = $15 contribution margin. $15 × 20,000 units = $300,000 (total
increase in contribution margin)
22 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 3
Compute breakeven sales and
perform sensitivity analyses.
22 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
0
100
200
300
400
500
600
0 1 2 3 4 5
Units (000)
$ (0
00)
Cost-Volume-Profit Analysis
— Sales
— Fixed
— Fixed + Variable
22 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sx – Vx – F = 0
Cost-Volume-Profit Analysis
Accountants use two methods to perform CVP analysis.
Both methods use an equation or formula derived from the contribution margin income statement.
22 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Equation Approach
With the equation approach, breakevensales in units is calculated as follows:
Unit sales price × Units soldUnit sales price × Units sold
Variable unit cost × Units soldVariable unit cost × Units sold
Fixed expenses Fixed expenses Operating incomeOperating income=
–
–
22 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Breakeven Point Example
Assume that fixed expenses amount to $90,000.
How many devices must be sold at the regular price of $100 to break even?
($100 × Units sold) – ($70 × Units sold) – $90,000 = 0
Units sold = $90,000 ÷ $30 = 3,000
22 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Per Unit Percent RatioSales price $100 100 1.00Variable expenses 70 70 .70Contribution margin $ 30 30 .30
Contribution Margin
22 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
(Fixed expenses + Operating income)÷ Contribution margin per unit = Units
($90,000 + 0) ÷ $30 = 3,000 Units
Contribution Margin Formula
22 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
(Fixed expenses + Operating income)÷ Contribution margin ratio = $ Sales
($90,000 + 0) ÷ .30 = $300,000
Contribution Margin Ratio Formula
22 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Change in Sales Price Example
Suppose that the sales price per device is $106 rather than $100.
What is the revised breakeven sales in units? New contribution margin: $106 – $70 = $36 $90,000 ÷ $36 = 2,500 units
22 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Change in Variable Costs Example
Suppose that variable expenses per device are $75 instead of $70.
Other factors remain unchanged. $90,000 ÷ $25 = 3,600 $90,000 ÷ 0.25 = $360,000
22 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Change in Fixed Costs Example
Suppose that rental costs increased by $30,000. What are the new fixed costs? $90,000 + $30,000 = $120,000 What is the new breakeven point? $120,000 ÷ $30 = 4,000 units $120,000 ÷ 0.30 = $400,000
22 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compute the sales level needed to
earn a target operating income.
Objective 4
22 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Target Operating Income Example
Suppose that a business would be content with operating income of $45,000.
Assuming $100 per unit selling price, variable expenses of $70 per unit, and fixed expenses of $90,000, how many units must be sold?
($90,000 + $45,000) ÷ $30 = 4,500
22 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Graph a set of cost-volume-profit
relationships.
Objective 5
22 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Various Sales Levels Example
Assume selling price is $35 per unit. Variable expense is $21 per unit. Fixed cost is $7,000. What is the breakeven point? 500 units or $17,500
22 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cost-Volume-Profit Graph
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
0 300 500 1000
Units
Dol
lars
Breakeven sales point500 units or $17,500 Sales revenue lin
e
Total expense line
Fixed expense line
22 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Various Sales Levels Example
What operating income is expected when sales are 300 units?
$14 × 300 = $4,200
$4,200 – $7,000 = ($2,800)
22 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Various Sales Levels Example
What operating income is expected when sales are 1,000 units?
$14 × 1,000 = $14,000
$14,000 – $7,000 = $7,000
22 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compute a margin of safety.
Objective 6
22 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Margin of Safety Example
Margin of safety is the excess of expected sales over breakeven sales.
Assume Luis and Tom’s breakeven point is 3,000 devices.
Suppose they expect to sell 4,000 during the period.
What is the margin of safety?
22 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
4,000 – 3,000 = 1,000 units
1,000 × $100 = $100,000
Margin of Safety Example
1,000 × 4,000 = 25%
$100,000 × $400,000 = 25%
22 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assumptions of CVP Analysis
1 Expenses can be classified as either variable or fixed.
2 CVP relationships are linear over a wide range of production and sales.
3 Sales prices, unit variable cost, and total fixed expenses will not vary within the relevant range.
22 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assumptions of CVP Analysis
4 Volume is the only cost driver.5 The relevant range of volume is specified.6 Inventory levels will be unchanged.7 The sales mix remains unchanged during
the period.
22 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Use the sales mix in CVP analysis.
Objective 7
22 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Mix Example
Suppose that Luis and Tom plan to sell two types of devices instead of one.
They estimate that sales will be 3,000 regular devices and 1,000 large devices.
This is a 3:1 sales mix. They expect 3/4 of the devices sold to be
regular devices and 1/4 to be large devices.
22 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Regular LargeSales price $100 $154Variable expenses 70 100Contribution margin 30 54Sales mix (units) 3 1
$ 90 $ 54
The total is $144.
Sales Mix Example
22 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Mix Example
Weighted-averagecontribution margin$144 ÷ (3 + 1) = $36
Breakeven sales$90,000 ÷ $36 = 2,500
2,500 × 3/4 = 1,875regular devices
2,500 × 1/4 = 625large devices
22 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Mix Example
1,875 regular × $100 = $187,500 625 large × $154 = 96,250Breakeven $283,750
$90,000 ÷ $144 = 625packages in the mix
22 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compute income using variable
costing and absorption costing.
Objective 8
22 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Absorption costing assigns allmanufacturing costs to products.
Financial statements prepared underGAAP use absorption costing.
Absorption costing assigns allmanufacturing costs to products.
Financial statements prepared underGAAP use absorption costing.
Variable costing assigns only variable manufacturing costs to products.
Variable costing is for internal use only.
Variable costing assigns only variable manufacturing costs to products.
Variable costing is for internal use only.
Product Costing
22 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assume the following costs:Direct material unit cost $6.00Direct labor unit cost $3.00Variable manufacturing overhead $2.00Variable marketing $2.50Fixed manufacturing overhead per unit $5.00
What is the product cost/unit?
Product Costing Example
22 - 48©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Absorption CostingAbsorption Costing
Direct materials $ 6.00 Direct labor 3.00 Variable manufacturing overhead 2.00 Fixed manufacturing overhead 5.00 Total $16.00
Product Costing Example
22 - 49©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Variable CostingVariable Costing
Direct materials $ 6.00 Direct labor 3.00 Variable manufacturing overhead 2.00 Fixed manufacturing overhead -0- Total $11.00
Product Costing Example
22 - 50©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
End of Chapter 22