ACTG 3000

Managerial Accounting and Cost-Volume-Profit Analysis

Nature of Managerial Accounting

• Managerial Financial• Internal External• Future-oriented Historical• Segmented Whole company• Any format Follows GAAP

Users and Uses

• Users – Internal• Main Responsibilities of Management

Accountants– Planning– Directing– Controlling– Improving– Decision Making

• Head Accountant – Controller • Top Positions – Chief Financial Officer (CFO)

Cost Behavior

• Variable costs - costs that change in total with changes in activity

• Activity bases – what causes variable costs to change• Fixed costs - costs that stay the same in total with

changes in activity• Mixed - costs that have some fixed and some variable

behavior; you must split these costs into variable and fixed costs

• Relevant range – point where cost behavior assumptions hold true

Cost Behavior

• In Total• Variable - changes directly

• Fixed - stays same

• These relationships hold over the relevant range.

• Per unit• Variable - stays same

• Fixed - changes inversely

Variable Costs

• Assume $30 unit• Volume Per unit Total cost• 100 units $30 ?• 200 units $30 ?• 300 units $30 ?

Fixed Costs

• Assume $3,000 in total• Volume Per unit Total cost• 100 units ? $3,000• 200 units ? $3,000• 300 units ? $3,000

High-low Method• Method used to separate the variable and fixed costs in a

mixed cost• Procedure

– Find the highest activity and the lowest activity– Subtract the lowest from the highest activity– The difference represents the variable part of the activity– Determine the variable cost per unit– Apply the variable cost per unit to either the low or the high amount

and subtract this amount from the total cost– The difference is the fixed cost.– You now have a cost formula: Total cost = fixed cost in total + variable

cost per unit

Cost-Volume-Profit Analysis

• Procedure that examines changes in costs -- variable and fixed-- and volume levels and the resulting effects on net income.

• Used for planning -- to determine effects of anticipated changes in revenues, variable costs, fixed costs and volume

• Used for controlling -- what happens to net income when changes occur

Contribution Margin

• Contribution margin = Sales – variable costs• Example:

Billy Bob’s Bicycles (Sales of 200 bikes)Sales Revenues $100,000Var. Costs 40,000Contr. Margin 60,000Less Fixed costs 30,000 Net Income $30,000

Contribution Margin

• Per unit – Sales Price per unit - var. costs per unit– Tells us how much in $ is contributed to firm

• Ratio– CM per unit/Sales price per unit– Tells us what % of each dollar is contributed to the

firm

Contribution Margin

• CM in total = $60,000• CM per unit = – $100,000/200 bikes = $500 sales price per bike– $ 40,000/200 bikes = $200 var.costs per bike– $ 60,000/200 bikes = $300 CM per bike

• CM Ratio =– $300/$500 = 60% OR– $60,000/$100,000 = 60%

Cost-Volume-Profit Relationships

• Break-even point = point where total costs = total revenues; no profit

• Costs = Fixed + variable• Revenues• Revenue per unit = fixed costs in total +

variable cost per unit• Rev(x) = Fixed + Var(x)• Solve for x

Break-even Analysis• Mathematical Method• Sales = Var. Costs + Fixed Costs• $500x = $200x + $30,000• $300x = $30,000• x = 100 bikes

• Check• Sales $50,000 • (100 x $500) • Var. Costs 20,000 • (100 x $200)• CM $30,000• - Fixed 30,000 • Net Income -0-

Break-even Analysis

• Contribution Margin Method• 1) Determine the CM per unit• $500 - $200 = $300• 2) Calculate how many units must be sold to

break even by the following formula:• Fixed costs $30,000 = 100 bikes• CM per unit $300

Break-even Analysis

• In Sales Dollars• B.E. in units x Sales price per unit• OR• Fixed Costs• CM ratio

• = $30,000/.60 = $50,000

Sensitivity Analysis

• A change in any of the variables will yield a new break-even point.– Sales prices

• Increase (decrease) – increased (decreased) break-even point

– Fixed costs• Increase (decrease) – increased (decreased) break-even point

– Variable costs• Increase (decrease) – increased (decreased) break-even point

Target Profit AnalysisAdd desired profit to fixed costs

• Mathematical Method• $500x = $200x + $30,000 fixed + $60,000

Desired profit• $300x = $90,000• x = 300 bikes

• CM Approach• $30,000 + $60,000• $300 • = $90,000/300 =• 300 bikes

Margin of safety

• Tells us the amount sales dollars can drop before we have a net loss

• Therefore, it is the difference between current sales and break-even sales dollars

Cost Structure- Operating Leverage

• Company 1 - Pizza Pizza• Sales $200,000• -Var. costs 150,000• CM 50,000• -Fixed costs 20,000• Net income 30,000

• Company 2 - Pizza oven manufacturers• Sales $200,000• -Var. costs 50,000• CM 150,000• -Fix. costs 120,000• Net income 30,000

Cost Structure

• What is CM ratio for each company?• Company 1 = 50,000/200,000 • Company 2 = 150,000/200,000• Which company is riskier?• Operating Leverage = Contribution Margin

Net Income• Higher operating leverage, more risky

company

C-V-P in a Multiproduct Environment

• Sales Mix - more than one product sold– Ratio of each product sold to total– Example: Pizza Hut sells pizza, breadsticks, etc.– How many pizzas sold per breadsticks?– Assume four pizzas to one breadstick– Sales mix = 4P + 1B– This equation is called a “basket” of goods

C-V-P in a Multiproduct Environment

• Breakeven/Target Profit analysis for multiproducts - use the CM per basket of goods

• Example: Assume the CM for pizzas is $4 and the CM for breadsticks is $2, equation would be:

• 4P ($4) + 1B ($2) = $18 CM per basket of goods• Proceed as usual with break-even analysis

C-V-P for MultiproductsBasket of Goods Approach

• Example: Fixed costs = $90,000• Break-even point = $90,000/18 CM• = 5,000 baskets of goods• 1 bag = 4 P + 1B, therefore• Break-even is 4 x 5000 = 20,000 pizzas and 1 x

5000 = 5,000 breadsticks• All analysis is based on baskets of goods!!!