nikki

• Managerial Accounting

  The study of how costs behave and how to use cost information to make business decisions
• This slide deck contains animations. Please disable animations if they cause issues with your device.
• Chapter Outline


  • Learning Objectives
• Learning Objective 1


  Explain variable, fixed, and mixed costs and the relevant range
• Learning Objective 2


  Apply the high-low method to determine the components of mixed costs
• Learning Objective 3


  Prepare a contribution margin income statement to determine contribution margin
• Learning Objective 4


  Compute the break-even point using three approaches
• Learning Objective 5


  Determine the sales required to earn target net income and determine margin of safety
• Cost Behavior Analysis


  The study of how specific costs respond to changes in the level of business activity
• Cost Behavior Analysis helps management plan operations and decide between alternative courses of action
• Cost Behavior Analysis applies to all types of businesses and entities
• Activity index


  Identifies the activity that causes changes in the behavior of costs and allows costs to be classified as variable, fixed, or mixed
• Variable costs

  Costs that vary in total directly and proportionately with changes in the activity level
• Activity levels expressed in terms of

  • Sales dollars (in a retail company)
  • Miles driven (in a trucking company)
  • Room occupancy (in a hotel)
  • Dance classes taught (by a dance studio)
• Many companies use more than one measurement base for activity levels
• Changes in the level or volume of activity should be correlated with changes in costs
• Relevant range


  The range over which the company expects to operate during a year
• Within the relevant range, a straight-line relationship usually exists for both variable costs and fixed costs
• Outside the relevant range, the relationship between costs and activity level is often curvilinear
• Mixed costs


  Costs that have both a variable element and a fixed element
• High-Low Method


  1. Uses the total costs incurred at the high and the low levels of activity to classify mixed costs into fixed and variable components

  2. Difference in costs between high and low levels represents variable costs

  3. Total fixed cost is determined by subtracting the total variable cost at either the high or the low activity level from the total cost at that activity level
• Maintenance costs for Metro Transit Company are $8,000 per month of fixed costs plus $1.10 per mile of variable costs
• Mixed costs consist of a variable cost element and a fixed cost element
• Mixed costs


  Consist of a variable cost element and a fixed cost element
• High-Low Method


  Used to separate mixed costs into variable and fixed cost elements
• Do It! 2: High-Low Method

  1. Compute the variable- and fixed-cost elements

  2. Write the cost formula

  3. Estimate the total cost if the company produces 8,000 units
• Cost-Volume-Profit (CVP) Analysis


  • The study of the effects of changes in costs and volume on a company's profits
  • Important in profit planning
  • Critical factor in management decisions such as setting selling prices, determining product mix, and maximizing use of production facilities
• Assumptions in CVP Analysis

  • Behavior of both costs and revenues is linear throughout the relevant range of the activity index
  • Costs can be classified accurately as either variable or fixed
  • Changes in activity are the only factors that affect costs
  • All units produced are sold
  • When more than one type of product is sold, the sales mix will remain constant
• Contribution Margin


  The amount of revenue remaining after deducting variable costs
• CVP Income Statement

  1. Classifies costs and expenses as fixed or variable

  2. Reports contribution margin in the body of the statement

  3. Reports the same net income as a traditional income statement
• Unit Contribution Margin


  Selling price per unit less variable cost per unit
• Contribution Margin Ratio


  Shows the percentage of each sales dollar available to apply toward fixed costs and profits
• Do It! 3: CVP Income Statement

  Prepare a CVP income statement providing per unit values and total values
• Break-Even Analysis


  • The process of finding the break-even point level of activity at which total revenues equal total costs (both fixed and variable)
  • Can be computed or derived from a mathematical equation, by using contribution margin, or from a CVP graph
  • Expressed either in sales units or in sales dollars
• Mathematical Equation for Break-Even Point

  Compute the break-even point in units
• Contribution Margin Technique for Break-Even Point

  1. Compute the break-even point in units using contribution margin per unit

  2. Compute the break-even point in dollars using contribution margin ratio
• CVP Graph


  Graphical presentation of break-even analysis
• Do It! 4: Break-Even Analysis

  Compute the break-even point in units using a mathematical equation and contribution margin per unit
• Target Net Income


  The level of sales necessary to achieve a target income
• Margin of Safety


  The difference between actual or expected sales and the break-even sales level