Post on 02-Jan-2016
12-1
CHAPTER 12
Managerial Accounting and
Cost—Volume—Profit Relationships
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
12-2
Decision Making
Strategic, Operational,and Financial (Planning)
Planning and Control Cycle
Executing operational
activities (Managing)
Performance analysis: Plans vs.
actual results (Controlling)
L O 1
Implement Plans
Rev
isit
Pla
ns
Data collection and Performance Feedback
12-3
Managerial Accounting versus Financial Accounting
Managerial accountingsupports the internal
planning (future-oriented)decisions made by
management.
Financial accounting hasmore of a scorekeeping,
historical orientationthat provides information
to owners and othersoutside the organization.
L O 2
12-4
Managerial Financial Accounting Accounting
Service perspective Internal to managers External to investorsand creditors
Time Frame Present and Future Historical perspective
Breadth of concern Micro - Individual unitsof organization
Reporting frequency Frequent and timely - Monthly - a week or and promptness one day after period ends more after period ends
Degree of precision Relevance more important High accuracy desired - than reliability reliability very important
Reporting standards Must follow GAAPand prescribed formats
None imposed
Macro - Entire organization
Managerial Accounting versus Financial Accounting
L O 2
12-5
How a cost will react to changes in the level of
business activity.
– Total variable costs change when activity changes.
– Total fixed costs remain unchanged when activity changes.
How a cost will react to changes in the level of
business activity.
– Total variable costs change when activity changes.
– Total fixed costs remain unchanged when activity changes.
Relationship of Total Costto Volume of Activity
L O 3
12-6
Total Fixed Cost
Your monthly basic telephone billprobably does not change when
you make more local calls.
Number of Local Calls
Mon
thly
Bas
ic
Tel
epho
ne B
ill
L O 4
12-7
Fixed Cost per Unit
Number of Local Calls
Mon
thly
Bas
ic T
elep
hone
B
ill p
er L
ocal
Cal
l
The average cost per local call decreasesas more local calls are made.
L O 4
12-8
Total Variable Cost
Your total long distance telephone bill is based on how many minutes you talk.
Minutes Talked
Tot
al L
ong
Dis
tanc
eT
elep
hone
Bill
L O 5
12-9
Variable Cost Per Unit
Minutes Talked
Per
Min
ute
Tel
epho
ne C
harg
e
The cost per long distance minute talked is constant. For example, 10 cents per minute.
L O 5
12-10
Relationship of Total Costto Volume of Activity
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goesthe same even when the down as activity level goes up.
activity level changes.
L O 5
12-11
Relationship of Total Costto Volume of Activity
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
L O 5
12-12
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Relationship of Total Costto Volume of Activity
L O 5
12-13
Variable costs are usually characterized by:
a. Unit costs that decrease as activityincreases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Variable costs are usually characterized by:
a. Unit costs that decrease as activityincreases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Relationship of Total Costto Volume of Activity
L O 5
12-14
Variable costs are usually characterized by:
a. Unit costs that decrease as activityincreases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Variable costs are usually characterized by:
a. Unit costs that decrease as activityincreases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Relationship of Total Costto Volume of Activity
LO 5
12-15
Activity
To
tal
Co
st
Economist’sCurvilinear Cost
Function
Relationship of Total Costto Volume of Activity
L O 5
12-16
Activity
To
tal
Co
st
Economist’sCurvilinear Cost
Function
Accountant’s Straight-Line Approximation (constant
unit variable cost)
Relationship of Total Costto Volume of Activity
L O 5
12-17
RelevantRange
Activity
To
tal
Co
st
Economist’sCurvilinear Cost
Function
Accountant’s Straight-Line Approximation (constant
unit variable cost)
Relationship of Total Costto Volume of Activity
A straight line closely
approximates a curvilinear variable cost line within the
relevant range.
A straight line closely
approximates a curvilinear variable cost line within the
relevant range.
L O 5
12-18
Fixed Costs andthe Relevant Range
Example: Office space is available at a rental rate of
$30,000 per year in increments of 1,000 square feet. As the business grows
more space is rented, increasing the total cost.
Continue
L O 5
12-19
Fixed Costs andthe Relevant Range
Ren
t C
ost
in
T
ho
usa
nd
s o
f D
oll
ars
0 1,000 2,000 3,000 Rented Area (Square Feet)
0
30
60
90
Relevant
Range
Total cost doesn’t change for a wide
range of activity, but then jumps to a new higher cost for the
next higher range of activity.
Total cost doesn’t change for a wide
range of activity, but then jumps to a new higher cost for the
next higher range of activity.
L O 5
12-20
Typical variable costs• Raw materials
• Direct labor
• Factory utilities
• Sales commissions
• Shipping costs
Typical fixed costs• Real estate taxes
• Insurance
• Supervisory salaries
• Depreciation
• Advertising
Relationship of Total Costto Volume of Activity
L O 5
12-21
A semivariable cost has both fixed and
variablecomponents.
Consider thefollowing electric utility example.
Relationship of Total Costto Volume of Activity
L O 5
12-22
Semivariable Costs
Fixed Monthly
Utility Charge
Variable
Utility Charge
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
Total semivariable cost
L O 5
12-23
Semivariable Costs
Fixed Monthly
Utility Charge
Variable
Utility Charge
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
Total semivariable cost
The total semivariable cost line can be expressed as an equation: Y = a + bX
Where: Y = the total semivariable cost
a = the total fixed cost (thevertical intercept of the line)
b = the variable cost per unit ofactivity (the slope of the line)
X = the level of activity
L O 5
12-24
Semivariable Costs
Fixed Monthly
Utility Charge
Variable
Utility Charge
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
Total semivariable cost Y = a + bX
L O 5
12-25
Estimating Cost Behavior Patterns
The high-low method isused to determine the fixedand variable components
of a semivariable cost.
L O 6
12-26
The High-low Method
Beetle Co. recorded the following productionactivity and maintenance costs for two months:
Using these two levels of activity, compute: the variable cost per unit; the fixed cost; and then express the costs in equation form Y = a + bX.
Cost Units
High activity level 9,700$ 9,000 Low activity level (6,100) (5,000)Change 3,600$ 4,000
L O 6
12-27
Unit variable cost =Change in costChange in units
The High-low MethodL O 6
Cost Units
High activity level 9,700$ 9,000 Low activity level (6,100) (5,000)Change 3,600$ 4,000
12-28
Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit
The High-low MethodL O 6
Cost Units
High activity level 9,700$ 9,000 Low activity level (6,100) (5,000)Change 3,600$ 4,000
12-29
Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
The High-low MethodL O 6
Cost Units
High activity level 9,700$ 9,000 Low activity level (6,100) (5,000)Change 3,600$ 4,000
12-30
Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $1,600 + $0.90X
The High-low MethodL O 6
Cost Units
High activity level 9,700$ 9,000 Low activity level (6,100) (5,000)Change 3,600$ 4,000
12-31
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
The High-low MethodL O 6
12-32
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
The High-low MethodL O 6
Cost Units
High level 14,000$ 120,000
Low level (10,000) (80,000)
Change 4,000$ 40,000
$4,000 ÷ 40,000 units = $0.10 per unit
12-33
The High-low MethodL O 6
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
12-34
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the fixed portion of sales salaries and commissions?
a. $ 2,000.
b. $ 4,000
c. $10,000
d. $12,000
If sales salaries and commissions are $14,000 when 120,000 units are sold and $10,000 when 80,000 units are sold, what is the fixed portion of sales salaries and commissions?
a. $ 2,000.
b. $ 4,000
c. $10,000
d. $12,000
Total cost = $14,000 = $10,000Total variable cost = ($0.10 × 120,000 units) = (.10 X 80,000 units)
= $12,000 = $8,000Total fixed cost = Total cost - Total variable cost =
= $14,000 - $12,000 = $10,000 - $8,000Total fixed cost = $2,000 = $2,000
Total cost = Total fixed cost + Total variable cost =
or y = a + bX =
y = $2,000 + $12,000 = $2,000 + 8,000y = $14,000 = $10,000
The High-low MethodL O 6
12-35
Let’s put our
knowledge of cost
behavior to work by
preparing a
contribution margin
format income
statement.
A Modified IncomeStatement Format
L O 7
12-36
Used primarily forexternal reporting.
Used primarily bymanagement.
The Contribution Margin FormatL O 7
Both formats report the same Operating income!
12-37
The Contribution Margin Format
Total Unit
Sales Revenue 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net income 10,000$
The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs
and provides for income.
L O 8
12-38
Contribution margin ratioContribution margin ratio
The Contribution Margin FormatL O 9
12-39
At Evans, each $1.00 increase in sales revenue results in a total contribution margin increase of
40¢.
If sales increase by $60,000, what will be the If sales increase by $60,000, what will be the increase in total contribution margin?increase in total contribution margin?
$60,000 $60,000 × 0.40 = $24,000× 0.40 = $24,000
At Evans, each $1.00 increase in sales revenue results in a total contribution margin increase of
40¢.
If sales increase by $60,000, what will be the If sales increase by $60,000, what will be the increase in total contribution margin?increase in total contribution margin?
$60,000 $60,000 × 0.40 = $24,000× 0.40 = $24,000
The Contribution Margin FormatL O 9
12-40
What is income if sales increase by 2,000 units? What is income if sales increase by 2,000 units?
Contribution Margin in ActionL O 9
12-41
Note that fixed expenses do not increase when sales volume increases.
Note that fixed expenses do not increase when sales volume increases.
Contribution Margin in ActionL O 9
12-42
What is the effect on income if a $1.00 per unitprice cut results in a 4,000 unit increase in volume?
What is the effect on income if a $1.00 per unitprice cut results in a 4,000 unit increase in volume?
Contribution Margin in ActionL O 9
12-43
Contribution margin is increased without anincrease in fixed expenses, so income increases.
Contribution margin is increased without anincrease in fixed expenses, so income increases.
Contribution Margin in ActionL O 9
12-44
Contribution Margin in Action
What is the effect on income if a $1.00 per unitprice cut, combined with a $10,000 increase inadvertising, results in an 8,000 unit increase
in volume?
What is the effect on income if a $1.00 per unitprice cut, combined with a $10,000 increase inadvertising, results in an 8,000 unit increase
in volume?
L O 9
12-45
Contribution Margin in Action
Contribution margin is increased more than the $10,000 increase in fixed expenses, so income increases.
Contribution margin is increased more than the $10,000 increase in fixed expenses, so income increases.
L O 9
12-46
Multiple Products andSales Mix Considerations
Sales mix is the relative combination in whicha company’s different products are sold.
Different products have different selling prices, costs, and contribution margins.
A change in the sales mix will result in a different contribution margin ratio.
Sales mix is the relative combination in whicha company’s different products are sold.
Different products have different selling prices, costs, and contribution margins.
A change in the sales mix will result in a different contribution margin ratio.
L O 10
12-47
Multiple Products andSales Mix Considerations
Lawnmowers TotalSales 250,000$ 100% 300,000$ 100% 550,000$ 100%Variable expense 150,000 60% 135,000 45% 285,000 52%Contribution margin 100,000$ 40% 165,000$ 55% 265,000$ 48%
Fixed expense 170,000 Operating income 95,000$
Lawn tractors
Jones Company provides uswith the following information:
L O 10
Both products have the same sales volume of 1,000 units
However, each product has a different contribution margin ratio
12-48
Multiple Products andSales Mix Considerations
Lawnmowers TotalSales 250,000$ 100% 300,000$ 100% 550,000$ 100%Variable expense 150,000 60% 135,000 45% 285,000 52%Contribution margin 100,000$ 40% 165,000$ 55% 265,000$ 48%
Fixed expense 170,000 Operating income 95,000$
Lawn tractors
$265,000
$550,000
= 48% (rounded)
Jones Company provides uswith the following information:
L O 10
Average total contribution margin ratio provided from all products
How will average total contribution margin change if Jones sold 1,500 lawn tractors, all other factors held constant?
12-49
Multiple Products andSales Mix Considerations
Lawnmowers TotalSales 250,000$ 100% $450,000 100% 700,000$ 100%Variable expense 150,000 60% 202,500 45% 352,500 50%Contribution margin 100,000$ 40% $247,500 55% 347,500$ 50%
Fixed expense 170,000 Operating income 177,500$
Lawn tractors
L O 10
$347,500
$700,000
= 50% (rounded)
Average total contribution margin ratio provided from all products
How will average total contribution margin change if Jones sold 1,500 lawn tractors, all other factors held constant?
Due to selling more product with a higher CM ratio
Increases
12-50
Break-Even Point Analysis
How many units must Evans sell to cover its fixed costs (break even)?
Answer: $30,000 ÷ $4 per unit = 7,500 units
How many units must Evans sell to cover its fixed costs (break even)?
Answer: $30,000 ÷ $4 per unit = 7,500 units
L O 11
12-51
Break-Even Point Analysis
We have just seen one of the basic CVP relationships – the break-even computation.
Break-even point in units = Fixed costs
Contribution margin per unit
Unit sales price less unit variable cost($4 for Evans company)
L O 11
12-52
Break-Even Point Analysis
The break-even formula may also be expressed in sales dollars.
Break-even point in dollars = Fixed costs
Contribution margin ratio
Unit sales price Unit variable cost
L O 11
12-53
Break-Even Point Analysis
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to
break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to
break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
L O 11
12-54
Break-Even Point Analysis
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per
unit, how many units must be sold to break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per
unit, how many units must be sold to break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units Unit contribution = $5.00 - $3.00 = $2.00
Fixed costsUnit contribution =
$200,000$2.00 per unit
= 100,000 units
L O 11
12-55
Break-Even Point Analysis
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
L O 11
12-56
Break-Even Point Analysis
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Unit contribution = $5.00 - $3.00 = $2.00
Contribution margin ratio = $2.00 ÷ $5.00 = .40
Break-even revenue = $200,000 ÷ .4 = $500,000
L O 11
12-57
Break-Even Point Analysis
Break-even formulas may be adjusted to show the sales volume needed to earn
any amount of operating income.
Break-even formulas may be adjusted to show the sales volume needed to earn
any amount of operating income.
Unit sales = Fixed costs + Desired incomeContribution margin per unit
Dollar sales = Fixed costs + Desired income
Contribution margin ratio
L O 11
12-58
Break-Even Point Analysis
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
L O 11
12-59
Break-Even Point Analysis
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units = 120,000 units
Unit contribution = $5.00 - $3.00 = $2.00
Fixed costs + Target income Unit contribution
$200,000 + $40,000 $2.00 per unit
L O 11
12-60
Break-Even Graph
Total expense
Volume in Units
Co
sts
and
Rev
enu
ein
Do
llar
s
Total fixed expense
Break-even point
Profit
Loss
Revenue
Total variable expense
L O 11
12-61
Operating Leverage
A measure of how sensitive net income is to percentage changes in sales.
With high leverage, a small percentage increase in revenue can produce a much larger percentage increase in income.
A measure of how sensitive net income is to percentage changes in sales.
With high leverage, a small percentage increase in revenue can produce a much larger percentage increase in income.
L O 12
12-62
Operating Leverage
If revenues increase by 20 percent,what is the percentage increase in income?
If revenues increase by 20 percent,what is the percentage increase in income?
L O 12
12-63
Operating Leverage
80 percent increase in income
Operating leverage resulted in the operating incomeincreasing proportionately more than the increase in revenue.
Operating leverage resulted in the operating incomeincreasing proportionately more than the increase in revenue.
20 percent increase in revenue
L O 12
12-64
End of Chapter 12