Presentation1.Pptx Week 4 Bep
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Program :
Faculty :
Course :
Trimester :
Session/s :
Week : 4
PGDM - 02
Pro!Dr!P!"!"amakris#nan
$ntro%uction toManagerial&ccounti
2
9
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Cost-Volume-Profit Analysis
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Learning objective
To understand the costing tool of marginalcosting
To comprehend BREAK EVE AAL!"#"
To be familiar $ith cost volume anal%sis
To understand the practical relevance ofcost volume anal%sis for decision ma&ing
To understand fi'ed and variable costing
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(lanning )o$ man% units of input do # need to support a
budgeted output*
+ontrol Are operations effective and efficient*
,ecision ma&ing
)o$ do $e decide on a price- and choose.uantit% given constraints*
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/i'ed cost and variable cost
Variable +osts0 +osts $hich change directl% in proportion to
changes in .uantit% or activit%
/i'ed +osts0 +osts $hich do not change $hen .uantit% or
activit% volume changes
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+osts that change in proportion to changes involume or activit%
0An automobile manufacturer $ill need 122 tires
to ma&e 322 cars- but 1-222 tires to ma&e3-222 cars
0A ba&er% $ill need 4 eggs to ma&e 3 ca&e and42 eggs to ma&e 32 ca&es
#f activit% increases b% 325- cost increasesb% 325
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+osts that change in proportion to changes in volume or activit%0An automobile manufacturer $ill need 122 tires to ma&e 322 cars-
but 1-222 tires to ma&e 3-222 cars
0A ba&er% $ill need 4 eggs to ma&e 3 ca&e and 42 eggs to ma&e 32ca&es
#f activit% increases b% 325- cost increases b% 325+osts that change in proportion to changes in volume or activit%
0An automobile manufacturer $ill need 122 tires to ma&e 322 cars-but 1-222 tires to ma&e 3-222 cars
0A ba&er% $ill need 4 eggs to ma&e 3 ca&e and 42 eggs to ma&e 32ca&es
#f activit% increases b% 325- cost increases b% 325
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+osts that change in proportion to changes in volume or activit%0An automobile manufacturer $ill need 122 tires to ma&e
322 cars- but 1-222 tires to ma&e 3-222 cars
0A ba&er% $ill need 4 eggs to ma&e 3 ca&e and 42 eggs to
ma&e 32 ca&es#f activit% increases b% 325- cost increases b% 325
+osts that change in proportion to changes in volume or activit%
0An automobile manufacturer $ill need 122 tires to ma&e322 cars- but 1-222 tires to ma&e 3-222 cars
0A ba&er% $ill need 4 eggs to ma&e 3 ca&e and 42 eggs toma&e 32 ca&es
#f activit% increases b% 325- cost increases b% 325
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Variable cost
A company has decided that direct labor costsare 100% variable. Last month total direct laborcosts were $125,000 and total direct labor hoursworked were 10,000
1. What is the direct labor cost per hour?
$125!!! " 1!!!! hours # $12.5! per hour
2. Predict labor costs in a month hen 12!!! labor hours are or%ed
$12.5! per hour & 12!!! hours # $15!!!!
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Variable cost
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/i'ed cost
,o not change in response to changes inactivit% level
T%pical fi'ed costs are depreciation-
supervisor% salaries- and buildingmaintenance
Rent for a ba&er% $ill not double if output
increases from 322 to 422 ca&es Activit% increases b% 325- costs remain
unchanged
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/i'ed cost
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,iscretionar% /i'ed +osts0 6anagement can easil% change
0Advertising- research and development
6an% companies cut bac& on these costs $hensales drop7 This can be shortsighted7 8h%*
+ommitted /i'ed +osts
0+annot be easil% changed0 Rent- insurance
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6i'ed cost
+ontain both variable and fi'ed cost elements
+an separate mi'ed costs into variable and
fi'ed components0 "alesperson $ith base salar% fi'ed: and
commission on sales variable:
0 Base salar% included $ith fi'ed costs0 +ommission included $ith variable costs
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"tepcost
/i'ed cost for a specific range
#ncreases to higher level $hen upper boundof range is e'ceeded
;se correct cost $hen budgeting for aparticular relevant range
+ompan% adds third production shift- costincrease includes supervisor% salar%
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Total cost ' ()*+!,0 aria.le cost er unit 1nits ro%uce% 3)+02000 Fi5e% costs
65ecte% cost o 2,00 units ' ()*+!,0 2,00 3 )+02000 ')70,8,0
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)igh lo$ cost method
;tili
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Total costat highactivit%level
Total cost atlo$ activit%
level
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)igh lo$ cost method
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"tatistical techni.ue Estimates the slope and intercept of a cost
e.uation
/inds the best straight line fit to theobservations
T%picall% statistical soft$are pac&ages are
utili
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Range of activit%
Range of activit% for $hich estimates andpredictions are e'pected to be accurate
> Accurac% e'pected onl% for production levels
$ithin range ,ifficult to assess costs outside the relevant
range
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+ost volume
The (rofit E.uation
(rofit ? "(x: 0 V+x: 0 T/+
8here@ x? uantit% of units produced and sold "( ? "elling price per unit
V+ ? Variable cost per unitT/+ ? Total fi'ed cost
/undamental to +V( anal%sis
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+ost volume profit anal%sis
The (rofit E.uation
(rofit ? "(x: 0 V+x: 0 T/+
8here@ x? uantit% of units produced and sold "( ? "elling price per unit
V+ ? Variable cost per unitT/+ ? Total fi'ed cost
/undamental to +V( anal%sis
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Brea&>Even (oint2 ? "(x: 0 V+x: 0 T/+
2 ? C422722 x)D C927Fx:D3G2-4H
2 ? C422722 $90.83)x)D3G2-4H
2 ? 32973Ix) 3G2-4H
32973Ix) =3G2-4H
x? 3G2-4H J 32973I
x = 1,468.21 unitsBreak-even point is 1,469 units (a!a"s roun# up)
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Revie$
abb%s 8edding +a&es creates elaborate$edding ca&es7 Each ca&e sells for H227 Thevariable cost of ba&ing the ca&es is 422 andthe fi'ed cost per month is G-222
1. Calculate the brea%-e'en point in units
$(!!! " )$5!! - $2!!* # 2! ca%es
2. +o many ca%es must be sold to earn a profit of $,!!!?
)$,!!! $(!!!* " )$5!! - $2!!* # 5! ca%es
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revie$
17 At 8inford +orp7- the selling price per la$nmo$er is 342- variable cost per la$n mo$er isHH7 /i'ed costs are 3F2-2227 E'pected salesare 1-422 units7 8hat is profit e'pected to be*
Ans$er here@ MMMMMMMMMMMMMMMMM
6argin of safet% in units ? 1-422 0 4-222 ? 4-422
4-422 units N GH unit +6 ? 31F-222
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+ontribution
,ifference bet$een revenue and variablecosts
0 +ontribution margin ?
Total revenue minus total variable costs0 ;nit contribution margin ?
"elling price minus variable cost per unit
> The unit contribution margin measures theamount of incremental profit generated b%selling an additional unit
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hetori/ 0nc. produces stereo spea%ers. hesellin price per pair of spea%ers is $3!!. he'ariable cost of production is $4!! and the
fi/ed cost per month is $5!!!!.
1. Calculate the unit contribution marin associated ith a pair ofspea%ers
$3!! $4!! # $5!!2. Calculate the contribution marin ratio for hetori/ associated ith
a pair of spea%ers
)$3!! $4!!* " $3!! # !.(25
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+ontribution margin
;sing the contribution margin and the contributionmargin ratio
"( ? 422722- V+ ? 927F- +6 ? 422 0 927F ? 32973I- T/+ ?3G2-4H- profit ? 12-222
;nits to produce ?(rofit O T/+: J ;nit contribution margin
12-222 O 3G2-4H: J 32973I ? 3-FH units
"ales re.uired in dollars: ?
(rofit O T/+: J +ontribution margin ratio
+6 ratio ? 32973I J 422722 ? 27H1H9
12-222 O 3G2-4H: J 27H1H9 ? FGG-92
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Rhetori'- #nc7 produces stereo spea&ers7 The selling price per pair of spea&ers is 227 The
variable cost of production is F22 and the fi'ed cost per month is H2-22271. 0f the company sells fi'e more spea%ers than planned hat is the e/pected effect on profit of sellin the
additional spea%ers?
5 spea%ers & $5!! unit C6 # $25!! profit
2. 0f the company has sales that are $5!!! hiher than e/pected hat is the e/pected effect on profit?
$5!!! & !.(25 # $4125
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Learning outcome
At the end of the chapter student can havea clear idea of
/i'ed-variable cost
Brea& even anal%sis +ontribution margin
(rofit volume ratioand cost volume profit
anal%sis $ith illustrations