Professional Documents
Culture Documents
INTRODUCTION
Today we will focus on gaining an understanding of how . . .
Interact
LECTURE OUTLINE
Important of Cost behavior in Business Activity cost behavior model Separating mixed costs Managerial judgment Cost-Volume-Profit (CVP)analysis Contribution margin and its measures Break-event analysis Applying CVP analysis
Computing income from sales and costs Computing sales for target income Computing margin of safety Using sensitivity analysis Computing multiple-product break-event
to:
Predict future conditions (planning); and Explain, evaluate, and act on past results (control)
Labour
Capital
Cost Behaviour
Changes in Output
COST BEHAVIOR
Cost
behavior is a general term for describing whether a cost changes when the level of output changes. Cost behavior patterns:
Fixed costs
Variable costs Mixed costs (Semi-variable costs)
costs
Remains unchanged in total within a relevant range as the level of output varies
As activity increases, total fixed costs do not change, but unit fixed cost declines
Variable
costs
As activity increases, total variable costs increase, but unit variable cost do not change
8
Notes: The relevant range is the limit of output level within which a specific relationship between costs and the cost driver is valid.
FIXED COSTS
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.
Cotinue
VARIABLE COST
1 10
100 200
$30 $30
$30 $30
$30 $300
$3,000 $6,000
FIXED COST
Volume
Volume
12
MIXED-COSTS
Linearity Assumption $ Total Costs
Fixed Costs
Variable Costs
Volume
$
But different between ranges of activity Volume
Why we need to separate mixed costs into fixed and variable components?
Accounting records typically show the total costs and the associated amount of output of a mixed cost item. E.g. the total cost of maintenance and the number of maintenance hours provided during a given period of time.
Total Costs
Level of Output
10
* * * *
* ** * **
X
QUICK-AND-DIRTY METHOD
Draw a line through the data points with about an equal numbers of points above and below the line. Y 20
10
* ** * **
X
QUICK-AND-DIRTY METHOD
The slope is the estimated variable cost per unit. Slope = Change in cost Change in units Y
20
10
* * * * Horizontal
distance is the change in activity.
* ** * **
Vertical distance is the change in cost.
ADVANTAGES
One
of the principal advantages of this method is that it lets us see the data.
Month
Activity Level: Patient Days 5,600 7,100 5,000 6,500 7,300 8,000 6,200
Textbook Example
Maintenance Cost Incurred $7,900 8,500 7,400 8,200 9,100 9,800 7,800
10000
Maintenance Cost
8000
6000
4000
2000
y = 0.7589x + 3430.9
0 0 2000 4000 6000 8000 10000 Patient-Days
HIGH-LOW METHOD
A
high point (the point with highest output level); and low point (the point with lowest output level)
The
HIGH-LOW METHOD
Using
intercept; and
Slope parameters
1: Find the high point and low point for a given data set 2: Calculate the variable rate (V) or slope
V
V
Step
3: Calculate the fixed cost using the variable rate and either the high point or low point the cost formula
Form
Month
Activity Level: Patient Days 5,600 7,100 5,000 6,500 7,300 8,000 6,200
Textbook Example
Maintenance Cost Incurred $7,900 8,500 7,400 8,200 9,100 9,800 7,800
$2,400 V = -----------3,000
= $0.80 Per Unit
TC = $3,400 + $0.80X
have used historical cost to arrive at the cost equation. we have to be careful in how we use the formula. forget the relevant range.
Therefore,
Never
to use
to understand
WEAKNESSES OF HIGH-LOW
Only
two data points are used in the analysis. be problematic if either (or both) high or low are extreme (i.e., Outliers).
Can
Other
WEAKNESSES OF HIGH-LOW
Other
statistical technique used to separate mixed costs into fixed and variable components.
All
observations are used to fit a regression line which represents the average of all data points.
Method
Fixed Cost
Variable Cost
High-Low
$3,400
$0.80
Scattergraph
$3,300
$0.79
Regression
$3,431
$0.76
Use past experience Try to confirm results with operating personnel Use common sense to confirm statistical studies
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
43
INCOME STATEMENTS . . .
Traditional Contribution Format
A reporting format where costs are reported by cost behaviour and a contribution margin is calculated
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
continue d
45
The difference between the sales price per unit and variable cost per unit
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
continue d
46
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
48
Total Sales (500 bikes) $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Net income $ 20,000
Perc 1
Sales (500 bikes) Less: variable expenses Contribution margin Less: fixed expenses Net income
Perc 1
Draw the fixed expense line Draw the total expense line Draw the total revenue line Break-even pointwhere the total revenue and total expense lines intersect
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
53
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
54
CVP GRAPH
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
Total Expenses
Fixed expenses
Units
CVP GRAPH
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
Total Sales
Units
CVP GRAPH
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
Break-even point
Units
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
58
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
59
SAFETY MARGIN
Difference between the budgeted sales revenue and the break-even sales revenue Gives a feel for how close projected operations are to the break-even point
60
When estimates of fixed costs are revised, the break-even point will change
Percentage change in fixed expenses will lead to similar increase in the break-even point (in units or dollars)
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
61
Changes the unit contribution margin A new break-even point An increase in unit variable expenses will increase the break-even point
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
continue d
62
Changes the unit contribution margin A new break-even point An increase in unit price will lower the break-even point
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
63
OPERATING LEVERAGE
Operating leverage is the use of fixed costs to multiple the impact of sales changes on income. Degree of operating leverage (DOL) for a given level of sales
DOL= Contribution margin / Operating income Percentage change in operating income = DOL x percentage change in sales
May involve
Increasing unit prices Undertaking an advertising campaign Hiring a new storage facility
Focuses on the difference in the total contribution margin, fixed expenses and profits under the two alternatives
An incremental approach
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
65
Sales mix
The relative proportions of each type of product (units) sold by the organisation
The unit contribution margins of a package in according with sales mix
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
66
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
67
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
68
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
69
Sensitivity analysis
An approach which examines how an outcome may change due to variations in the predicted data or underlying assumptions
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
continue d
70
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
continue d
71
Allows the analyst to specify the outcome, so that software can specify the necessary inputs
The analyst specifies changes in assumptions to examine the effect of these changes on the output
What-if analysis
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
72
Copyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith
73