Professional Documents
Culture Documents
Week 3 (Chp 2)
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 2-1
Cost Behaviour
It is how the activities of an organisation affect its costs.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Cost Drivers
Any output measure that causes the use of costly resources is a cost driver.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Labour hours
Hours spent servicing products
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Rules of Thumb
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Rules of Thumb
The per-unit variable cost remains unchanged regardless of changes in the cost-driver activity.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Relevant Range
The relevant range specifies the limits of cost-driver activity within which a specific relationship between a cost and its cost driver will be valid.
Relevant Range
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Relevant Range
$115,000 100,000
Fixed Costs
60,000
Relevant range
20
40
60
80
100
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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CVP Scenario
Selling price Variable cost of each item Selling price less variable cost Monthly fixed expenses: Rent Wages Other Total fixed expenses Percentage Per Unit of Sales $.50 100% .40 80 $.10 20%
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Equation Method
Net income equals zero at the break-even point.
Sales
= Variable expenses Fixed expenses Zero net income (break-even point)
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
Equation Method
Let N = number of units to be sold to break even. $.50N $.40N $6,000 = 0 $.10N = $6,000 N = $6,000 $.10 N = 60,000 Units
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Equation Method
Let S = sales in dollars needed to break even. S .80S $6,000 = 0 .20S = $6,000 S = $6,000 .20 S = $30,000
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Cost-Volume-Profit Graph
$60000 Ringgit (RM) $50000 $40000 $30000 Break-even sales point 60,000 units or $30,000
$20000
$10000 0 0 10 20 30 40 50 60 70 80 90 100 Units (thousands)
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
However, Ramos sold only 50,000 key (K) cases. What is the net income?
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
Managers can also use CVP analysis to determine the total sales, in units and dollars, needed to reach a target net profit.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Operating leverage
Margin of safety
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Operating Leverage
$60000 Ringgit (RM) $50000 $40000 $30000
$20000
$10000 0 0 10 20 30 40 50 60 70 80 90 100 Units (thousands)
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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$.10
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
Nonprofit Application
Suppose a city has a $100,000 lump-sum budget appropriation to conduct a counseling program. Variable costs per prescription is $400 per patient per day. Fixed costs are $60,000 in the relevant range of 50 to 150 patients.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 2 - 40
Nonprofit Application
If the city spends the entire budget appropriation, how many patients can it serve in a year? $100,000 = $400N + $60,000 $400N = $100,000 $60,000 N = $40,000 $400 N = 100 patients
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