19-1 hansen & mowen cost management accounting and control
TRANSCRIPT
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HANSEN & MOWENHANSEN & MOWEN
Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL
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Pricing and Profitability AnalysisPricing and Profitability Analysis
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Economic Pricing ConceptsEconomic Pricing Concepts
Quantity
P*
Q*
Price Supply
Demand
Basic Pricing ConceptsBasic Pricing Concepts 1
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Market Structure and Price
Perfect Competition—Many buyers and sellers; no one of which is large enough to influence the market.
Monopolistic Competition—Has both the characteristics of both monopoly and perfect competition.
Oligopoly—Few sellers.Monopoly—Barriers to entry are so high that there is
only one firm in the market.
Basic Pricing ConceptsBasic Pricing Concepts 1
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Characteristics of the Four Basic Types of Market Characteristics of the Four Basic Types of Market StructureStructure
Characteristics of the Four Basic Types of Market Characteristics of the Four Basic Types of Market StructureStructure
Basic Pricing ConceptsBasic Pricing Concepts 1
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Two Approaches to Pricing
1. Cost-based prices are established using “cost” plus markup.
2. Target prices are influenced by market conditions.
Pricing PoliciesPricing Policies 2
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Cost-Plus Pricing
AudioPro Company sells and installs audio equipment in homes, cars, and trucks. AudioPro’s income statement for last year is as follows:
Revenues $350,350Cost of goods sold:
Direct materials $122,500Direct labor 73,500Overhead 49,000 245,000
Gross profit $105,350Selling and administrative expenses 25,000Operating income $ 80,350
Pricing PoliciesPricing Policies 2
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The firm wants to earn the same amount of profit on each job as was earned last year:
Markup on COGS = (Selling and administrative expenses + Operating income)/COGS
Markup on COGS = ($25,000 + $80,350)/$245,000
Markup on COGS = 0.43
Cost-Plus Pricing (continued)
Pricing PoliciesPricing Policies 2
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The markup can be calculated using a variety of bases. The calculation for markup on direct materials is as follows:
Markup on DM = (Direct labor + Overhead + Selling and administrative expense + Operating income)/Direct materials
Markup on DM = ($73,500 + $49,000 + $25,000 + $80,350)/$122,500
Markup on DM = 1.86
Cost-Plus Pricing (continued)
Pricing PoliciesPricing Policies 2
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AudioPro wants to expand the company’s product line to include automobile alarm systems and electronic car door openers. The cost for the sale and installation of one electronic remote car door opener is as follows:
Direct materials (component and two remote controls) $ 40.00
Direct labor (2.5 hours x $12) 30.00
Overhead (65% of direct labor cost) 19.50
Estimated cost of one job $ 89.50
Plus 43% markup on COGS 38.49
Bid price $127.99
Cost-Plus Pricing (continued)
Pricing PoliciesPricing Policies 2
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Target Costing and Pricing
Target costing is a method of determining the cost of a
product or service based on the price that the customers
are willing to pay.
Target costing is a method of determining the cost of a
product or service based on the price that the customers
are willing to pay.
Target costing involves much more upfront work than cost-
based pricing. However, if the cost-plus pricing turns out to be higher than what customers will accept, additional work or lost
opportunity will result.
Target costing involves much more upfront work than cost-
based pricing. However, if the cost-plus pricing turns out to be higher than what customers will accept, additional work or lost
opportunity will result.
Pricing PoliciesPricing Policies 2
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Predatory pricing is the practice of setting prices below cost for the purpose of injuring competitors
and eliminating competition.
CompetitionCompetition
Predatory pricing on the international
market is called dumping.
The Legal System and PricingThe Legal System and Pricing 3
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Price discrimination refers to the charging of different prices to different customers for essentially the same
product.
The Legal System and PricingThe Legal System and Pricing 3
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Cobalt, Inc. manufactures vitamin supplements that costs an average of $163 per case. Cobalt sold 250,000 cases last year as follows:
Customer Prices per Case Cases Sold
Large drug store chain $200125,000
Small local pharmacies 232100,000
Individual health clubs 25025,000Cobalt is practicing price discrimination!Cobalt is practicing price discrimination!
The Legal System and PricingThe Legal System and Pricing 3
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The Legal System and PricingThe Legal System and Pricing 3
Analysis of Cobalt, Inc., Customer Class CostsAnalysis of Cobalt, Inc., Customer Class CostsAnalysis of Cobalt, Inc., Customer Class CostsAnalysis of Cobalt, Inc., Customer Class Costs
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Lasersave, Inc., a company that recycles used toner cartridges for laser printers. During August the firm manufactured 1,000 cartridges at the following costs:
Direct materials $ 5,000Direct labor 15,000Variable overhead 3,000Fixed overhead 20,000 Total manufacturing cost $43,000
During August, these cartridges were sold at $60 each. Variable marketing cost was $1.25 per unit. Fixed expenses were $12,000.
Absorption-Costing
Measuring ProfitMeasuring Profit 4
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Absorption-Costing Income Statement for Absorption-Costing Income Statement for Lasersave, Inc., for AugustLasersave, Inc., for August
Absorption-Costing Income Statement for Absorption-Costing Income Statement for Lasersave, Inc., for AugustLasersave, Inc., for August
Measuring ProfitMeasuring Profit 4
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Absorption-Costing Income Statement for Absorption-Costing Income Statement for Lasersave, Inc., for SeptemberLasersave, Inc., for September
Absorption-Costing Income Statement for Absorption-Costing Income Statement for Lasersave, Inc., for SeptemberLasersave, Inc., for September
Measuring ProfitMeasuring Profit 4
*Direct materials ($5 x 1,250) $ 6,250
Direct labor ($15 x 1,250) 18,750
Variable overhead ($3 x 1,250) 3,750
Fixed overhead 20,000
Total manufacturing overhead $48,750
Add: Beginning inventory 0
Less: Ending inventory (9,750)
Cost of goods sold $39,000
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Variable-Costing Income Statements Variable-Costing Income Statements for Lasersave, Inc.for Lasersave, Inc.
Variable-Costing Income Statements Variable-Costing Income Statements for Lasersave, Inc.for Lasersave, Inc.
Measuring ProfitMeasuring Profit 4
*Direct materials $ 5,000
Direct labor 15,000
Variable overhead 3,000
Total variable manufacturing expenses $23,000
Add: Variable marketing expenses 1,250
Total variable expenses $24,250
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Comparative Income Statements for Lasersave, Inc. Comparative Income Statements for Lasersave, Inc. for the Month of October for the Month of October
Comparative Income Statements for Lasersave, Inc. Comparative Income Statements for Lasersave, Inc. for the Month of October for the Month of October
Measuring ProfitMeasuring Profit 4
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Changes in Inventory under Absorption Changes in Inventory under Absorption and Variable Costing and Variable Costing
Changes in Inventory under Absorption Changes in Inventory under Absorption and Variable Costing and Variable Costing
Measuring ProfitMeasuring Profit 4
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Alden Company manufactures two products: basic fax machines and multi-function fax machines. The multi-function fax uses more
advanced technology; therefore, it is more expensive to manufacture.
Basic Multi-Function
Number of units 20,000 10,000Direct labor hours 40,000 15,000Price $200 $350Prime cost per unit $55 $95Overhead per unit $30 $22.50
5Profitability of SegmentsProfitability of Segments
Profit by Product Line
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5Profitability of SegmentsProfitability of Segments
Absorption-Costing Income by Product LineAbsorption-Costing Income by Product LineAbsorption-Costing Income by Product LineAbsorption-Costing Income by Product Line
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5Profitability of SegmentsProfitability of Segments
Variable-Costing Income by Product LineVariable-Costing Income by Product LineVariable-Costing Income by Product LineVariable-Costing Income by Product Line
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5Profitability of SegmentsProfitability of Segments
Overhead Activities and DriversOverhead Activities and DriversOverhead Activities and DriversOverhead Activities and Drivers
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5Profitability of SegmentsProfitability of Segments
Activity-Based Costing Income by Product LineActivity-Based Costing Income by Product LineActivity-Based Costing Income by Product LineActivity-Based Costing Income by Product Line
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Divisional Profit
Alpha Beta Gamma Delta Total
Sales $ 90 $ 60 $ 30 $120 $300Cost of goods sold 35 20 11 98 164Gross profit $ 55 $ 40 $ 19 $ 22 $136Division expenses -20 -10 -15 -20 -65Corporate expenses -3 -2 -1 -4 -10 Operating income (loss) $ 32 $ 28 $ 3 $ -2 $ 61
5Profitability of SegmentsProfitability of Segments
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Sales price variance =
Actual price –
Expected price x
Quantity sold
Price volume variance =
Actual volume
– Expected volume
xExpected
price
6Analysis of Profit-Related VariancesAnalysis of Profit-Related Variances
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Contribution margin
variance=
Annual contribution
margin–
Budgeted contribution
margin
Contribution margin volume
variance=
Annual quantity
sold–
Budgeted quantity
soldx
Budgeted average unit contribution
margin
6Analysis of Profit-Related VariancesAnalysis of Profit-Related Variances
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Data for Birdwell, Inc.Data for Birdwell, Inc.Data for Birdwell, Inc.Data for Birdwell, Inc.
6Analysis of Profit-Related VariancesAnalysis of Profit-Related Variances
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Sales mix variance = [(Product 1 actual units – Product 1 budgeted units) x (Product 1 budgeted unit contribution margin – Budgeted average unit contribution margin)] + [(Product 2 actual units – Product 2 budgeted units) x (Product 2 budgeted unit contribution margin – Budgeted average unit contribution margin)]
Birdwell sales mix variance = [($1,250 – 1,500) x ($4.00 – $6.75)] + [(625 –500) x ($15.00 – $6.75)] = $1,718.75 Favorable
6Analysis of Profit-Related VariancesAnalysis of Profit-Related Variances
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Market share variance = [(Actual market share percentage – Budgeted market share percentage) x (Actual industry sales in units)] x (Budgeted average unit contribution margin)
Market size variance = [(Actual industry sales in units – Budgeted industry sales in units) x (Budgeted market share percentage)] x (Budgeted average unit contribution margin)
6Analysis of Profit-Related VariancesAnalysis of Profit-Related Variances
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7The Product Life CycleThe Product Life Cycle
Product Life CycleProduct Life CycleProduct Life CycleProduct Life Cycle
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7The Product Life CycleThe Product Life Cycle
Impact of the Product Life Cycle on Cost ManagementImpact of the Product Life Cycle on Cost ManagementImpact of the Product Life Cycle on Cost ManagementImpact of the Product Life Cycle on Cost Management
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7The Product Life CycleThe Product Life Cycle
Product Life Cycle Costs in the ABC CategoriesProduct Life Cycle Costs in the ABC CategoriesProduct Life Cycle Costs in the ABC CategoriesProduct Life Cycle Costs in the ABC Categories
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8Limitations of Profit MeasurementLimitations of Profit Measurement
Limitations of profit include
focus on past performance
uncertain economic conditions
difficulty of capturing all important factors in financial measures
Successful firms measure far more than accounting profit.
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End of End of Chapter 19Chapter 19