chapters 4 and 5. variablefixed mixed copyright (c) 2009 prentice hall. all rights reserved3
TRANSCRIPT
Chapters 4 and 5
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Total variable costs change in direct proportion to changes in the volume of activity◦ If activity increases, so does the cost
Unit variable cost remains constant
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Units produce
d
Direct materials cost per
unit
Total direct
materials cost
100 $25 $2,500
200 $25 5,000
300 $25 7,500
400 $25 10,000
500 $25 12,500
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Do not change over wide ranges in volume Examples:
◦ Straight-line depreciation◦ Salaries
Fixed cost per unit is inversely proportional to activity◦ The more activity, the less the fixed cost per unit
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Have both a fixed and variable component Example:
◦ Utilities that charge a set fee per month, plus a charge for usage
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$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$0 $10,000 $20,000 $30,000 $40,000
Total Sales
Sal
es C
om
pen
sati
on
9
Variable
Fixed
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The manager of Swift Car Inspection reviewed his monthly operating costs for the past year. His costs ranged from $4,400 for 1,400 inspections to $4,000 for 900 inspections. To determine the variable cost per unit, the change in cost, $400, is divided by the 500-unit change in inspections. The result is a variable cost per inspection of 80 cents.
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Variable cost per unit
Change in total cost
Change in activity
$4,400 - $4,000
1,400 - 900
Variable cost per unit
Variable cost per unit
$0.80 per inspection$0.80 per inspection
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Total fixed costs
Total mixed cost
minus
Total variable cost
$4,000
minus
900 inspections x $0.80
Total fixed costs
$3,280$3,280Total fixed costs
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Number of inspections
$0.80 per inspection
Total mixed cost
$3,280
$0.80 per inspection$0.80 per inspection
1,000 inspections
1,000 inspections
$3,280
$4,080$4,080
Band of volume: ◦ Where total fixed costs remain constant and
variable cost per unit remains constant Outside the relevant range, costs can differ
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Sales level at which operating income is zero◦ Sales above breakeven result in a profit◦ Sales below breakeven result in a loss
Two methods:◦ Income statement approach◦ Contribution margin approach
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Sales – Variable costs – Fixed costs = Operating income
Sales – Variable costs – Fixed costs = Operating income
Selling price per
unit x units sold
Selling price per
unit x units sold
Variable cost per unit x
units sold
Variable cost per unit x
units sold
Fixed costsFixed costs
Operating incomeOperating income
Set to zero
Solve for units sold
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Sales revenue per unit
Variable costs per
unit
Contribution margin per unit
Fixed costsFixed costs
Contribution margin per unit
Contribution margin per unit
Breakeven point in
units
Breakeven point in
units
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Sales revenue
Contribution margin
ratio
Contribution margin
Fixed costs
Contribution margin ratio
Breakeven point in sales
dollars
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Fixed costs + Desired operating income
Contribution margin ratio
Target sales in dollars
Target sales in dollars
$0
$5,000
$10,000
$15,000
$20,000
0 500 1,000 1,500
Volume of Units
Do
llars
23
Breakeven point
Profit
Loss
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Management tool to predict how changes in sale prices, cost or volume affects profits
“What-if?” analysis
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All would impact breakeven point
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Cause Effect Result
Change Contribution margin
Breakeven point
Selling price increases Increase Decrease
Selling price decreases Decrease Increase
Variable cost per unit increases Decrease Increase
Variable cost per unit decreases
Increase Decrease
Fixed costs increase No effect Increase
Fixed costs decrease No effect Decrease
Excess of expected sales over breakeven sales
Cushion company can absorb without incurring a loss
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Expected sales in units
Expected sales in units
Breakeven sales in unitsBreakeven
sales in units
Margin of safety in
units
Margin of safety in
units
Expected sales in dollars
Breakeven sales in dollars
Margin of safety in dollars
Country Road Driving School charges $230 per student to prepare and administer written and behind-the-wheel driving tests. Variable costs of $70 per student include trainers’ wages, study materials, and gasoline. Annual fixed costs of $112,000 include the training facility and fleet of cars.
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Copyright (c) 2009 Prentice Hall. All rights reserved 29
Sales price per unit
Variable costs per
unit
Contribution margin per
unit
Fixed costsFixed costs
Contribution margin per unit
Contribution margin per unit
Breakeven point in
units
Breakeven point in
units
$230 $70 $160
$112,000
$160
700 students
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Decreased Sales price
per unit
Decreased Sales price
per unit
Variable costs per
unit
Variable costs per
unit
Decreased Contribution margin per
unit
Decreased Contribution margin per
unit
Fixed costsFixed costs
Contribution margin per unit
Contribution margin per unit
New Breakeven point in
units
New Breakeven point in
units
$200$200 $70 $130$130
$112,000
$130
862 students
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Sales price per unit
Sales price per unit
Decreased variable costs per
unit
Decreased variable costs per
unit
Increased Contribution margin per
unit
Increased Contribution margin per
unit
Fixed costsFixed costs
Contribution margin per unit
Contribution margin per unit
New Breakeven point in
units
New Breakeven point in
units
$50$50 $180$180
$112,000
$180
623 students
$230
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Sales price per unit
Variable costs per
unit
Contribution margin per
unit
Decreased fixed costsDecreased fixed costs
Contribution margin per unit
Contribution margin per unit
Breakeven point in
units
Breakeven point in
units
$230 $70 $160
$102,000$102,000
$160
638 students
Slide 5-33
Variable CostingVariable CostingVariable CostingVariable Costing
Slide 5-34
Inventory costs include: -direct materials used -direct labor incurred -both fixed & variable manufacturing overhead
Required by GAAP for external reporting purposes
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-35
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-36
Inventory costs includes:-Direct materials used-Direct labor incurred-Variable manufacturing overhead
Fixed manufacturing overhead treated as a period cost
Helpful for internal decision making Not allowed for GAAP reporting
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-37
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-38
Treatment of fixed manufacturing overhead
◦ Under full costing, it is included in inventory and expensed when the product is sold
◦ Under variable costing, it is considered a period cost and expensed in the period incurred.
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-39
Learning objective 2: Prepare an income statement using variable costing.
Slide 5-40
Learning objective 2: Prepare an income statement using variable costing.
Slide 5-41
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Full Cost Unit Cost 13 Variable Unit Cost 9 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000
Sales are 38,500 snow shovels. Calculate net income using variable cost.
Sales 38,500 X 25 962,500 Variable Cost of Sales 38,500 X 9 346,500 Variable Selling & Admin 152,000 + 38,500 X 1 38,500 Fixed Overhead 168,000 Fixed Selling and Admin 152,000 Net Income 257,500
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-42
Units produced = units soldNo difference in net income
Units produced greater than units soldFull costing yields higher net income
Units Produced less than units soldVariable costing yields higher net income
Learning objective 3: Discuss the effect of production on full and variable costing income.