cost management accounting and control
DESCRIPTION
Cost Management ACCOUNTING AND CONTROL. HANSEN & MOWEN. 17. CHAPTER. Cost-Volume-Profit Analysis. 1. The Break-Even Point in Units. OBJECTIVE. Sales (72,500 units @ $40)$2,900,000 Less: Variable expenses 1,740,000 Contribution margin$1,160,000 - PowerPoint PPT PresentationTRANSCRIPT
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HANSEN & MOWENHANSEN & MOWEN
Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL
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Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
17
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Sales (72,500 units @ $40)
$2,900,000
Less: Variable expenses
1,740,000
Contribution margin
$1,160,000
Less: Fixed expenses
800,000
Operating income
$ 360,000
The Break-Even Point in UnitsThe Break-Even Point in Units 1
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0 = ($40 x Units) – ($24 x Units) – $800,000
Operating Income Approach
0 = ($16 x Units) – $800,000
($16 x Units) = $800,000
Units = 50,000
$1,740,000 ÷ 72,500
The Break-Even Point in UnitsThe Break-Even Point in Units 1
ProofSales (50,000 units @ $40) $2,000,000Less: Variable expenses 1,200,000Contribution margin $ 800,000Less: Fixed expenses 800,000 Operating income $ 0
ProofSales (50,000 units @ $40) $2,000,000Less: Variable expenses 1,200,000Contribution margin $ 800,000Less: Fixed expenses 800,000 Operating income $ 0
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Number of units
Contribution Margin Approach
= $800,000 / $16 per unit
= 50,000 units
The Break-Even Point in UnitsThe Break-Even Point in Units 1
= $800,000 / ($40 - $24)
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$424,000
$1,224,000
Units
The Break-Even Point in UnitsThe Break-Even Point in Units 1
Target Income as a Dollar Amount
= ($40 x Units) – ($24 x Units) – $800,000
= $16 x Units
= 76,500
ProofSales (76,500 units @ $40) $3,060,000Less: Variable expenses 1,836,000Contribution margin $1,224,000Less: Fixed expenses 800,000 Operating income $ 424,000
ProofSales (76,500 units @ $40) $3,060,000Less: Variable expenses 1,836,000Contribution margin $1,224,000Less: Fixed expenses 800,000 Operating income $ 424,000
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0.15($40)(Units) = ($40 x Units) – ($24 x Units) – $800,000
$6 x Units = ($40 x Units) – ($24 x Units) – $800,000
$6 x Units = ($16 x Units) – $800,000
$10 x Units = $800,000
Units = 80,000
More-Power Company wants to know the number of sanders that must be sold in order to earn a profit equal to 15 percent of sales revenue.
The Break-Even Point in UnitsThe Break-Even Point in Units 1
Target Income as a Percentage of Sales Revenue
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Net income
= Operating income – (Tax rate x Operating income)
= Operating income (1 – Tax rate)
Or
Operating income =Net income
(1 – Tax rate)
After-Tax Profit Targets
The Break-Even Point in UnitsThe Break-Even Point in Units 1
= Operating income – Income taxes
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$487,500 = Operating income – 0.35(Operating income)
$487,500 = 0.65(Operating income)
$750,000 = Operating income
More-Power Company wants to achieve net income of $487,500 and its income tax rate is 35 percent.
Units = ($800,000 + $750,000)/$16Units = $1,550,000/$16Units = 96,875
After-Tax Profit Targets
The Break-Even Point in UnitsThe Break-Even Point in Units 1
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Break-Even Point in Sales DollarsBreak-Even Point in Sales Dollars 2
Revenue Equal to Variable Cost Revenue Equal to Variable Cost Plus Contribution Margin Plus Contribution Margin
Revenue Equal to Variable Cost Revenue Equal to Variable Cost Plus Contribution Margin Plus Contribution Margin
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Sales $2,900,000 Less: Variable expenses 1,740,000 Contribution margin $1,160,000 Less: Fixed expenses 800,000Operating income $ 360,000
Sales $2,900,000 Less: Variable expenses 1,740,000 Contribution margin $1,160,000 Less: Fixed expenses 800,000Operating income $ 360,000
The following More-Power Company contribution margin income statement is
shown for sales of 72,500 sanders.
The following More-Power Company contribution margin income statement is
shown for sales of 72,500 sanders.
Sales $2,900,000 100%Less: Variable expenses 1,740,000 60%Contribution margin $1,160,000 40%Less: Fixed expenses 800,000Operating income $ 360,000
Sales $2,900,000 100%Less: Variable expenses 1,740,000 60%Contribution margin $1,160,000 40%Less: Fixed expenses 800,000Operating income $ 360,000
To determine the break-even in sales dollars, the contribution margin ratio must be determined ($1,160,000 ÷ $2,900,000).
To determine the break-even in sales dollars, the contribution margin ratio must be determined ($1,160,000 ÷ $2,900,000).
Break-Even Point in Sales DollarsBreak-Even Point in Sales Dollars 2
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Operating income = Sales – Variable costs – Fixed Costs
0 = Sales – (Variable cost ratio x Sales) – Fixed costs
0 = Sales (1 – Variable cost ratio) – Fixed costs
0 = Sales (1 – .60) – $800,000
Sales(0.40) = $800,000
Sales = $2,000,000
Break-Even Point in Sales DollarsBreak-Even Point in Sales Dollars 2
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Break-Even Point in Sales DollarsBreak-Even Point in Sales Dollars 2
Impact of Fixed Costs on ProfitImpact of Fixed Costs on ProfitImpact of Fixed Costs on ProfitImpact of Fixed Costs on Profit
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Break-Even Point in Sales DollarsBreak-Even Point in Sales Dollars 2
Impact of Fixed Costs on ProfitImpact of Fixed Costs on ProfitImpact of Fixed Costs on ProfitImpact of Fixed Costs on Profit
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Break-Even Point in Sales DollarsBreak-Even Point in Sales Dollars 2
Impact of Fixed Costs on ProfitImpact of Fixed Costs on ProfitImpact of Fixed Costs on ProfitImpact of Fixed Costs on Profit
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How much sales revenue must More-Power generate to earn a before-tax profit of $424,000?
Sales = ($800,000) + $424,000/0.40
= $1,224,000/0.40
= $3,060,000
Break-Even Point in Sales DollarsBreak-Even Point in Sales Dollars 2
Profit Targets
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Regular Mini- Sander Sander Total
Sales $3,000,000 $1,800,000 $4,800,000Less: Variable expenses 1,800,000 900,000 2,700,000
Contribution margin $1,200,000 $ 900,000 $2,100,000Less: Direct fixed expenses 250,000 450,000 700,000
Product margin $ 950,000 $ 450,000 $1,400,000Less: Common fixed exp. 600,000
Operating income $ 800,000
Multiple-Product AnalysisMultiple-Product Analysis 3
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Regular sander break-even units= Fixed costs/(Price – Unit variable cost)= $250,000/$16= 15,625 units
Mini-sander break-even units= Fixed costs/(Price – Unit variable cost)= $450,000/$30= 15,000 units
Multiple-Product AnalysisMultiple-Product Analysis 3
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Income Statement: Break-Even SolutionIncome Statement: Break-Even SolutionIncome Statement: Break-Even SolutionIncome Statement: Break-Even Solution
Multiple-Product AnalysisMultiple-Product Analysis 3
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Profit or Loss
Loss
(40, $100)I = $5X - $100
Break-Even Point(20, $0)
$100—
80—
60—
40—
20—
0—
- 20—
- 40—
-60—
-80—
-100—
5 10 15 20 25 30 35 40 45 50 | | | | | | | | | |
Units Sold
(0, -$100)
4Graphical Representation of Graphical Representation of CVP Relationships CVP Relationships
Profit-Profit-Volume Volume GraphGraph
Profit-Profit-Volume Volume GraphGraph
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Revenue
Units Sold
$500 --
450 --
400 --
350 --
300 --
250 --
200 --
150 --
100 --
50 --
0 -- 5 10 15 20 25 30 35 40 45 50 55 60 | | | | | | | | | | | |
Total Revenue
Total Cost
Profit ($100)100)
LossLoss
Break-Even Point (20, $200)
Fixed Expenses ($100)
Variable Expenses ($200, or $5 per unit)
4Graphical Representation of Graphical Representation of CVP Relationships CVP Relationships
Cost-Volume-Profit GraphCost-Volume-Profit GraphCost-Volume-Profit GraphCost-Volume-Profit Graph
Profit Region
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Assumptions of C-V-P Analysis1. The analysis assumes a linear revenue function and a linear
cost function.
2. The analysis assumes that price, total fixed costs, and unit variable costs can be accurately identified and remain constant over the relevant range.
3. The analysis assumes that what is produced is sold.
4. For multiple-product analysis, the sales mix is assumed to be known.
5. The selling price and costs are assumed to be known with certainty.
4Graphical Representation of Graphical Representation of CVP Relationships CVP Relationships
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$
Units
Total Cost
Total Revenue
Relevant Range
4Graphical Representation of Graphical Representation of CVP Relationships CVP Relationships
Cost and Revenue RelationshipsCost and Revenue RelationshipsCost and Revenue RelationshipsCost and Revenue Relationships
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5Changes in the CVP VariablesChanges in the CVP Variables
Alternative 1: If advertising expenditures increase by $48,000, sales will increase from 72,500 units to 75,000 units.
Summary of the Effects of the First AlternativeSummary of the Effects of the First AlternativeSummary of the Effects of the First AlternativeSummary of the Effects of the First Alternative
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Alternative 2: A price decrease from $40 per sander to $38 would increase sales from 72,500 units to 80,000 units.
Summary of the Effects of the Second Summary of the Effects of the Second AlternativeAlternative
Summary of the Effects of the Second Summary of the Effects of the Second AlternativeAlternative
5Changes in the CVP VariablesChanges in the CVP Variables
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Alternative 3: Decreasing price to $38 and increasing advertising expenditures by $48,000 will increase sales from 72,500 units to 90,000 units.
Summary of the Effects of the Third AlternativeSummary of the Effects of the Third AlternativeSummary of the Effects of the Third AlternativeSummary of the Effects of the Third Alternative
5Changes in the CVP VariablesChanges in the CVP Variables
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Margin of Safety
Assume that a company has a break-even volume of 200 units and the company is currently selling 500 units.
Current sales500Break-even volume200Margin of safety (in units)300Break-even point in dollars:
Current revenue$350,000
Break-even volume 200,000
Margin of safety (in dollars)$150,000
5Changes in the CVP VariablesChanges in the CVP Variables
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Operating Leverage
Automated ManualSystem System
Sales (10,000 units) $1,000,000 $1,000,000Less: Variable expenses 500,000 800,000
Contribution margin $ 500,000 $ 200,000Less: Fixed expenses 375,000 100,000
Operating income $ 125,000 $ 100,000
Unit selling price $100$100
Unit variable cost 5080
Unit contribution margin 5020
$500,000 ÷ $125,000 = DOL of 4
$500,000 ÷ $125,000 = DOL of 4
$200,000 ÷ $200,000 = DOL of 2
$200,000 ÷ $200,000 = DOL of 2
5Changes in the CVP VariablesChanges in the CVP Variables
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What happens to profit in each system if sales
increase by 40 percent?
What happens to profit in each system if sales
increase by 40 percent?
5Changes in the CVP VariablesChanges in the CVP Variables
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Automated ManualSystem System
Sales (14,000 units) $1,400,000$1,400,000
Less: Variable expenses 700,000 1,120,000Contribution margin $ 700,000$ 280,000
Less: Fixed expenses 375,000 100,000Operating income $ 325,000$ 180,000
Automated system—40% x 4 = 160% $125,000 x 160% = $200,000 increase
$125,000 + $200,000 = $325,000
Manual system—40% x 2 = 80% $100,000 x 80% = $80,000
$100,000 + $80,000 = $180,000
5Changes in the CVP VariablesChanges in the CVP Variables
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Total cost = Fixed costs + (Unit variable cost x Number of units) + (Setup cost x Number of setups) + (Engineering cost x Number of engineering hours)
The ABC Cost Equation
Operating income = Total revenue – [Fixed costs + (Unit variable cost x Number of units) + (Setup cost x Number of setups) + (Engineering cost x Number of engineering hours)]
Operating Income
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
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Break-even units = [Fixed costs + (Setup cost x Number of setups) + (Engineering cost x Number of engineering hours)]/(Price – Unit variable cost)
Break-Even in Units
Differences Between ABC Break-Even and Convention Break-Even
The fixed costs differ
The numerator of the ABC break-even equation has two nonunit-variable cost terms
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
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Data about Variables
Cost Driver Unit Variable Cost Level of Cost Driver
Units sold $ 10 --
Setups 1,000 20
Engineering hours 30 1,000
Other data:
Total fixed costs (conventional) $100,000
Total fixed costs (ABC) 50,000
Unit selling price 20
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
Example Comparing Convention and ABC Analysis
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Units to be sold to earn a before-tax profit of $20,000:
Units = (Targeted income + Fixed costs)/(Price – Unit variable cost)
= ($20,000 + $100,000)/($20 – $10)
= $120,000/$10
= 12,000 units
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
Example Comparing Convention and ABC Analysis
Same data using the ABC:
Units = ($20,000 + $50,000 + $20,000 + $30,000/($20 – $10)
= $120,000/$10
= 12,000 units
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Suppose that marketing indicates that only 10,000 units can be sold. A new design reduces direct labor by $2 (thus, the new variable cost is $8). The new break-even is calculated as follows:
Units = Fixed costs/(Price – Unit variable cost)
= $100,000/($20 – $8)
= 8,333 units
Example Comparing Convention and ABC Analysis
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
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The projected income if 10,000 units are sold is computed as follows:
Sales ($20 x 10,000) $200,000
Less: Variable expenses ($8 x 10,000) 80,000
Contribution margin $120,000
Less: Fixed expenses 100,000
Operating income $ 20,000
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
Example Comparing Convention and ABC Analysis
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Suppose that the new design requires a more complex setup, increasing the cost per setup from $1,000 to $1,600. Also, suppose that the new design requires a 40 percent increase in engineering support. The new cost equation is given below:
Total cost = $50,000 + ($8 x Units) + ($1,600 x Setups) + ($30 x Engineering hours)
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
Example Comparing Convention and ABC Analysis
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The break-even point using the ABC equation is calculated as follows:
Units = [$50,000 + ($1,600 x 20) + ($30 x 1,400)]/($20 – $8)
= $124,000/$12
= 10,333
This is more than the firm can sell!
6CVP Analysis and Activity-Based CostingCVP Analysis and Activity-Based Costing
Example Comparing Convention and ABC Analysis
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End of End of Chapter 17Chapter 17