Kế toán, kiểm toán - Chapter 4: Cost - Volume - profit analysis

Prepared by Debby Bloom-Hill CMA, CFMCost-Volume-Profit AnalysisSlide 4-2CHAPTER 4Management QuestionsPlanningWhat level of profit should be in the budget for the coming year?ControlDid the manager responsible for production costs do a good job of controlling costs?Decision makingShould the price be increased?Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Slide 4-3Variable CostsCosts which change directly in proportion to changes in quantity or activityFixed CostsCosts which do not change when quantity or activity volume changesCommon Cost Behavior PatternsSlide 4-4Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Mixed CostsCosts that have both variable and fixed elementsStep CostsFixed for a range of output, but increase when upper bound of range is exceededCommon Cost Behavior PatternsSlide 4-5Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Variable CostsCosts that change in proportion to changes in volume or activityAn automobile manufacturer will need 400 tires to make 100 cars, but 4,000 tires to make 1,000 carsA bakery will need 2 eggs to make 1 cake and 20 eggs to make 10 cakesIf activity increases by a certain percentage, cost increases by that same percentageSlide 4-6Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.A company has decided that direct labor costs are 100% variable. Last month total direct labor costs were $125,000 and total direct labor hours worked were 10,000.What is the direct labor cost per hour? $125,000 / 10,000 hours = $12.50 per hourPredict labor costs in a month when 12,000 labor hours are worked $12.50 per hour × 12,000 hours = $150,000Slide 4-7Test Your Knowledge 1Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Variable CostsTotal Variable Cost = $91 × Units producedSlide 4-8Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Fixed CostsDo not change in response to changes in activity levelTypical fixed costs are depreciation, supervisory salaries, and building maintenanceRent for a bakery will not double if output increases from 100 to 200 cakesIf activity increases by a certain percentage, costs remain unchangedSlide 4-9Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Fixed CostsTotal fixed cost = $94,000Slide 4-10Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Fixed CostsDiscretionary fixed costsManagement can easily change, e.g. advertising, research & developmentMany companies cut back on these costs when sales drop. This can be shortsighted.A cut in research & development can have a negative effect on long run profitabilityA cut in repair and maintenance can have a negative effect on the life of valuable assetsCommitted fixed costsCannot be easily changed, e.g. rent, insuranceSlide 4-11Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Mixed CostsContain both variable and fixed cost elementsCan separate mixed costs into variable and fixed componentsSalesperson with base salary (fixed) and commission on sales (variable)Base salary included with fixed costsCommission included with variable costsSlide 4-12Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Mixed CostsTotal cost = ($91 × Units produced) + $94,000Slide 4-13Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Step CostsFixed cost for a specific range of volumeIncreases to higher level when upper bound of range is exceededAt that point, costs again remain fixed until another upper bound is exceededStep costs are often classified as either:Step variable costs, if the range of activity where the cost is fixed is small, orStep fixed costs, if the range of activity where the cost is fixed is largeSlide 4-14Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Step Variable CostSlide 4-15Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Step Fixed CostSlide 4-16Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Relevant RangeSlide 4-17The relevant range is the range of activity for which assumptions as to how costs behave are reasonably validIf it is known that production is going to be within the relevant range, we can use assumptions about the fixed and variable costsMaking assumptions about fixed and variable costs at production levels well above or below this range would not be validLearning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.The Relevant RangeTotal step costs = $7,000 for relevant range 0 – 3,000 units produced $14,000 for relevant range 3,001 – 6,000 units $21,000 for relevant range 6,001 – 9,000 unitsSlide 4-18Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Cost Estimation MethodsAccount AnalysisClassify costs into variable and fixed pools ScattergraphsCan see cost relationships visuallyHigh-Low MethodLinear estimation connects high and low volume observationsRegression AnalysisLinear estimation is best fit to observed valuesSlide 4-19Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Account AnalysisMost common approachRequires professional judgment of managementManagement classifies costs as fixed, variable, or mixedTotal variable costs divided by activity equals variable cost per unitVariable cost per unit and total fixed costs can be used in cost equationSlide 4-20Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Account AnalysisSlide 4-21Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.ScattergraphsUtilization of cost information from several previous periodsWeekly, monthly, or quarterly cost reports are usefulPlot the actual costs at the observed activity levelsLook for relationship between cost and activity, linear is idealUse relationship to predict future costsSlide 4-22Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.ScattergraphsIs there a relationship between units produced and production costs? Describe the relationship.Slide 4-23Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.High-Low MethodUtilization of cost information from previous periodsFits a straight line from lowest activity level to highest activity levelSlope of the line is the estimate of the unit variable costThe slope measures the change in cost per unit in relation to the change in activity levelTotal cost at lowest or highest activity level minus variable cost at that level equals fixed costSlide 4-24Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.High-Low MethodSlide 4-25Total cost at high activity levelTotal cost at low activity levelLearning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.High-Low MethodSlide 4-26Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Estimate Variable CostSlide 4-27Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Estimate Fixed CostSlide 4-28Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.During the past year, Island Air flew 15,000 miles in August (its busiest month) and had total costs of $300,000. In November (its least busy month) the company flew 5,000 miles and had $200,000 of costs. Using the high-low method, estimate variable cost per mile and fixed cost per month.$20 of variable cost and $100,000 fixed$15 of variable cost and $250,000 fixed$10 of variable cost and $150,000 fixed$5 of variable cost and $250,000 fixedAnswer: cSlide 4-29Test Your Knowledge 2Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method. Slide 4-30Test Your Knowledge 2Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Regression AnalysisStatistical techniqueEstimates the slope and intercept of a cost equationFinds the best straight line fit to the observationsTypically statistical software packages are utilizedSpreadsheet applications like Excel® typically include statistical operationsSee appendix fox Excel® exampleSlide 4-31Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.The Relevant Range and Cost EstimationEstimates of fixed and variable costs are valid for only a limited range of activityKnown as the relevant rangeOutside the relevant range, estimates of fixed and variable costs may not be usefulActual costs may behave in a manner that is different from the common cost behavior patternsSlide 4-32Learning objective 1: Identify common cost behavior patterns, and estimate the relation between cost and activity using account analysis and the high-low method.Cost-Volume-Profit AnalysisThe Profit EquationProfit = SP(x) – VC(x) – TFCWhere: x = Quantity of units produced and sold SP = Selling price per unit VC = Variable cost per unitTFC = Total fixed costFundamental to CVP analysisLearning objective 2: Perform cost-volume profit analysis for single and multiple products.Slide 4-33Cost-Volume-Profit AnalysisBreak-Even PointNumber of units sold that allow the company to neither earn a profit nor incur a loss$0 = SP(x) – VC(x) – TFCCodeConnect has the following cost structureSelling price $200.00 per unitVariable cost $81.50 per unitMonthly fixed production cost $102,000Monthly fixed selling and administrative $63,900Find CodeConnect’s break-even pointSlide 4-34Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Cost-Volume-Profit AnalysisBreak-Even Point$0 = SP(x) – VC(x) – TFC$0 = $200.00 (x) – $81.50(x) – $165,900$118.50(x) = $165,900x = 1,400 units Always round up if the breakeven point is not a whole numberSlide 4-35Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Break-Even PointSlide 4-36Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Gabby’s Wedding Cakes creates elaborate wedding cakes. Each cake sells for $500. The variable cost of baking the cakes is $200 and the fixed cost per month is $6,000. What is the break-even point in number of units?2002012100Answer: bTest Your Knowledge 3Slide 4-37Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Gabby’s Wedding Cakes creates elaborate wedding cakes. Each cake sells for $500. The variable cost of baking the cakes is $200 and the fixed cost per month is $6,000. What is the break-even point in number of units?0 = SP(x) – VC(x) – TFC0 = (SP – VC)(x) – TFC0 = ($500 – $200)(x) – $6,0000 = $300(x) – $6,000$300(x) = $6,000x = $6,000 / $300 = 20 cakes to break evenTest Your Knowledge 3Slide 4-38Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Margin of SafetyThe margin of safety is the difference between the expected level of sales and break-even salesIf breakeven sales for Model DX375 is $280,000 and expected sales are $350,000, calculate the margin of safetyThe margin of safety is: $350,000 - $280,000= $70,000Slide 4-39Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Margin of Safety RatioThe margin of safety can also be expressed as a ratioCalled the margin of safety ratioEqual to the margin of safety divided by expected salesShows what percentage sales would have to drop before the product shows a lossSlide 4-40Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Contribution MarginDifference between revenue and variable costsContribution margin = total revenue minus total variable costsContribution margin per unit = selling price minus variable cost per unitFor CodeConnect’s Model DX375, the contribution margin is the $200.00 selling price less the variable cost of $81.50$200.00 – $81.50 = $118.50Slide 4-41Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Contribution MarginThe profit equation in terms of the contribution marginProfit = SP(x) – VC(x) – TFCProfit = (SP – VC)(x) – TFCProfit = Contribution margin per unit(x) - TFCSlide 4-42Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Contribution MarginThe contribution margin per unit measures the amount of incremental profit generated by selling an additional unitFor CodeConnect, how much incremental profit would be generated by selling 100 more units?Incremental profit = number of units sold * contribution margin per unitIncremental profit = 100 * $118.50 = $11,850Slide 4-43Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Units Needed for Target ProfitSolve the profit equation for the sales quantity in unitsUnit sales (x) needed to attain a specified profit =Slide 4-44Learning objective 2: Perform cost-volume profit analysis for single and multiple products. Test Your Knowledge 4Slide 4-45Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Contribution Margin RatioThe unit contribution margin ratio measures the amount of incremental profit generated by an additional dollar of salesTwo methods to calculate the contribution margin ratioContribution margin divided by sales revenue (Sales – TVC) / SalesUnit contribution margin divided by selling price (SP – VC) / SPSlide 4-46Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Contribution Margin Ratio Slide 4-47Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Dollar Sales Needed to Achieve Profit TargetCalculate the amount of sales dollars needed to earn a monthly profit of $35,550Slide 4-48Learning objective 2: Perform cost-volume profit analysis for single and multiple products.“What If” Analysis“What if” analysis examines what will happen if an action is takenThe profit equation can show how profit will be affected by various options under considerationCodeConnect is selling 3,000 units at $200, with variable cost of $81.50 and fixed cost of $165,900Management is considering a change to $80.00 variable cost and fixed cost of $215,900Slide 4-49Learning objective 2: Perform cost-volume profit analysis for single and multiple products.“What If” AnalysisChange in fixed and variable costsWithout the change, the profit is$200(3,000) - $81.50(3,000) - $165,900 = $189,600If the price and quantity stay the same, the profit assuming the alternative is selected would be$200(3,000) - $80(3,000) - $215,900 = $144,100The alternative would hurt profitabilitySlide 4-50Learning objective 2: Perform cost-volume profit analysis for single and multiple products.“What If” AnalysisChange in selling priceAny one of the variables in the profit equation can be consideredFor example, if CodeConnect sells 3,000 units, what selling price is required to earn a profit of $200,000?$200,000 = SP(3,000) - $81.50(3,000) - $165,900SP(3,000) = $610,400SP = $203.47Slide 4-51Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Matthews Consulting expects to work 5,000 hours next month. It has variable costs of $100 per hour and fixed costs of $600,000. What price must the company charge to earn a monthly profit of $900,000?$500$350$400$200Answer: cTest Your Knowledge 5Slide 4-52Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Matthews Consulting expects to work 5,000 hours next month. It has variable costs of $100 per hour and fixed costs of $600,000. What price must the company charge to earn a monthly profit of $900,000?$900,000 = SP(5,000) - $100(5,000) - $600,000$900,000 = SP(5,000) - $1,100,000SP(5,000) = $2,000,000SP = $2,000,000 / 5,000 = $400Test Your Knowledge 5Slide 4-53Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Multiproduct AnalysisContribution margin approachUsed if the items sold are similarCalculate a weighted average contribution margin per unitUse the weighted average contribution margin in the profit formula to calculate breakeven point and target salesThe relative product mix is then used to calculate the required sales of individual itemsSlide 4-54Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Multiproduct AnalysisSlide 4-55The sales mix is 2:1 Model A, Model BThe company has fixed costs of $3,500,000Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Multiproduct AnalysisThe 2,500 units is made up of the 2:1 mix, so Rohr must sell 1,667 Model A (2/3 of 2,500) and 833 Model B units (1/3 0f 2,500)Slide 4-56Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Multiproduct AnalysisContribution Margin Ratio ApproachProducts are substantially differentCalculate total company contribution margin ratioUse total company contribution margin ratio to compute required sales in dollarsTotal company fixed costs (common costs) are not included for contribution margin approach but used for contribution margin ratio approachSlide 4-57Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Multiproduct AnalysisA company with 4 divisions has the following information available:Total sales $6,450,000Total variable costs $4,706,000Total direct fixed costs $484,000Total common fixed costs $1,120,000 Calculate total contribution margin ratio ($6,450,000 – $4,706,000) / $6,450,000 = .2704Calculate total company break-even sales in dollars ($484,000 + $1,120,000) / .2704 = $5,931,953Slide 4-58Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Multiproduct AnalysisCan calculate the contribution margin ratio for each product lineCan also easily calculate the break-even point for the various product linesBreak-even sales for garden tools is $95,000 / .1874 = $506,937When total company sales increase, each product line’s sales will increase proportionatelyCan use the contribution margin ratio to calculate the increase in profit for each product lineSlide 4-59Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Multiproduct AnalysisSlide 4-60Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Assumptions in CVP AnalysisAssumptions can affect the validity of the analysisCosts can be separated into fixed and variable componentsTotal fixed cost and unit variable cost do not change over the levels of interestMultiproduct analysis assumes the product mix does not changeDespite assumptions, CVP is useful Slide 4-61Learning objective 2: Perform cost-volume profit analysis for single and multiple products.Operating LeverageLevel of fixed versus variable costs in a company A company with a high level of fixed costs has a high operating leverage Companies with high operating leverage have large fluctuations in profit when sales increase or decreaseThese companies are seen as more riskyHigh operating leverage is better when sales are expected to increaseLearning objective 3: Discuss the effect of operating leverage, and use the contribution margin per unit of the constraint to analyze situations involving a resource constraint.Slide 4-62ConstraintsDue to shortages of space, equipment or labor there can be constraints on how many items can be producedUtilize contribution margin per unit to analyze situationsCalculate contribution margin per unit of constraintProduce product with highest contribution margin per unit of constraintLinear programming can solve multiple constraintsSlide 4-63Learning objective 3: Discuss the effect of operating leverage, and use the contribution margin per unit of the constraint to analyze situations involving a resource constraint.ConstraintsA company can produce Product A or Product B using the same machinery. Only 1,000 machine hours are available.Slide 4-64Learning objective 3: Discuss the effect of operating leverage, and use the contribution margin per unit of the constraint to analyze situations involving a resource constraint.ConstraintsWith the 1,000 available machine hours, Product A generates $20,000 of contribution marginProduct B generates $50,000 of contribution marginAlthough Product A has the higher contribution margin per unit, Product B has the higher contribution margin per unit of constraintSlide 4-65Learning objective 3: Discuss the effect of operating leverage, and use the contribution margin per unit of the constraint to analyze situations involving a resource constraint.CHAPTER 4Cost-Volume-Profit Analysis AppendixSlide 4-66Regression AnalysisSlide 4-67Regression AnalysisSlide 4-68Regression AnalysisSlide 4-69Copyright© 2016 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Slide 4-70