Lecture Fundamentals of cost accounting (4th edition): Chapter 3 - Lanen, Anderson, Maher

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(BQ) Chapter 3: Fundamentals of cost-volume-profit analysis. In order to be a well prepared leader and manager, one must have a systematic method of analyzing the ever changing environment. Chapter 3 focuses on how decision-makers analyze changes in the volume of sales.

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Nội dung Text: Lecture Fundamentals of cost accounting (4th edition): Chapter 3 - Lanen, Anderson, Maher

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamentals of CostVolumeProfit Analysis Chapter 3 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved.
Learning Objectives LO 3-1 Use cost-volume-profit (CVP) analysis to analyze decisions. LO 3-2 Understand the effect of cost structure on decisions. LO 3-3 Use Microsoft Excel to perform CVP analysis. LO 3-4 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis. LO 3-5 Understand the assumptions and limitations of CVP analysis. 33
LO 3-1 CostVolumeProfit Analysis LO 3-1 Use cost-volume-profit (CVP) analysis to analyze decisions. CVP analysis explores the relationship between revenue, cost, and volume and their effect on profits. 34
LO 3-1 Profit Equation The Income Statement Total revenues – Total costs = Operating profit The Income Statement written horizontally Operating profit = Total revenues – Total costs Profit = TR – TC 35
LO 3-1 Profit Equation Total revenue (TR) Average selling price per unit (P) × Units of output produced and sold (X) TR = PX Total cost (TC) [Variable cost per unit (V) × Units of output (X)] + Fixed costs (F) TC = VX + F 36
LO 3-1 Profit Equation Profit = Total revenue – Total costs = TR – TC TC = VX + F Therefore, Profit = PX – (VX + F) Profit = (Price – Variable costs) × Units of output – Fixed costs = X(P – V) – F 37
LO 3-1 Contribution Margin This is the difference between price and variable cost. It is what is leftover to cover fixed costs and then add to operating profit. Contribution margin = Price per unit – Variable cost per unit P–V 38
LO 3-1 CVP Example Contribution margin = $2,880 ÷ 12,000 = $0.24 39
LO 3-1 BreakEven Volume in Units This is the volume level at which profits equal zero. Profit 0 = X(P – V) – F If profit = 0, then X = F ÷ (P – V) Fixed costs Break-even volume (in units) = Unit contribution margin = $1,500 ÷ $0.24 = 6,250 prints 310
LO 3-1 BreakEven Volume in Sales Dollars Contribution margin percentage (contribution margin ratio) is the contribution margin as a percentage of sales revenue. Contribution Margin Percentage $0.24 ÷ $0.60 = 0.40 (or 40%) Break-even in Sales Dollars $1,500 ÷ 0.40 = $3,750 311
LO 3-1 Target Volume Assume that management wants to have a profit of $1,800. How many prints must be sold? What is the target dollar sales? Target Volume in Units ($1,500 + $1,800) ÷ $.24 = 13,750 Target Volume in Sales Dollars ($1,500 + $1,800) ÷ 0.40 = $8,250 312
LO 3-1 CVP Summary: BreakEven Break-even volume Fixed costs (units) = Unit contribution margin Break-even volume Fixed costs = (sales dollars) Contribution margin ratio 313
LO 3-1 CVP Summary: Target Volume Target volume Fixed costs + Target profit (units) = Unit contribution margin Target volume Fixed costs + Target profit = (sales dollars) Contribution margin ratio 314
LO 3-1 Graphic Presentation Total cost TC = $1,500 + $0.36X $3,750 6,250 prints Total revenue TR = $0.60X 315
Use of CVP to Analyze the Effect LO 3-2 of Different Cost Structures LO 3-2 Understand the effect of cost structure on decisions. Cost Structure The proportion of fixed and variable costs to total costs. Operating Leverage The extent to which the cost structure is comprised of fixed costs. 316
Use of CVP to Analyze the Effect LO 3-2 of Different Cost Structures Contribution margin Operating leverage = Operating profit The The higher higher the the organization’s organization’s operating operating leverage, leverage, the the higher higher the the break-even break-even point. point. 317
LO 3-2 Comparison of Cost Structures Lo-Lev Company Hi-Lev Company (1,000,000 units) (1,000,000 units) Amount % Amount % Sales $1,000,000 100 $1,000,000 100 Variable costs 750,000 75 250,000 25 Contribution margin $ 250,000 25 $ 750,000 75 Fixed costs 50,000 5 550,000 55 Operating profit $ 200,000 20 $ 200,000 20 Break-even point 200,000 units 733,334 units Contribution margin per unit $0.25 $0.75 Degree of operating leverage 1.25 3.75 318
LO 3-2 Comparison of Cost Structures Suppose Low-Lev and High-Lev both increase sales 10% or $100,000. Lo-Lev Hi-Lev Sales increase $100,000 $100,000 Contribution margin 0.25 0.75 Increase in profit $ 25,000 $ 75,000 Prior net income $200,000 $200,000 Net income with sales increase of 10% $225,000 $275,000 319
LO 3-2 Margin of Safety The excess of projected or actual sales volume over break-even volume The excess of projected or actual sales revenue over break-even revenue Suppose U-Develop sells 8,000 prints. At a break-even volume of 6,250, its margin of safety is: Sales – Break-even 8,000 – 6,250 = 1,750 prints 320