Chapter 6 Cost-Volume-Profit Analysis and Relevant Costing.
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Transcript of Chapter 6 Cost-Volume-Profit Analysis and Relevant Costing.
![Page 1: Chapter 6 Cost-Volume-Profit Analysis and Relevant Costing.](https://reader036.fdocuments.in/reader036/viewer/2022081418/56649f325503460f94c4e0a5/html5/thumbnails/1.jpg)
Chapter 6
Cost-Volume-Profit Analysis and Relevant Costing
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1. How is breakeven point computed and what does it
represent?
2. How do costs, revenues, and contribution margin
interact with changes in an activity base (volume)?
Learning Objectives
C6
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3. How does cost-volume-profit (CVP) analysis in single-
product and multiproduct firms differ?
4. What are the underlying assumptions of CVP analysis
and how do these assumptions create a short-run
managerial perspective?
C6
Continuing . . . Learning Objectives
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5. How do quality decisions affect the components of CVP
analysis?
6. What constitutes relevance in a decision-making
situation?
C6
Continuing . . . Learning Objectives
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7. How can management best utilize a scarce
resource?
8. What is the relationship between sales mix and
relevant costing problems?
Continuing . . . Learning Objectives
C6
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9. How can pricing decisions be used to
maximize profit?
10. How can product margin be used to determine
whether a product line should be retained or
eliminated?
C6
Continuing . . . Learning Objectives
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11. How are breakeven and profit-volume graphs
prepared? (Appendix 1)
12. What are the differences between absorption and
variable costing? ( Appendix 2)
13. Why is linear programming a valuable tool for
managers? (Appendix 3)
C6
Continuing . . . Learning Objectives
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The Breakeven Point (BEP)
The level of activity, in units or dollars, at which
REVENUES = COSTS
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Basic Assumption: Relevant Range
Company is operating within the relevant
range of activity specified in determining the revenue
and cost information used.
Total$
Activity Level
RelevantRange
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Basic Assumption: Revenue
Total revenue fluctuates in direct proportion to level of activity or volume. On a per unit basis, the selling
price remains constant.
Total$
Activity Level
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Basic Assumption: Variable Costs
Total variable costs fluctuate in direct proportion to level of activity or volume. On a per unit basis,
variable costs remain constant.
Total$
Activity Level
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Basic Assumption: Fixed Costs
Total fixed costs remain constant relative to activity level changes. Per-unit fixed costs decrease as
volume increases and increase as volume decreases.
Total$
Activity Level
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Basic Assumption: Mixed Costs
Mixed costs must be separated into variable and fixed elements.
Total$
Activity Level
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Cost Behavior Example
Selling price per ice bucket $40
Variable production cost per ice bucket $20Variable selling cost per ice bucket 4Total variable cost per ice bucket $24
Fixed production costs $100,000Fixed selling and administrative costs 20,000
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Contribution Margin Per Unit
Contribution margin per unit equals selling price per unit less variable cost per unit.
sp -vc = cm
$40 - $24 = $16
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Contribution Margin Ratio
Contribution margin ratio is per-unit contribution margin divided by selling price, or total contribution margin divided by total sales dollars.
cm/sp=cm%
$16 / $40 = 40%
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Breakeven Point
Breakeven point is the point at which profits are
zero because total revenues equal total costs, or
Total revenues = Total variable costs + Total fixed costs
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Continuing . . . Breakeven Point
Total fixed costs In units = ---------------------
CM per unit
Total fixed costs In sales dollars = ---------------------
CM ratio
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Continuing . . . Breakeven Point
$120,000 In units = ----------- = 7,500 ice buckets
$16
$120,000 In sales dollars = ----------- = $300,000
.40
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CVP Analysis: Fixed Amount of
Profit Before Taxes (PBT)
Total fixed costs + PBTIn units = ------------------------------
CM per unit
Total fixed costs + PBTIn sales dollars = ------------------------------
CM ratio
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CVP Analysis: Fixed Amount of
Profit Before Taxes (PBT)
$120,000 + $64,000In units = ------------------------ = 11,500 buckets
$16
$120,000 + $64,000In sales dollars = ------------------------ = $460,000
.40
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CVP Analysis: Variable Amount
of Profit Before Taxes
Assume PUBT desired is 25% on sales
Therefore, PUBT = .25 ($40) = $10
Total fixed costsSales in units = ---------------------------
CM per unit - PUBT
$120,000Sales in units = --------------- = 20,000 ice buckets
$16 - $6
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CVP Analysis: Variable Amount
of Profit Before Taxes
Assume PUBT desired is 25% on sales
Therefore, PUBT = .25 ($40) = $10
Total fixed costsSales in $ = ---------------------
CM% - PUBT%
$120,000Sales in $ = --------------- = $800,000 .40 - .25
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Income Statement
Dollars Percentages
Sales $800,000 100%
Variable costs 480,000 60%
Contribution margin $320,000 40%
Fixed costs 120,000 15%
Income $200,000 25%======= ==
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CVP Analysis - Multiple Products
Ice ServingBuckets Sets
Selling price $40 $24Variable cost 24 12Contribution margin $16 $12
Contribution margin ratio 40.0% 50.0%Sales mix* 80.6% 19.4%
*5:2 ratio
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Continuing . . . CVP Analysis -
Multiple Products
Ice ServingBuckets Sets
Contribution margin ratio 40.0% 50.0%
Sales mix* 80.6% 19.4%
Weighted contribution margin 32.2% 9.7%
Contribution margin ratio per bag 41.9%
*5:2 ratio
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Continuing . . . CVP Analysis -
Multiple Products
Total fixed costs BEP in sales dollars = -----------------------
CM ratio per bag
($120,000 + $30,000*) BEP in sales dollars = ----------------------------
.419
= $357,995
*$30,000 of additional fixed cost is incurred to produce both units
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Scarce Resource -- Machine Hours
Ice Juice Crushers Extractors
Selling price per unit $15 $12Variable production cost per unit: Direct materials $3 $3 Direct labor 4 2 Variable overhead 3 1Total variable cost 10 6Unit contribution margin $5 $6Units of output per machine hour 30 20Contribution margin per machine hour $150 $120
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Sales Mix Decisions
How many of each product?
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Relevant Costs in
Product Line Decisions
• Revenues associated with product• Variable costs associated with product• Avoidable fixed costs • Consider product margin
Revenues - Variable costs - Avoidable fixed costs
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Exhibit 6-12: Partial Product Line
Income Statement
ElectricSkillet
Sales $75,000Total direct variable expenses 43,750Total contribution margin $31,250Total fixed expenses* 39,500Net loss ($8,250)
*Fixed expenses:Avoidable fixed expenses $25,000Unavoidable fixed expenses 4,500Allocated common costs 10,000 Total $39,500
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Exhibit 6-13: Product Margin for
the Electric Skillet Product Line
Electric
Skillet
Sales $75,000
Total direct variable expenses 43,750
Total contribution margin $31,250
Avoidable fixed expenses 25,000
Product margin $6,250
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CVP Graph
Total$
Volume
Total Costs
Total RevenuesBEP
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Profit-Volume Graph
BEP
Fixed Costs
Volume
Profit or Loss
Total$
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Absorption Costing
• Also known as full costing• Treats costs of all manufacturing components as
inventoriable, or product, costs– Direct materials
– Direct labor
– Variable factory overhead
– Fixed factory overhead
• Presents expenses on income statement according to functional classifications
– Cost of goods sold
– Selling expenses
– Administrative expenses
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Variable Costing
• Also known as direct costing
• Includes only variable production costs as inventoriable, or product, costs
– Direct materials
– Direct labor
– Variable factory overhead
• Fixed factory overhead costs treated as period expenses
• Income statement separates costs by cost behavior– May also present expenses by functional classifications within
behavioral categories
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Absorption Costing
Income Statement
Sales XXXCost of Goods Sold:
Beginning inventory XXXCost of goods manufactured XXX Cost of goods available XXXEnding inventory XXX
Cost of goods sold XXXGross Margin XXXOperating Expenses:
Selling XXXAdministrative XXX XXX
Income before Taxes XXX
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Variable Costing
Income StatementSales XXXCost of Goods Sold:
Beginning inventory XXXCost of goods manufactured XXX Cost of goods available XXXEnding inventory XXX
Variable cost of goods sold XXXProduct Contribution Margin XXXVariable Selling Expense XXXTotal Contribution Margin XXXFixed Expenses:
Factory XXXSelling XXXAdministrative XXX XXX
Income before Taxes XXX
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Absorption Costing vs. Variable
Costing Income Statements
Absorption Costing Variable Costing:
Sales $60,000 Sales $60,000
Cost of sales 30,000 Variable costs:
Gross profit $30,000 Cost of sales 30,000
Operating expenses: Operating expenses 6,000
Variable $6,000 Total variable costs $36,000
Fixed 20,000 Contribution margin: $24,000
Total operating expenses $26,000 Fixed costs 20,000
Income $4,000 Income $4,000
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Linear Programming
• Used to solve problems with one objective and multiple limiting factors
• Objective
• Constraints
– Resource
– Demand
– Technical product requirements
– Non-negativity
• Optimal solution
• Simplex