Managerial Accounting Wild and Shaw Third Edition McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 1

Cost Behavior and Cost-Volume-Profit Analysis Chapter 5 Cost Behavior and Cost-Volume-Profit Analysis

Conceptual Learning Objectives C1: Describe different types of cost behavior in relation to production and sales volume. C2: Describe several applications of cost-volume-profit analysis. 5-3

Analytical Learning Objectives A1: Compute the contribution margin and describe what it reveals about a company’s cost structure. A2: Analyze changes in sales using the degree of operating leverage. 5-4

Procedural Learning Objectives P1: Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs. P2: Compute the break-even point for a single product company. P3: Graph costs and sales for a single product company. P4: Compute the break-even point for a multiproduct company. 5-5

Questions Addressed by Cost-Volume-Profit Analysis CVP analysis is used to answer questions such as: What sales volume is needed to earn a target income? What is the change in income if selling prices decline and sales volume increases? How much does income increase if we install a new machine to reduce labor costs? What is the income effect if we change the sales mix of our products or services? 5-6

Cost Behavior Summary C1 5-7

Mixed Costs C1 Mixed costs contain a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage. Example: monthly electric utility charge Fixed service fee Variable charge per kilowatt hour used 5-8

Total cost remains constant within a narrow range of activity. Step-Wise Costs C1 Total cost remains constant within a narrow range of activity. Cost Activity 5-9

Computing The Break-Even Point Exh. 22-8 We have just seen one of the basic CVP relationships – the break-even computation. Break-even point in units = Fixed costs Contribution margin per unit Unit sales price less unit variable cost 5-10

Costs and Revenue in Dollars Preparing a CVP Chart P3 Sales Total fixed costs Costs and Revenue in Dollars Total costs Break-even Point Volume in Units 5-11

Assumptions of CVP Analysis A limited range of activity called the relevant range, where CVP relationships are linear. Unit selling price remains constant. Unit variable costs remain constant. Total fixed costs remain constant. Production = sales (no inventory changes). 5-12

Computing Sales for a Target Income Break-even formulas may be adjusted to show the sales volume needed to earn any amount of income. Fixed costs + Target income Unit sales = Contribution margin per unit Fixed costs + Target income Dollar sales = Contribution margin ratio 5-13

Computing Multiproduct Break-Even Point The CVP formulas may be modified for use when a company sells more than one product. The unit contribution margin is replaced with the contribution margin for a composite unit. A composite unit is composed of specific numbers of each product in proportion to the product sales mix. Sales mix is the ratio of the volumes of the various products. Click to add notes 5-14

End of Chapter 5 5-15