CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15-1 Cost Characteristics That Influence Decisions

CENTURY 21 ACCOUNTING © Thomson/South-Western 2 LESSON 15-1 ABBREVIATED INCOME STATEMENT page 445  All costs for a specific period of time are called total costs  The above income statement shows the total cost of merchandise sold was $118,800 and total selling expenses were $31,930  These totals show how much money was spent for these activities during a specific period of time

CENTURY 21 ACCOUNTING © Thomson/South-Western 3 LESSON 15-1 Cost of Merchandise Sold Total Cost ÷Units Sold= Cost of Merchandise Sold Total Cost $118, ÷ 36,000 = $3.30 CALCULATING COST OF MERCHANDISE SOLD UNIT COST page 445  An amount spent for one unit of a specific product or service is called a unit cost  Units may be expressed in many different terms.  Units should be expressed in terms that are meaningful to the people who are responsible for the costs

CENTURY 21 ACCOUNTING © Thomson/South-Western 4 LESSON 15-1 VARIABLE COST CHARACTERISTICS page 446  Total costs can be separated into two parts: variable & fixed  Total costs that change in direct proportion to a change in the number of units are called variable costs  The total variable cost varies with a change in the number of units  Specifically, it increases  The unit variable cost remains the same regardless of the number of units

CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 15-1 FIXED COSTS page 446  Total costs that remain constant regardless of change in business activity are called fixed costs

CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON 15-1 GROSS PROFIT INCOME STATEMENT page 447  Gross profit is determined by subtracting cost of merchandise sold from net sales  On a typical income statement costs are shown as cost of merchandise sold, selling expenses, & administrative expenses

CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 15-1 CONTRIBUTION MARGIN INCOME STATEMENT page 447  Income determined by subtracting all variable costs from net sales is called contribution margin  On this income statement contribution margin and net income are reported by grouping costs into two categories: variable and fixed

CENTURY 21 ACCOUNTING © Thomson/South-Western 8 LESSON 15-1 CONTRIBUTION MARGIN PER UNIT page 448 Total Contribution Margin ÷Units Sold= Contribution Margin per Unit $27, ÷ 36,000 = $0.75  Contribution margin is important to managers because it allows them to determine the income available to cover fixed costs & provide a profit  Using the income statement on the previous slide managers can determine that total contribution margin was $27,000 and based on units sold the contribution margin per unit was $.75.

CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 15-1 TERMS REVIEW total costs unit cost variable costs fixed costs contribution margin page 450