Student Version o Repetition is an important component, a key part of learning. In memory, the more times patterns of thought are repeated, the more likely you will be able to recall information. o These PowerPoint slides have been modified from the lecture decks by making them fill-in-the-blank. Why? So that you get an opportunity to repeat a visual cue (from the lecture or the book) via completing text here. o In addition, most text book exhibits have been removed as they are available in your text directly.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Behavior and Cost-Volume-Profit Analysis Chapter 21

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Classify costs as variable costs, fixed costs, or mixed costs. 1

Cost Behavior o _____ _____ is the manner in which a cost changes as a _____ activity changes. Understanding the behavior of a cost depends on:  Identifying the activities that cause the cost to change, called _____ _____ (or _____ _____ ).  Specifying the range of activity over which the changes in the cost are of interest. This range of activity is called the _______ ________.

Variable Costs o _____ costs are costs that vary in _______ to changes in the level of _____. o Jason Sound Inc. produces stereo systems. The parts for the stereo systems are purchased from suppliers for $10 per unit (a variable cost) and are assembled by Jason Sound Inc. For Model JS-12, the direct materials costs for the relevant range of 5,000 to 30,000 units of production are shown.

V ARIABLE C OSTS

Variable Costs o As noted, the variable costs have the following characteristics:  _____ ___ _____ remains the _____ regardless of changes in the activity base.  _____ _____ changes in _____ to changes in the activity base.

Total Direct Materials Cost $300,000 $250,000 $200,000 $150,000 $100,000 $50, $20 $15 $10 $ Number of Units of Model JS-12 Produced Units Produced (000) Direct Materials Cost per Unit Total Direct Materials Cost 5,000 units$10$ 50,000 10,00010l00,000 15, ,000 20, ,000 25, ,000 30, ,000 Cost per Unit V ARIABLE C OSTS

Fixed Costs o _____ _____ are costs that remain the _____ in _____ dollar amount as the activity base _____. o Minton Inc. manufactures, bottles, and distributes perfume. The production supervisor is Jane Sovissi. She is paid $75,000 per year. The plant produces from 50,000 to 300,000 bottles of perfume.

The _____ units produced, the _____ the _____ cost per unit. F IXED C OSTS

Fixed Costs o _____ costs have the following characteristics:  _____ __ _____ changes _____ to changes in the activity base.  _____ _____ remains the _____ regardless of _____ in the activity base.

Total Salary $150,000 $125,000 $100,000 $75,000 $50,000 $25, Units Produced (000) Number of Bottles of Perfume Produced Salary per Unit $1.50 $1.25 $1.00 $.75 $.50 $ Units Produced (000) Total Salary for Jane Sovissi 50,000 bottles$75,000$ ,00075, ,00075, ,00075, Salary per Bottle of Perfume Produced F IXED C OSTS

Mixed Costs o _____ _____ have characteristics of both a _____ and a _____ cost. Mixed costs are sometimes called _______ or _______ costs. o Over one range of activity, the _____ mixed cost may _____ the _____. Over another range of activity, the mixed cost may change in _____ to changes in the _____ of _____.

Mixed Costs o Simpson Inc. manufactures sails, using rented equipment. The rental charges are $15,000 per year, plus $1 for each machine hour used over 10,000 hours.

Mixed Costs o The rental charges for various hours used within the relevant range of 8,000 hours to 40,000 hours are as follows:

Mixed Costs o The high-low _____ is a cost _____ method that may be used to separate _____ costs into their _____ and _____ components.

Mixed Costs o The Equipment Maintenance Department of Kason Inc. incurred the following costs during the past five months:

Mixed Costs o The number of units produced is the activity base, and the relevant range is the units produced between June and October. The following illustrate how the high-low method is used to determine the fixed and variable costs.

First, select the highest and lowest levels of activity. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 costs incurred _____ costs incurred Variable Cost per Unit = _____ C OSTS

ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Next, fill in the formula for _____ in _____ cost. $61,500 41,250 $20,250 Variable Cost per Unit = Difference in Total Cost Difference in Production $20,250 M IXED C OSTS

2, ,350 Then, fill in the formula for _____ in _________. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Variable Cost per Unit = Difference in Total cost Difference in Production $20,250 1,350 M IXED C OSTS

Variable cost per unit is $15 ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 $15 = $15 Variable Cost per Unit = $20,250 1,350 M IXED C OSTS

Fixed Cost = _____ _____ – (_____ _____ _____ _____ x _____ _____) Mixed Costs o The _____ cost is estimated by subtracting the _____ _____ costs from the _____ _____ for the units produced as shown below:

Fixed Cost = $61,500 – ($15 x 2,100 units) Fixed Cost = $61,500 – $31,500 $30,000 Fixed Cost = $30,000 Highest Level Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced) Mixed Costs o The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc.

Lowest Level Fixed Cost = $41,250 – ($15 x 750 units) Fixed Cost = $41,250 – $11,250 $30,000 Fixed Cost = $30,000 Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced) Mixed Costs o The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc.

Total Cost = ($15 x 2,000) + $30,000 Total Cost = $30,000 + $30,000 $60,000 Total Cost = $60,000 Total Cost = ($15 x Units Produced) + $30,000 Mixed Costs o With fixed costs and variable costs estimated at $30,000 plus $15 per unit, a formula is in place to estimate production at any level. If the company is expected to produce 2,000 units in November, the estimated total cost would be calculated as follows:

_____ _____ Costs Total Units Produced _____ _____ Costs Total Units Produced Per-Unit Cost Total variable costs _____ and _____ ___________ with activity level. Per-unit _____ costs _____ the _____ ________ of activity level. Total Costs Summary of Cost Behavior Concepts

Total Units Produced Total Costs Total Units Produced Total fixed costs _____ the _____ _____ of activity level. Per-unit _____ _____ _____ as activity level _____. _____ _____ Costs Per-Unit Cost Summary of Cost Behavior Concepts

o One method of reporting _____ and _____ costs is called _____ _____ or direct _____. o Under _____ costing, only the _____ manufacturing costs are included in the _____ cost. o The _____ factory _____ is treated as an _____ of the _____ in which it is incurred.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Compute the contribution margin, the contribution margin ratio, and the unit contribution margin. 2

Cost-Volume-Profit Relationships o _____ - _____ - _____ analysis is the examination of the relationships among _____ _____, sales and production volume, _____, _____, and _____.

Cost-Volume-Profit Relationships o Some of the ways cost-volume-profit analysis may be used include the following:  __________________________________________

Contribution Margin o _____ _____ is the _____ of _____ over variable costs, as shown in the formula below. = – ______________ _____ = _____ – _____ _____

Contribution Margin Ratio o The contribution margin _____, sometimes called the profit-volume _____, indicates the _____ of each _____ _____ available to cover _____ _____ and to provide _____ from operations. It is computed as follows: Contribution Margin Ratio =

Contribution Margin Sales Contribution Margin Ratio = $400,000 $1,000,000 40% Contribution Margin Ratio = 40% Contribution Margin Ratio o The contribution margin ratio is 40% for Lambert Inc., computed as follows:

Change in Income from Operations Change in Sales Dollars x Contribution Margin Ratio = Change in Income from Operations $32,000 $80,000 x 40% = $32,000 = Contribution Margin Ratio o If Lambert Inc. adds $80,000 in sales from the sale of an additional 4,000 units, its income will increase by $32,000, as computed below.

Proof C ONTRIBUTION M ARGIN R ATIO

_____ Contribution Margin o The _____ contribution margin is useful for analyzing the _____ _____ of proposed decisions. The _____ _____ _____ is computed as follows: Unit Contribution Margin = _______________________ –

Unit Contribution Margin o The unit contribution margin is most useful when the _____ or _____ in _____ _____ is measured in sales _____ (quantities). o The change in income from operations can be determined using the following formula: Change in Income from Operations ___________ = x ______________

Change in Income from Operations Change in Sales Units = x Unit Contribution Margin Change in Income from Operations = $ 15,000 units x $8 = $ _____ Unit Contribution Margin o Lambert Inc.’s sales could be increased by 15,000 units, from 50,000 to 65,000 units. Lambert’s income from operations would increase by $ _____ (15,000 x $8), as shown below.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Determine the break-even point and sales necessary to achieve a target profit. 3

_____ - _____ Point o The _____ - _____ point is the level of operations at which a company’s _____ and _____ are equal.

Effect of Changes in Fixed Costs

Break-Even Sales (units) = additional advertising: _____ additional advertising: Break-Even Sales (units) = $600,000 $20 = 30,000 units additional advertising: _____ additional advertising: Break-Even Sales (units) = $700,000 $20 = 35,000 units Effect of Changes in Fixed Costs

Effect of Changes in Unit Variable Costs

$250 – [$145 + ($250 x 2%)] = $100 additional 2% commission: _____ additional 2% commission: Break-Even Sales (units) = $840,000 $105 = 8,000 units Break-Even Sales (units) = additional 2% commission: _____ additional 2% commission: Break-Even Sales (units) = $840,000 $100 = 8,400 units Effect of Changes in _____ _____ Costs

Effect of Changes in Unit Selling Price

Break-Even Sales (units) = price increase: _____ price increase: Break-Even Sales (units) = $600,000 $20 = 30,000 units price increase: _____ price increase: Break-Even Sales (units) = $600,000 $30 = 20,000 units Effect of Changes in Unit Selling Price

Summary of Effects of Changes on B/E Point

Target Profit o The _____ _____ required to earn a _____ _____ is determined by modifying the _____ - _____ equation. Sales (units) =

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Using a cost-volume-profit chart and a profit-volume chart, determine the break-even point and sales necessary to achieve a target profit. 4

Cost-Volume-Profit (Break-Even) _____ o A cost-volume-profit _____, sometimes called a ____-_____ _____, graphically shows sales, costs, and the related _____ or _____ for various levels of _____ _____.

Assumptions of Cost-Volume-Profit Analysis o The primary assumptions are as follows:  _______________________________________________.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Compute the break-even point for a company selling more than one product, the operating leverage, and the margin of safety. 5

Sales Mix Considerations o Many companies sell more than one product at different selling prices. In addition, the products normally have different unit contribution margins. o The ______ mix is the relative distribution of sales among the various products sold by a company.

Operating Leverage o The relationship of a company’s contribution margin to income from operations is measured by ______ ______. A company’s operating leverage is computed as follows: Operating Leverage =

Operating Leverage o Operating leverage can be used to measure the impact of changes in ______ on ______ from operations. This measure can be computed as follows: Percent Change in Income from Operations = _____________ x

Operating Leverage o The impact of a change in sales on income from operations for companies with high and low operating leverage can be summarized as follows:

Margin of Safety o The ________ of ________ indicates the possible ________ in sales that may occur before an ________ loss results. o The ________ of ________ may be expressed in the following ways:  _________________

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix Variable Costing

o The cost of manufactured products consists of direct materials, direct labor, and factory overhead. The reporting of all these costs in financial statements is called _________ _________. o _________ _________ is required by GAAP.

Variable Costing o In _________ _________, also called direct costing, the cost of goods _________ consists of direct _________, direct _________, and _________ factory _________. o In a _________ costing income statement, fixed _________ _________ costs do not become a part of the cost of goods _________.

Variable Costing o Instead, fixed factory overhead costs are treated as a _________ _________.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Behavior and Cost-Volume-Profit Analysis The End