1. Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. Chapter 18 Cost Behavior and Cost-Volume-Profit Analysis 18-2

3. 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. 18-3

4. 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. Analytical Learning Objectives 18-4

5. 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. Procedural Learning Objectives 18-5

6. 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?  Will income change if we change the sales mix of our products or services? 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?  Will income change if we change the sales mix of our products or services? Questions Addressed by Cost-Volume-Profit Analysis C1 18-6

7. Cost Behavior Summary C1 18-7

8. 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 Mixed Costs C1 18-8

9. Activity Cost Total cost remains constant within a narrow range of activity. Step-Wise Costs C1 18-9

10. The objective is to classify all costs as either fixed or variable. Identifying and Measuring Cost Behavior P1 When presented with a mixed cost, the fixed and variable components must be separated. 18-10

11. 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 Computing The Break-Even Point (Exhibit 18.11) Unit sales price less unit variable cost ($30 in previous example) P2 18-11

12. Sales Number of Units Produced Costs and Revenue in Dollars  Starting at the origin, draw the sales line with a slope equal to the unit sales price. Preparing a Cost-Volume- Profit Chart Break- even Point Total costs Total fixed costs P3 18-12

13.  A limited range of activity called the relevant range, where CVP relationships are linear. 4 Unit selling price remains constant. 4 Unit variable costs remain constant. 4 Total fixed costs remain constant.  Production = Sales (no inventory changes). Assumptions of CVP Analysis C1 18-13

14. Break-even formulas may be adjusted to show the sales volume needed to earn any amount of income. Unit sales = Fixed costs + Target income Contribution margin per unit Dollar sales = Fixed costs + Target income Contribution margin ratio Computing Sales for a Target Income C2 18-14

15. 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 sales volumes for the various products. Computing Multiproduct Break-Even Point P4 18-15

16. The extent, or relative size, of fixed costs in the total cost structure of an organization. A measure of how a percentage change in sales will affect profits. Total contribution margin (in dollars) Pretax income Operating Leverage (Exhibit 18.31) A2 Degree of operating leverage = 18-16

17. End of Chapter 18 18-17