1. Cost Behavior Analysis
Cost Behavior Analysis … how costs react to changes in the level of business level of activity.
Activity levels may be: Sales $$, % Occupancy, # Covers, # Miles, # Classes
Some costs change … others remain the same.
This allows costs to be classified as: variable, fixed, or mixed (part fixed part variable).
Note … “cost per unit” vs “total costs”

2. Cost of a Slurpee Variable Costs Fixed Costs Slurpee Mix Cup Lid Straw
Slurpee Machine

3. Variable costs vary in total, remain the same (constant) per unit.
Slurpee Mix
Cup
Lid
Straw
Total Costs
… vary directly and proportionately
with changes in activity level.
Unit Costs
… remain the same (constant)
regardless of activity.
Variable costs vary in total, remain the same (constant) per unit.

4. Variable Cost Behavior Analysis
Variable Costs “Behavior”

5. Fixed costs are constant in total, vary per unit.
Slurpee Machine
Total Costs
… remain the same regardless of changes in the activity level.
Unit Costs
… varies inversely with activity. Cost “per unit” goes down with activity
Fixed costs are constant in total, vary per unit.

6. Fixed Cost Behavior Analysis
Illustration: Apple leases a factory building at $10,000 per month.
Total Cost
“Total Fixed Cost” for the Factory Rent will be:
* $10,000 if 2,000 iPhones made, * $10,000 if 10,000 iPhones made.
(Activity Index)

7. Fixed Cost Behavior Analysis
Illustration: Apple leases a factory building at $10,000 per month.
Per Unit
“Fixed Cost Per Unit” for the Factory Rent will be:
* $5 per unit if 2,000 iPhones made, * $1 per unit if 10,000 iPhones made.
* Calculations:
$10,000 total cost ÷ 2,000 iPhones = $5 per iPhone
$10,000 total cost ÷ 10,000 iPhones = $1 per iPhone
(Activity Index)

8. Fixed Cost Behavior Analysis
Fixed Costs “Behavior”

9. Relevant Range
The range of activity (“how busy”) a company expects to operate during a year. (the norm or usual)
“Technically” all costs are variable
if you ignore relevant range.

10. Mixed Cost Behavior Analysis
Mixed Costs
Costs with both variable & fixed cost elements.
Change in total … but not proportionately with changes in activity.
Ex: car rental: $20 per day (fixed) PLUS .10 per mile (variable)

11. Mixed Cost Behavior Analysis
Break down Mixed Costs into: fixed & variable components.
Use: High-Low Method … (only for mixed costs)
High-Low uses the total costs incurred at both the high and the low levels of activity to classify mixed costs.
The difference in costs between the high and low levels represents variable costs, since only variable costs change as activity levels change.

12. Mixed Cost Behavior Analysis
Assume your weekly pay is based on:
salary (fixed) + commission (variable).
What part is “salary” (fixed) and
What part is “commission” (variable)
Day
# Sold
$ Earned
Mon 10 70
Tues 20
Wed 13 85
Thurs
Fri 17
105
Sat 24
140
Sun 21
125

13. Mixed Cost Behavior Analysis
High-Low Method
STEP 1: Determine variable cost per unit using formula:
Activity
Costs
Day
# Sold
$ Earned
Mon 10 70
Tues 20
Wed 13 85
Thurs
Fri 17
105
Sat 24
140
Sun 21
125
(High$ – Low$)
HighSold - LowSold $
140
-20
120 20 -0
120 20
= $6
VARIABLE
per unit
units

14. Mixed Cost Behavior Analysis
Apply the High-Low Method
Illustration: Metro Bus Co. has these maintenance costs and mileage data for its fleet of buses over a 6-month period.
Low
High

15. Mixed Cost Behavior Analysis
High-Low Method
STEP 1: Determine variable cost per unit using formula:
high - low costs
high – low volume (activity)

16. Mixed Cost Behavior Analysis
High-Low Method
STEP 2: fixed cost - total variable cost
at either the high or low activity level.

17. Mixed Cost Behavior Analysis
High-Low Method
STEP 2: fixed cost - total variable cost
at either the high or low activity level.

18. Cost Behavior Analysis
High-Low Method
Maintenance costs = $8,000 per month plus $1.10 per mile. (Represented by formula):
Maintenance costs = Fixed costs + ($1.10 x Miles driven)
Ex: At 45,000 miles, estimated maintenance costs would be:
Fixed
$ 8,000
Variable
($1.10 x 45,000) 49,500
$57,500

19. Compute the variable & fixed cost elements.
Do It! … Byrnes Company accumulates this data concerning a mixed cost, using units produced as the activity level.
HIGH
LOW
Compute the variable & fixed cost elements.
Variable cost: ($14,740 - $11,100) / (9, ,000) = $1.30 per unit
Fixed cost: $14,740 - $12,740 ($1.30 x 9,800 units) = $2,000
or $11,100 - $9,100 ($1.30 x 7,000) = $2,000

20. $2,000 Estimate the total cost if the company produces 6,000 units.
Total cost (6,000 units):
$2,000
= $9,800 +
(1.30 x 6,000)
Fixed component +
Variable
component

22. Cost-Volume-Profit Analysis
Cost-Volume-Profit (CVP) analysis is the study of the effects of changes of costs and volume on profits.
Important in profit planning
Critical factor in management decisions as
Setting selling prices,
Determining product mix, and
Maximizing use of production facilities.

23. Cost-Volume-Profit Analysis
Basic Components of C-V-P

24. Traditional Income Statement GAAP required for external reporting
(Revenue – Expenses = Net Income)
GAAP required for external reporting

25. Sales – Variable Costs = CM
CVP Income Statement
Same net income as a traditional income statement.
For internal use only … not for public (per GAAP)
Classifies costs & expenses as fixed or variable.
Reports contribution margin in the statement.
Contribution Margin – amount of revenue remaining after deducting variable costs.
Sales – Variable Costs = CM

27. Traditional Income Statement
Cost-Volume-Profit Analysis
Ex: Vargo Video produces camcorders. Relevant data for June:
Traditional Income Statement
Revenues (1,600 x $500 ea) … ,000
- Expenses (480, ,000) … ,000
Net Income …………………… ,000

28. Cost-Volume-Profit Analysis
Ex: Vargo Video produces camcorders. Relevant data for June:
CVP Income Statement
(1,600 x $300)

29. Cost-Volume-Profit Analysis
Contribution Margin per Unit
Contribution Margin must cover ALL fixed costs
THEN profit (the “contribution” to net income).

30. (Revenue – Variable – Fixed Expenses = Breakeven Point)
When Revenue exactly equals ALL costs
(Revenue – Variable – Fixed Expenses = Breakeven Point)
Where loss ends and profit begins.
The point at which a business, product or project becomes financially viable.
Expressed as “Dollars” or “Units”.

31. Cost-Volume-Profit Analysis
Break-Even Analysis
Process of finding the break-even point where total revenues equal total costs (both fixed and variable).
Can be computed or derived
from a mathematical equation,
by using contribution margin, or
from a cost-volume profit (CVP) graph.
Expressed either in sales units or in sales dollars.

32. Cost-Volume-Profit Analysis
CVP Income Statement

33. Break-Even Analysis Mathematical Equation Mathematical Equation
Break-even occurs where total sales equal variable costs plus fixed costs; i.e., net income is zero
Mathematical Equation
Computation of break-even point in units.

34. Break-Even Analysis Mathematical Equation “Profit Planning”
Using the formula for the break-even point, simply include the desired net income as a factor.

35. Cost-Volume-Profit Analysis
Ex: Vargo Video produces camcorders. Relevant data for June:
CM per unit

36. Cost-Volume-Profit Analysis
Contribution Margin Ratio
Shows the percentage of each sales dollar available to apply toward fixed costs and profits.
Formula for contribution margin ratio is:

37. Cost-Volume-Profit Analysis
Contribution Margin Ratio
If current sales are $500,000 what is the effect of a $100,000 (200-unit) increase in sales.

38. Break-Even Analysis Contribution Margin Technique
To get Break-Even point in units, use CM per unit

39. Break-Even Analysis Contribution Margin Technique
To get Break-Even point in dollars, use CM ratio.

40. Target Net Income Contribution Margin “Profit Planning”
To determine the required sales in units for Vargo Video:

41. Target Net Income Contribution Margin “Profit Plannning”
To determine the required sales in dollars for Vargo Video:

42. Cost-Volume-Profit Analysis
Margin of Safety
Difference between actual (or projected) sales and the sales at the break-even point.
Measures the “cushion” if expected sales fail to materialize.
May be expressed in dollars or as a ratio.
Assuming actual/expected sales are $750,000:

43. The higher the dollars or %, the greater the margin of safety.
Cost-Volume-Profit Analysis
Margin of Safety Ratio
Divide the margin of safety in $$ by the actual or sales.
Assuming actual/expected sales are $750,000:
The higher the dollars or %, the greater the margin of safety.