1. 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.

2. c. 2014 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

3. c. 2014 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

4. 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 _______ ________.

5. 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.

6. V ARIABLE C OSTS

7. 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.

8. Total Direct Materials Cost $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 102030 0 $20 $15 $10 $5 0 102030 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 15,00010150,000 20,00010200,000 25,00010250,000 30,00010300,000 Cost per Unit V ARIABLE C OSTS

9. 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.

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

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

12. Total Salary $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 100200300 0 Units Produced (000) Number of Bottles of Perfume Produced Salary per Unit $1.50 $1.25 $1.00 $.75 $.50 $.25 100200300 0 Units Produced (000) Total Salary for Jane Sovissi 50,000 bottles$75,000$1.500 100,00075,0000.750 150,00075,0000.500 200,00075,0000.375 Salary per Bottle of Perfume Produced F IXED C OSTS

13. 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 _____.

14. 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.

15. 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:

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

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

18. 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.

19. 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

20. 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

21. 2,100 750 1,350 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

22. 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

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

24. 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.

25. 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.

26. 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:

27. _____ _____ 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

28. 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

29. 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.

30. c. 2014 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

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

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

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

34. 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 =

35. 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:

36. 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.

37. Proof C ONTRIBUTION M ARGIN R ATIO

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

39. 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 ______________

40. 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.

41. c. 2014 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

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

43. Effect of Changes in Fixed Costs

44. 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

45. Effect of Changes in Unit Variable Costs

46. $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

47. Effect of Changes in Unit Selling Price

48. 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

49. Summary of Effects of Changes on B/E Point

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

51. c. 2014 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

52. 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 _____ _____.

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

54. c. 2014 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

55. 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.

56. 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 =

57. 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

58. 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:

59. 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:  _________________

60. c. 2014 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

61. 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.

62. 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 _________.

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

64. c. 2014 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