Lecture financial and managerial accounting (4:e) chapter 18 wild, shaw, chiappetta

Conceptual Learning Objectives C1: Describe different types of cost behavior in relation to production and sales volume.. P3: Graph costs and sales for a single product company.. CVP an

Financial and Managerial

Accounting

Wild, Shaw, and Chiappetta

Fourth Edition

Wild, Shaw, and Chiappetta

Fourth Edition

Chapter 18

Cost Behavior and Cost-Volume-Profit Analysis

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

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

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

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?

 What is the income effect if we change the

sales mix of our products or services?

such as:

target income?

prices decline and sales volume increases?

install a new machine to reduce labor costs?

sales mix of our products or services?

Questions Addressed by Cost-Volume-Profit Analysis

C2

Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit

Variable Changes as activity level

changes.

Remains the same over wide

ranges of activity

Fixed Remains the same even

when activity level changes.

Dereases as activity level

increases

Cost Behavior Summary

C1

Mixed costs contain a fixed portion

that is incurred even when the facility is unused, and a variable portion that increases with usage

charge

kilowatt hour used

Mixed Costs

C1

Total cost remains

constant within a

narrow range of

activity.

Step-Wise Costs

C1

We have just seen one of the basic CVP

relationships – the break-even

Contribution margin per unit

Computing The Break-Even Point

Unit sales price less unit variable cost

Exh

22-8

P2

Preparing a CVP Chart

Break-even Point

Total costs Total fixed costs

P3

 A limited range of activity called the relevant

 Unit selling price remains constant

 Unit variable costs remain constant

 Total fixed costs remain constant

 Production = sales (no inventory changes)

Assumptions of CVP Analysis

C1

Break-even formulas may be

adjusted to show the sales volume needed to earn any amount of

income

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

Computing Sales for a

Target Income

C2

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 volumes of the

various products.

Computing Multiproduct

Break-Even Point

P4

End of Chapter 18