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Managerial Accounting

Topic 1 Job-order costing and process costing

Part 1: Job-order costing

Glossary

1 Allocation base A measure of activity such as direct labor-hours or machine-hours

that is used to assign costs to cost objects

3 Bill of materials A document that shows the quantity of each type of direct material

required to make a product

4 Cost driver A factor, such as machine-hours, beds occupied, computer time, or

flight-hours, that causes overhead costs

7 Job cost sheet A form that records the materials, labor, and manufacturing

overhead costs charged to a job

8 Job-order costing A costing system used in situations where many different

products, jobs, or services are produced each period

9 Materials requisition

form

A document that specifies the type and quantity of materials to bedrawn from the storeroom and that identifies the job that will becharged for the cost of those materials

predeterminedoverhead rates

A costing system with multiple overhead cost pools and a differentpredetermined overhead rate for each cost pool, rather than asingle predetermined overhead rate for the entire company Eachproduction department may be treated as a separate overhead costpool

11 Normal cost system A costing system in which overhead costs are applied to a job by

multiplying a predetermined overhead rate by the actual amount

of the allocation base incurred by the job

overhead

A credit balance in the Manufacturing Overhead accountthat occurs when the amount of overhead cost applied to Work inProcess exceeds the amount of overhead cost actually incurredduring a period

15 Raw materials Any materials that go into the final product

16

Schedule of cost

A schedule that contains three elements of productcosts—direct materials, direct labor, and manufacturing overhead

of goods manufactured

—and that summarizes the portions of those costs that remain inending Work in Process inventory and that are transferred out ofWork in Process into Finished Goods

17 Schedule of cost of

goods sold

A schedule that contains three elements of product costs—directmaterials, direct labor, and manufacturing overhead — and thatsummarize the portions of those costs that remain in endingFinished Goods inventory and that are transferred out of FinishedGoods into Cost of Goods Sold

18 Time ticket A document that is used to record the amount of time an employee

spends on various activities

overhead

A debit balance in the Manufacturing Overhead accountthat occurs when the amount of overhead cost actually incurredexceeds the amount of overhead cost applied to Work in Processduring a period

20 Work in process Units of product that are only partially complete and will require

further work before they are ready for sale to the customer

Concepts in Action

1 Read and fill in the blanks with the following words: costing data, project variances, unique, last-minute, profitable, identified, leverage, budgeted cost, individually, pricing decisions, direct labor-hours, completed, success, experience, grand opening, stages, estimated overhead costs, allocation bases, the percentage, a job costing system

Job Costing on Cowboys Stadium

Over the years, fans of the National Football League have (1)

the Dallas Cowboys as “America’s Team.” Since 2009, however, the team known for winningfive Super Bowls has become just as recognized for its futuristic new home, Stadium inArlington, Texas When the Cowboys take the field, understanding each week’s game plan is

critical for (2) _ But for Manhattan Construction, the company that

managed the development of the $1.2 billion Cowboys Stadium project, understanding costs is

just as critical for making successful (3) , winning contracts, and ensuring that each project is(4) Each job is estimated (5) because the (6) end-products, whether a new stadium or an office

building, demand different quantities of Manhattan Construction’s resources

In 2006, the Dallas Cowboys selected Manhattan Construction to lead the construction

of its 73,000 seat, 3 million- square-foot stadium To be (7) in three

years, the stadium design featured two monumental arches spanning about a quarter-mile inlength over the dome, a retractable roof, the largest retractable glass doors in the world (in eachend zone), canted glass exterior walls, 325 private suites, and a 600-ton JumboTron hovering

90 feet above the field

With only 7% of football fans ever setting foot in a professional stadium, “Our maincompetition is the home media center,” Cowboys owner Jerry Jones said in unveiling the

stadium design in 2006 “We wanted to offer a real (8) that you

can’t have at home, but to see it with the technology that you do have at home.”

Generally speaking, the Cowboys Stadium project had five (9) _ :

(1) conceptualization, (2) design and planning, (3) preconstruction, (4) construction, and (5)

finalization and delivery During this 40-month process, Manhattan Construction hiredarchitects and subcontractors, created blueprints, purchased and cleared land, developed thestadium—ranging from excavation to materials testing to construction—built out and finished

interiors, and completed (10) changes before the stadium’s

(11) in mid-2009

While most construction projects have distinct stages, compressed timeframes andscope changes required diligent management by Manhattan Construction Before the first gamewas played, Manhattan Construction successfully navigated nearly 3,000 change requests and aconstantly evolving budget

To ensure proper allocation and accounting of resources, Manhattan Construction

project managers used (12) _ The system first calculated the (13)

of more than 500 line items of direct materials and labor costs It then allocated

(14) _ (supervisor salaries, rent, materials handling, and so on)

to the job using direct material costs and (15) as

(16) _ Manhattan Construction’s job-costing system allowed

managers to track (17) on a weekly basis Manhattan

Construction continually estimated the profitability of the Cowboys Stadium project based on

(18) of work completed, insight gleaned from previous stadium

projects, and revenue earned Managers used the job-costing system to actively manage costs,while the Dallas Cowboys had access to clear, concise, and transparent

(19) _

Just like quarterback Tony Romo navigating opposing defenses, Manhattan

Construction was able to (20) _ its job-costing system to ensure the

successful construction of a stadium as iconic as the blue star on the Cowboys’ helmets

2 Listen and fill in the blanks

such as what type of films to produce in the future? How

much to charge for DVD? and even figure out if the director is keeping to a film’s budget while

it is being made

(3) involves the (4) , (5) and (6) _

of (7) From these data, companies can determine both

(8) and (9) of each product There are two

basic types of (10) : a job-order cost system and a process cost system Under (11) _ , a company like a movie studio or an independent self – financed film maker assigns costs to each job or in this case each movie produced And an (12)

of job order costing is that each job or batch has its own (13) , it measures costs for (14) rather than for set time periods

Heidi van Leer knows a lot about film costs She‘s not only a programmer for theannual Slamdance Film Festival in Park City Ulta but in independent film maker herself

Heidi van Leer:” Production costs, especially the studio production they’re really used

to spending a lot of money on everything In an independent film, I usually just try and feed

my crew, pay for my equipment, pay for stock and that’s about it.”

Companies that manufacture large volumes of (15) use a

(16) which accumulates product related costs for (17) such

as a quarter or year and assigns them to (18) or processes Job order

costing is more precise in assignment of costs to projects than process costing However

recording the information is (19) Just the same, it isn’t unusual for a

company to use both systems For example Jones Soda practices process costing when manufacturing soda but uses job order costing when producing small custom orders for Its my

Jones program

Studios today must be more budget – conscious than ever that means maintaining a

good job order (20) The flow of costs (21) _ ,

(22) _ and (23) in job order cost

accounting parallels the physical flow of the materials as they are converted into finished

goods While a film is produced, the studio accumulates (24) through

accurate record keeping and assigns those costs to the account for each film as a

(25) When the film is finished, they transfer the cost to the

film to finished good inventory Later, when the film is sold or distributed, they transfer the

costs for that film to (26) So that they can compare costs to the final

revenues of the film to determine their profit

Not all cost can be easily attributed to one section as the flow of material Overheadcosts like studio executive office space cannot be assigned to specific jobs on the basis of

(27) incurred Instead companies assign costs to a work - in process into

specific jobs on an estimated basis to the use (28)

In general, company across industries established a predetermined overhead rate

(29) of the year Small companies often use a single company – wide

predetermined overhead rate Large companies often use rates that vary from department todepartment The formula for a predetermined overhead rate is as follows:

(30) _ divided by (31) equals

Predetermined overhead rate Overhead relates to production operations as a whole To knowwhat the whole is, the logical thing is to wait until the end of the year operation At that time,the studio know all of its costs for the period As a practical matter though, managers cannot

wait until (32) To price product accurately they need information about product costs of (33) completed during the year Using a predetermined

overhead rate enables the cost to be determined for the job immediately

Job order costing can be fairly (34) _ and (35)

manufacturing situations But how costs are assigned to a movie is often

(36) _ and may be subjected to (37) For

example in Hollywood studios often negotiate producer, director and actors payment based on

a percentage of a films (38) As a movie has gone to larger box

office grosses it is not uncommon to see the various players fighting over what they perceive to

be their fair share

Film making has changed greatly in the last half century Before 1970s it was nearlyimpossible to do a film outside of a major studio Technology has changed all that But evenwith new distribution channels like cable networks and the internet the overwhelming supply

of material has reduced the price, studio can pay for any individual film

The (39) _ of film both great and small is dependent upon the practices

of a careful (40)

Summary

Read and fill in the blanks with the following words: predetermined overhead rate, labor time tickets, job-order costing, over-applied overhead, manufacturing overhead costs, the actual overhead cost, materials requisition forms, the estimated total manufacturing overhead cost, finished goods, the estimated total amount of the allocation base, direct labor- hours, machine-hours, under-applied, cost of goods sold, work- in process

(1) is used in situations where the organization offersmany different products or services, such as in furniture manufacturing, hospitals, and legal

firms (2) and (3) are used to assign direct

materials and direct labor costs to jobs in a job- order costing system

(4) are assigned to jobs using a (5)

All of the costs are recorded on a job cost sheet The predetermined overhead rate is

determined before the period begins by dividing (6)

for the period by (7) for the period The

most frequently used allocation bases are (8) and

(9) _ Overhead is applied to jobs by multiplying the

predetermined overhead rate by the actual amount of the allocation base recorded for the job.Because the predetermined overhead rate is based on estimates,

(10) incurred during a period may be more or less

than the amount of overhead cost applied to production Such a difference is referred to as

Questions

1 Why aren’t actual manufacturing overhead costs traced to jobs just as direct materialsand direct labor costs are traced to jobs?

2 Explain the four-step process used to compute a predetermined overhead rate

3 What is the purpose of the job cost sheet in a job-order costing system?

4 Explain how a sales order, a production order, a materials requisition form, and a labortime ticket are involved in producing and costing products

5 Explain why some production costs must be assigned to products through an allocationprocess

6 Why do companies use predetermined overhead rates rather than actual manufacturingoverhead costs to apply overhead to jobs?

7 What factors should be considered in selecting a base to be used in computing thepredetermined overhead rate?

8 If a company fully allocates all of its overhead costs to jobs, does this guarantee that aprofit will be earned for the period?

9 What account is credited when overhead cost is applied to Work in Process? Would youexpect the amount applied for a period to equal the actual overhead costs of the period? Why

or why not?

10 What is under-applied overhead? Over-applied overhead? What disposition is made ofthese amounts at the end of the period?

11 Provide two reasons why overhead might be under-applied in a given year

12 What adjustment is made for under-applied overhead on the schedule of cost of goodssold? What adjustment is made for over-applied overhead?

13 What is a plant-wide overhead rate? Why are multiple overhead rates, rather than aplant - wide overhead rate, used in some companies?

14 What happens to overhead rates based on direct labor when automated equipmentreplaces direct labor?

Part B: Process costing

Glossary

1 Conversion cost Direct labor cost plus manufacturing overhead cost

2 Equivalent units The product of the number of partially completed units and their

percentage of completion with respect to a particular cost Equivalentunits are the number of complete whole units that could be obtainedfrom the materials and effort contained in partially completed units

4 FIFO method A process costing method in which equivalent units and unit costs

relate only to work done during the current period

5 Operation costing A hybrid costing system used when products have some common

characteristics and some individual characteristics

6 Process costing A costing method used when essentially homogeneous products are

produced on a continuous basis

Hybrid Costing for Customized Shoes at Adidas

Adidas has been designing and manufacturing athletic footwear for nearly 90 years.Although shoemakers have long individually crafted shoes for professional athletes like ReggieBush of the New Orleans Saints, Adidas took this concept a step further when it initiated the

Mi adidas program Mi adidas gives customers the (1) to create

shoes to their exact personal specifications for function, fit, and aesthetics Mi adidas is

available in (2) around the world, and in special Mi adidas

“Performance Stores” in cities such as New York, Chicago, and San Francisco

The process works as follows: The customer goes to a Mi adidas station, where a

salesperson develops an in-depth (3) , a 3-D computer scanner develops

a scan of the customer’s feet, and the customer selects from among 90 to 100 different styles

and colors for his or her modularly designed shoe During the (4) _ ,

30-minute high-tech process, mi adidas experts take customers through the “mi fit,” “mi

performance,” and “mi design” phases, resulting in a customized shoe (5) _

their needs The resulting data are transferred to an Adidas plant, where small, multiskilled

teams produce the (6) shoe The measuring and fitting process is

(7) , but purchasing your own specially made shoes costs between

$40 and $65 on top of the normal retail price, depending on the style

Historically, costs associated with individually customized products have fallen into the

domain of job costing Adidas, however, uses a (8) — (9) for the material and customizable components that customers choose and (10) _

to account for the conversion costs of production The cost of making each pair of shoes is

calculated by accumulating all (11) and dividing by the number of shoes made In other words, even though each pair of shoes is different, (12) of

each pair is assumed to be the same

The (13) of customization with certain features of mass

production is called mass customization It is the consequence of being able to

(14) information that individual customers indicate is important to

them Various products that companies are now able to customize within

(15) _ setting (for example, personal computers, blue jeans,

bicycles) still require job costing of materials and considerable human intervention However,

as manufacturing systems become flexible, companies are also using process costing toaccount for the standardized conversion costs

2 Listen and fill in the blanks

Jones Soda

In a world where soda brands and flavors can be found almost anywhere and often fill

entire aisle supermarkets, John Soda manages (1) _ from the

competition This is partly due to quirky label photos which are submitted by customer as well

as their fund yet eccentric line of soda flavors

Mike Spear: “It’s kind of a modern terms but I would say that Jones is an

(2) , today we had 1.2 million photos in our gallery,

online photo gallery, so we really let consumers participate in the brand You know that andour flavors and colors of our flavors are very unique There is not a lot of green apples sodasout there, not a lot of fruits sodas out there.”

Fans of Jones Soda are so well fanatic that many create video tributes to their favoriteflavors or feel themselves trying some of the more challenging flavor There are manycompanies today that manufacture sodas, so competition is understandably fears for bothmarket share and sell space

(3) is a cost accounting method that works ideally for the

soda industry or any industry where costs are assigned to (4) that are (5) in a continuous fashion (6) on the other hand is better suited for organizations looking to assign costs to (7) such as advertising agencies, motion picture companies and law firms (8) between the two include: both (9) track three manufacturing (10) , the accumulation of the costs of materials, labor and overhead and (11) is the same The (12) between a job order cost and a process cost system are : the number of (13) accounts used, the documents used (14) costs, the point at which costs are (15) and unit cost computations

As a general rule, manufacturing of soda normally consists of two processes: blendingand bottling As the flow of costs indicates: companies can add materials, labor andmanufacturing overhead in both departments When the blending Department finishes its work,

they transfer the (16) to the bottling department The bottling department finishes the goods and then transfers (17) Within each department (18) is performed on (19)

Since Jones Soda uses a wide variety of labels particularly within the my Jones personalcustomization program, they have three major processes: blending, bottling and labeling Theuse of custom labels has a bit of a story history of Jones Soda When they first incorporatedcustom labels ten years ago, the process was quite humble They used an intern and inkjetprinter

Mike Spear:” Literally it was sort of a (20) as business grew we

decided that we had to outsource it and then the process actually goes through a machinenow where the labels are glued in, the liquid goes through a process of applying to the bottles

so it’s not hands on anymore

Vendors such as this can give Jones a (21) because as suppliers they have expertise in specialized areas Alternatively, large (22) like Coke

and Pepsi have the resources and economy of scale to do almost everything internally

Now let’s look at an example where we’ve generalized to the assignment of cost atJones for the previous month For purposes of this exercise let’s assume Jones does everythingin-house, so there would be three processes First, we have a work - in process for rawmaterials Raw materials used were blending 16,000; bottling 3,000 and labeling 7,000.Factory labor costs were blending 10,000; bottling 4,000 and labeling 6,000 and manufacturingoverhead costs were blending 5,000; bottling 2,000 and labeling 2500 The company transfersunits completed at a cost of $19,000 in the blending department to the bottling department Thebottling department transfers units completed at a cost of $10,000 to the labeling departmentand the labeling department transfers units completed at a cost of $8,000 to finished goods

Companies often use a combination of a process cost and a job order cost system

called (23) This (24) is similar to process costing in its assumption that (25) are used to manufacture the product The my

Jones program for example with its highly customized small quantity orders is a good example

of a manufactured product more suited to a job order cost system

Jones Soda has a model run with the little guy create some changes Cost accountinghelps Jones to compete in a cutthroat business against industry mega corporations along theway they’ve inspired a great loyalty among fans and organizations including NASA whoordered soda during their space shuttle program

Mike Spear:”And I find out that was just neat They put it in their VIP areas so I would

imagine senators and vice president senior drinking Jones as they watch the space shuttlelaunched into space I think in a model of some other soda brands if another CBG brand that

we make this emotional connection with consumers, and it just makes me feel good that we canmake people feel good so.”

Summary

Read and fill in the blanks with the following words: transferred out, the cost reconciliation report, percentage of completion, equivalent units, process costing, a job-order costing system, specific cost category, partially completed units, costs flow, completed units, weighted-average method, work–

in process

(1) _ is used in situations where homogeneous products or services are produced on a continuous basis (2) through the

manufacturing accounts in basically the same way in a process costing system as in

(3) However, costs are accumulated by department rather than

by job in process costing

In process costing, the (4) of production must be determined for each cost category in each department Under the (5) , the

equivalent units of production equals the number of units transferred out to the nextdepartment or to finished goods plus the equivalent units in ending work in processinventory The equivalent units in ending inventory equals the product of the number of

(6) in ending work in process inventory and their (7) _ with respect to the specific cost category

Under the weighted-average method, the cost per equivalent unit for a (8)

is computed by adding the cost of beginning work in process inventory and the cost addedduring the period and then dividing the result by the equivalent units of production The cost

per equivalent unit is then used to value the ending (9) inventory and the units (10) to the next department or to finished goods

(11) reconciles the cost of beginning inventory and the costs

added to production during the period to the cost of ending inventory and the cost of unitstransferred out Costs are transferred from one department to the next until the last processing

department At that point, the cost of (12) is transferred to finished goods.

Questions

1 Under what conditions would it be appropriate to use a process costing system?

2 In what ways are job-order and process costing similar?

3 Why is cost accumulation simpler in a process costing system than it is in a job-ordercosting system?

4 How many Work in Process accounts are maintained in a company that uses processcosting?

5 Assume that a company has two processing departments—Mixing followed by Firing.Prepare a journal entry to show a transfer of work in process from the Mixing Department

to the Firing Department

6 Assume that a company has two processing departments—Mixing followed by Firing.Explain what costs might be added to the Firing Department’s Work in Process accountduring a period

7 What is meant by the term equivalent units of production when the weighted-averagemethod is used?

8 Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, andgold The medallions are identical except for the materials used in their manufacture Whatcosting system would you advise the company to use?

Topic 2 CVP analysis

Glossary

leverage

A measure, at a given level of sales, of how apercentage change in sales will affect profits Thedegree of operating leverage is computed by dividingcontribution margin by net operating income

5 Incremental analysis An analytical approach that focuses only on those

costs and revenues that change as a result of a decision

break-even dollar sales

a given percentage change in dollar sales

products are sold Sales mix is computed byexpressing the sales of each product as a percentage oftotal sales

9 Target profit analysis Estimating what sales volume is needed to achieve a

specific target profit.

10 Variable expense ratio A ratio computed by dividing variable expenses by

dollar sales

Concepts in action

1 Read and fill in the blanks with the following words: low, competitive disadvantage,

in contrast, loyal listeners, fixed costs, cost structure , revenue, bankruptcy, the weight of, lost, variable costs, decrease, high operating leverage, profitability, in debt, opposite, cut, high , renegotiating, fee

Fixed Costs, Variable Costs, and the Future of Radio

Building up too much (1) can be hazardous to a company’s health Because fixed costs, unlike (2) , do not automatically (3) as

volume declines, companies with too much fixed costs can lose a considerable amount ofmoney during lean times SiriusXM, the satellite radio broadcaster, learned this lesson the hardway

To begin broadcasting in 2001, both Sirius Satellite Radio and

XM Satellite Radio—the two companies now comprising SiriusXM—spent billions of dollars

on broadcasting licenses, space satellites, and other technology infrastructure Onceoperational, the companies also spent billions on other fixed items such as programming andcontent (including Howard Stern and Major League Baseball), satellite transmission, and

R&D (4) , variable costs were minimal, consisting mainly of artist-royalty

fees and customer service and billing In effect, this created a business model with a

(5) —that is, the companies’ (6) had a very

significant proportion of fixed costs As such, (7) could only be

achieved by amassing millions of paid subscribers and selling advertising

The (8) of this highly-leveraged business model was nearly

disastrous Despite amassing more than 14 million subscribers, over the years Sirius and XM

rang up $3 billion (9) and tallied cumulative operating losses in excess of $10 billion.

Operating leverage, and the threat of bankruptcy, forced the merger of Sirius and XM in

2007, and since then the combined entity has struggled to (10) costs, refinance its

sizable debt, and reap the profits from over 18 million monthly subscribers

While satellite radio has struggled under (11) too much fixed cost, Internet radio had the (12) problem—too much variable costs But “How?”

you ask Don’t variable costs only increase as revenues increase?

Yes, but if the revenue earned is less than the variable cost, an increase in revenue can lead

to (13) This is almost what happened to Pandora, the Internet radio

service

Pandora launched in 2005 with only $9.3 million in venture capital Available free overthe Internet, Pandora earned revenue in three ways: advertising on its Web site, subscriptionfees from users who wanted to opt-out of advertising, and affiliate fees from iTunes and

Amazon.com Pandora had (14) fixed costs but (15) variable costs for

streaming and performance royalties Over time, as Pandora’s popular service attracted

millions of (16) , its costs for performance royalties––set by the Copyright

Royalty Board on a per song basis––far exceeded its revenues from advertising andsubscriptions As a result, even though royalty rates were only a fraction of a cent, Pandora

(17) more and more money each time it played another song!

In 2009, Pandora avoided bankruptcy by (18) a lower per-song

royalty rate in exchange for at least 25% of its U.S revenue annually Further, Pandora began

charging its most frequent users a small (19) and also started increasing its advertising (20)

2 Listen and fill in the blanks

Southwest Airlines

Brad Hawkins: “Southwest Airlines is simply the most legendary and successful

company in modern aviation history Almost everyone has a Southwest story whether you are

an employee working for the company or you are a devoted customer to the product theSouthwest offered for nearly 40 years.”

Back then in 1971 Southwest was just a scrappy upstart with a cheeky sense of humor.Today they ‘re still cheeky but they carry more passengers within the US than any other

airlines and they’ve been (1) every single year of their existence even during

(2) when some competitors were losing 10 to 15 million a day

Managing any business requires an understanding of how costs respond to changes in

(3 and the effective changes in (4) and (5) on (6) .

Within (7) companies classify costs in a (8) of ways.

(9) are costs that vary in total (10) with changes

in the (11) So, for example if an airline paid 10cents a bag for peanuts and

a flight had one passenger the cost for peanuts would be 10cents If there were 50 passengersthe cost would be $5 and if there were 100 passengers it would be $10 Variables costs may

also be defined as costs that (12) at every level of activity within (13) So, the per unit cost of a bag of peanut would be the same regardless of the number of passengers on the plane (14) are cost that

(15) regardless of changes in the activity level The salary of the

pilot on that flight for example would be the same regardless if he or she flew 50 passengers or

100 Because total fixed costs (16) as (17) , fixed costs per unit is very (18) with activity, as volume increases unit costs decrease and (19) Thus if we were to calculate the pilot salary per passenger for one

passenger the fixed cost per unit would be $200, for 2 passengers it would be $100 and for

100 passengers it would be just $2

Today airlines like Southwest are thought of largely as variable cost companies because

fuel often their largest cost can (20) in price How significant is this particular variable cost to their (21) , they consume 1.4 billion gallons of fuel

a year so just a 1 cent per gallon increase equals $14 million It follows then that

(22) would play a key role in their (23)

The most significant relationship in cost volume profit analysis is the

(24) at which total revenues equal total costs or the (25) A

great way for a company to determine a break–even point is to prepare ( 26

also known not surprisingly as (27) Let’s examine a typically airline

round-trip flight To keep things simple, we assume that every ticket costs $100 and that the

plane has 150 seats Okay, looking at our graph we’ve got the unit of sales along the (28) which in this case is seats The (29) _ is labeled $ because we will use

it to record both total revenues and total costs (fixed plus variable) First, we plot our total

sales line starting at zero going up to (30) So, total revenue for a full plane would be $100 times 150 seats or $1500 The revenue line here is (31)

throughout, sets all tickets cost the same

Next, we plot our total fixed cost which in this case happens to be $4000 and it is thesame at every level of activity This represents things like the pilot salary overhead in

(32) A total cost line starts at the fixed cost line at zero activity For

this flight we assume a variable cost of $ 60 per seat So, if the plane were

(33) the variable cost would be $60 times 150 seats, or $9,000and the total cost would be $9,000 in variable costs plus $4,000 in fixed costs, or $13,000

(34) that total costs from total revenue we get a $2,000 profit round – trip.

And where do they break-even? That would be here, at the (35) of the total

cost line and the total sales line where at 100 seats or $10,000 in sales Southwest covers thecosts but has not yet earned a profit

Okay, now the interesting part, Southwest flights are not always full, of course In factthe average last year was 75% occupancy On our graph, that translates to just $480 in profitround-trip or $240 each way Wait, $240 in profit cannot be true? Well, yes in fact the

(36) for a one-way flight on Southwest last year was just slightly

higher at $290 And if your divide that by the average one-way ticket price of $58, you can seethat just 5 passengers per flight kept the most successful airline in the USA

Why are airline margin so razor-thin? Mostly because ticket prices adjusted for

inflation or half of what they were 25 years ago Fuel costs have (37) and that

explains why most airlines now charge for checked baggage, most but not Southwest

Brad Hawkins: “The leadership really made a courageous decision Early on this

process The Wall Street analysts saying: “What are you doing? You’ve leaving hundreds of

millions of dollars in (38) on the table.” But people don’t

want feel nickel-and-dime they don’t want to come back to that.”

How did Southwest make this decision by analyzing (39) and

(40) Southwest flights’re just one type of aircraft and the

resulting efficiencies give them the lowest baggage handling costs in the industry Crunching

the numbers they predicted that the Bags Fly Free program would lead to higher occupancy

rates and more revenue and the profits would outweigh incremental revenue gain from baggagefees and as Brad’s explain, their prediction was correct

Brad Hawkins: “Our leadership noted a significant share shift more than a 1% which is

about a billion dollars’ worth of customer business shifting over to us for no reason other the

Bags Fly Free strategy.”

The airline business is complex in few companies today seem to properly manage alltheir fixed and variable costs from personnel to fuel contracts to flight schedules Southwestdoes it well, manages customer loyalty and seems to have an awful lot of fun in the process

3 Listen and fill in the blanks

Whole foods

Michael Besancon has worked for Whole Foods for most of his adult life He loves hisjob and that has a lot to do with the fact that he feels good about the Whole foods mission

Michael Besancon:” the number one (1) of Whole Foods market is to

sell the highest quality natural organic foods possible Every store of Whole Foods market isdifferent and every store has a feel You could blindfold me and take me into a Whole FoodsMarket anywhere in the country and I would know I was in a Whole Foods If I didn’t see anysigns because I would know it by the feel.”

Whole Foods sells mostly organic groceries with an emphasis on fresh produces Theircommitment to sustainable agriculture, collaboration with suppliers in community wellnessmakes them a premium brand that costs a little more than their big box competitors butmaintaining high quality and great value for the customers without compromising their corevalues is the true secret to their success

(2) (CVP) is the study of the effects of changes in (3) and (4) on the (5) Is it important to (6) ?

Determining (7) ? Maximizing use of (8) ? Setting (9) ? And it’s often reported in a (10) for (11) The income statement classifies costs as variable or fixed and compute a (12) - the amount of revenue remaining after deducting

variable costs

Let’s start by reviewing some basics about CVP analysis, specifically break-evenanalysis, target net income and margin of safety For sake of simplicity, let’s assume you’re

selling just one product, tomatoes at a farmers market (13) can be

computed by taking fixed costs and dividing by the contribution margin

((14) ) Contribution margin can also be expressed in the form of

the (15) , contribution margin divided by sales providing the

break-even point in dollars versus units When a company is in its early stages of operation, the

(16) is break even Failure to do so will lead to (17)

Once you’ve determined the break-even point, you want to set a sale goal that will

generate a (18) This will provide you with (19 in

either units or dollars depending on whether you use a contribution margin per unit or

contribution margin ratio Finally, (20) indicates how much sales

can decline before you’re operating at a loss and again can be expressed in dollar terms or as apercentage

Ok, that seems easy enough Now let’s get back to the Whole foods where things areslightly more complicated because Whole Foods doesn’t just sell tomatoes, they sell thousands

of different products with different costs that fluctuate constantly under a variety of

(21) such as the weather, competition and transportation costs.

Michael Besancon:” Produce could be a higher because of lower freight costs in one

area and in another area it could have a lower margin on it What you have to do is you have toblend your margin across the full spectrum of products “