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Chapter 2
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 1
Learning Objective 1
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 2
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 3
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 4
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 5
Value chain function and Example costs Distribution Wages of shipping personnel Transportation costs including depreciation of vehicles and fuel
Customer service Salaries of service personnel products Costs of supplies, travel
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 6
Learning Objective 2
A variable cost changes in direct proportion to changes in the cost-driver level. Think of variable costs on a per-unit basis. The per-unit variable cost remains unchanged regardless of changes in the cost-driver.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 7
Relevant Range
The relevant range is the limit of cost-driver activity level within which a specific relationship between costs and the cost driver is valid.
Even within the relevant range, a fixed cost remains fixed only over a given period of time Usually the budget period.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 8
Relevant range
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 9
CVP Scenario
Cost-volume-profit (CVP) analysis is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit). Per Unit $1.50 1.20 $ .30 Percentage of Sales 100% 80 20%
Selling price Variable cost of each item Selling price less variable cost Monthly fixed expenses: Rent Wages for replenishing and servicing Other fixed expenses Total fixed expenses per month
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 10
Learning Objective 3
Break-Even Point
The break-even point is the level of sales at which revenue equals expenses and net income is zero.
Sales - Variable expenses - Fixed expenses Zero net income (break-even point)
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 11
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 12
$18,000 fixed costs 20% (contribution-margin percentage) = $90,000 of sales to break even
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 13
Equation Method
Sales variable expenses fixed expenses = net income $1.50N $1.20N $18,000 = 0 $.30N = $18,000 N = $18,000 $.30 N = 60,000 Units
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 14
Equation Method
Let S = sales in dollars needed to break even. S .80S $18,000 = 0 .20S = $18,000 S = $18,000 .20 S = $90,000 Shortcut formulas: Break-even volume in units = fixed expenses unit contribution margin Break-even volume in sales = fixed expenses contribution margin ratio
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 15
Learning Objective 4
Cost-Volume-Profit Graph
A Net Income
Sales
90,000
60,000 30,000 18,000 0
B
Total Expenses
Variable Expenses
Units (thousands)
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 16
Learning Objective 5
Managers use CVP analysis to determine the total sales, in units and dollars, needed To reach a target net profit.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 17
Operating Leverage
Operating leverage: a firms ratio of fixed costs to variable costs.
Highly leveraged firms have high fixed costs and low variable costs. A small change in sales volume = a large change in net income.
Low leveraged firms have lower fixed costs and higher variable costs. Changes in sales volume will have a smaller effect on net income. Margin of safety = planned unit sales break-even sales How far can sales fall below the planned level before losses occur?
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 20
Learning Objective 6
Selling price Variable costs (acquisition cost) Contribution margin and gross margin are equal
$ .30
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 21
Sales Acquisition cost of unit sold Variable commission Total variable expense Contribution margin Gross margin
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 22
Nonprofit Application
Suppose a city has a $100,000 lump-sum budget appropriation to conduct a counseling program. Variable costs per prescription is $400 per patient per day. Fixed costs are $60,000 in the relevant range of 50 to 150 patients.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 23
Nonprofit Application
If the city spends the entire budget appropriation, how many patients can it serve in a year? $100,000 = $400N + $60,000 $400N = $100,000 $60,000 N = $40,000 $400 N = 100 patients
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 24
Nonprofit Application
If the city cuts the total budget Appropriation by 10%, how many Patients can it serve in a year?
Learning Objective 7
Sales mix is the relative proportions or combinations of quantities of products that comprise total sales.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 26
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 27
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 28
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 30
$ 325,000 $100,000
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 31
Learning Objective 8
Suppose that a company earns $480 before taxes and pays income tax at a rate of 40%.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 32
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 33
$.50N $.40N $6,000 = $288 (1 0.40) $.10N = $6,000 + ($288/.6) $.06N = $3,600 + $288 = $3,888 N = $3,888/$.06 N = 64,800 units
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 34
$.50N $.40N $6,000 = $480 (1 0.40) $.10N = $6,000 + ($480/.6) $.06N = $3,600 + $480 = $4080 N = $4,080 $.06 N = 68,000 units
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 35
The End
End of Chapter 2
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 2 - 36