You are on page 1of 36 MANAGERIAL ACCOUNTING

COST BEHAVIORS, SYSTEMS, AND ANALYSIS

with Gary Hecht Cost-Volume-Profit Analysis  Foundations and Basic Analyses LESSON 4-1 OBJECTIVES

You should understand:

The fundamental concepts of CVP analysis

How to apply CVP analysis, recognizing the influence of setting characteristics on method and conclusions COST-VOLUME-PROFIT

ANALYSIS

Analytic tool useful for:

What-ifanalysis

Uses relationships among fundamental components of basic accountingequation representing income  TWO APPROACHES TO PROFIT

Financial

Revenue

- Direct materials

- Direct labor

= Gross margin

- Other expenses

= Profit

Managerial

Revenue

- Direct materials (V)

- Direct labor (V)

- Other expenses (V)

= Contribution margin

- All fixed expenses (F)

= Profit FUNDAMENTAL EQUATION Operating Profit = Revenues Total VC Total FC

We can use this equation to ask a very basic question:

How many units do we have to sell to break even?  FUNDAMENTAL EQUATION Operating Profit = Revenues Total VC Total FC

Step 1: Set operating profit to \$0

0 = Revenues Total VC Total FC  FUNDAMENTAL EQUATION

0 = Revenues Total VC Total FC Step 2: Simplify terms into components (where applicable)

0 = (Selling price x Q) (VC per unit x Q) Total FC  FUNDAMENTAL EQUATION 0 = (SP x Q) (VC x Q) Total FC

Step 3: Isolate Total FC and factor out Q

Total FC = Q x (SP VC)  FUNDAMENTAL EQUATION Total FC = Q x (SP – VC)

Step 4: Isolate Q

Q = Total FC = Total FC

(SP – VC)

CM    EXAMPLE 1 The following information relates to a microchip manufactured by Kane Corporation:

Current selling price, per unit: \$7.55 Direct labor, per unit: \$1.00 Direct materials, per unit: \$2.00 Variable manufacturing overhead, per unit: \$1.35 Other variable costs (mostly selling), per unit: \$1.20 Fixed manufacturing overhead for microchip: \$2.5 M/year Other fixed costs for microchip: \$1.5 M/year

EXAMPLE 1

Calculate the break-even point for Kane Company.  ASSUMPTIONS UNDERLYING CVP ANALYSIS

Costs can be categorized as fixed or variable – or broken down appropriately

Everything is linear:

Revenue Variable costs Fixed costs

In manufacturing firms, the inventory levels at the beginning and end of the period are the same. This implies that the number of units produced during the period equals the number of units sold. ASSUMPTIONS UNDERLYING CVP ANALYSIS

Efficiency and productivity of production processes remain constant

Sales mix remains constant over the relevant range

Product mix does not change in response to changes in production/sales volume EXAMPLE 2 - TAXES Taves Donuts sells donuts, coffee, and other related food items. The following information is available:

Service varies from a single coffee to multiple dozen donuts. The average revenue earned for each customer is \$8.00.

The average cost of food and other variable costs for each customer is \$3.00.

Total fixed costs for the year is \$450,000.

The income tax rate is 30%.

Target (i.e., desired) net income is \$105,000.

EXAMPLE 2 Data: SP = \$8.00; VC = \$3.00; FC = \$450,000; Target income = \$105,000; Tax Rate = .30

How many customers are needed to break even?

EXAMPLE 2 Data: SP = \$8.00; VC = \$3.00; FC = \$450,000; Target income = \$105,000; Tax Rate = .30

How many customers are needed to reach the desired profit?

EXAMPLE 2     EXAMPLE 2 EXAMPLE 2  WHAT WE’VE LEARNED IN LESSON 4-1

How to use the contribution margin approach to facilitate what-ifdecisions

CVP analysis simply fixes four of the five variables in the profit equation and solves for the fifth

Most commonly, we fix target profit, selling price, variable unit costs, and fixed costs, and solve for quantity  Multi-Product Scenarios and Related Concepts  LESSON 4-2 OBJECTIVES

You will understand how to:

Apply CVP analysis in more complex (i.e., multi-product) scenarios

Customize analysis to correspond with assumptions, uncertainty, and managers’ needs  EXAMPLE 3 – MULTIPLE PRODUCTS

HOSA Company manufactures two products – Product X and Product Y.

Product X

Product Y

 Selling price \$10 \$15 Variable costs \$6 \$12 Fixed costs \$10,000 \$12,000

Compute HOSA’s break-even point.     EXAMPLE 3 – MULTIPLE PRODUCTS            EXAMPLE 3 – MULTIPLE PRODUCTS HOSA Company manufactures two products – Product X and Product Y.

Product X

Product Y

 Selling price \$10 \$15 Variable costs \$6 \$12 Fixed costs \$10,000 \$12,000

Let’s also assume that normally, HOSA’s sales are 60% Product X and 40% Product Y.

EXAMPLE 3 – MULTIPLE PRODUCTS    WHAT WE’VE LEARNED IN LESSON 4-2

Multi-product scenarios

Assumptions determine method and conclusions  WHAT WE’VE LEARNED IN MODULE 4

Fundamentals of CVP analysis Assumptions Setting-specific 