C T C D Cost Terms, Concepts, and Classifications: Cost Volume Profit Analysis

2-1
2-1
Cost Volume Profit Analysis
z Cost Terms,Concepts,Classifications
z Cost Behaviour
z Cost Volume Profit ( CVP ) Analysis
© McGraw-Hill Ryerson Limited., 2001
C T
Cost Terms, CConcepts, and
d
Classifications
2-2
2-3
Managerial Accounting and

Financial Accounting
Managerial accounting Financial accounting

provides information provides information
for managers of an to stockholders,
organization who creditors and others
direct and control who are outside
its operations. the organization.
2-4
Work of Management
Planning
Directing and
Motivating
Controlling

2-3
2-5
Planning and Control Cycle

Formulating Long-and Begin
Short-Term Plans
((Planning)
g)
Comparing Actual Implementing

to Decision the Plans
Planned Performance Making (Directing and
(Controlling) Motivating)
Measuring
Performance
(Controlling)
2-6
Differences Between Financial and

Managerial Accounting
Financial Managerial
Accounting Accounting
1. Users External persons w ho Managers w ho plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance

versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on

timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments

the w hole organization of an organization
6. Requirements Must follow GAAP Need not follow GAAP

and prescribed formats or any prescribed format

2-4
2-7
Comparing Merchandising and

Manufacturing Activities
Merchandisers . . . Manufacturers . . .
Buy finished goods
goods. Buy raw materials.
materials
Sell finished goods. Produce and sell
finished goods.
MegaLoMart
2-8
Manufacturing Cost Concepts
Financial Managerial
Accounting Accounting
Cost is a measure of Product costs are the
resources used or costs a company
given up to achieve a assigns to units
stated purpose. produced.

2-5
2-9
Manufacturing Costs
Direct Direct Manufacturing

g
Materials Labour Overhead
The Product
2-10
Direct Materials
Those materials that become an integral part

of the product and that can be conveniently
traced directly to it.
Example: A radio installed in an automobile

2-6
2-11
Direct labour
Those labour costs that can be easily traced to
individual units of product
product.
Example: Wages paid to automobile assembly workers
2-12
Manufacturing Overhead
Manufacturing costs that cannot be traced
directly to specific units produced
produced.
Examples: Indirect labour and indirect materials
Wages paid to employees Materials used to support

who are not directly the production process.
i
involved
l d in
i production
d ti
work. Examples: lubricants and
Examples: maintenance cleaning supplies used in the
workers, janitors and automobile assembly plant.
security guards.

2-7
2-13
Classifications of Costs
Manufacturing costs are often

combined as follows:
Direct Direct Manufacturing
Materials labour Overhead
Prime Conversion
Cost Cost
2-14
Nonmanufacturing Costs
Marketing and selling costs . . .

Costs necessary to get the order and deliver the
product.
Administrative costs . . .
All executive, organizational, and clerical costs.

2-8
2-15
Product Costs Versus Period Costs
Product costs include Period costs are not

direct materials
materials, direct included in product
labour, and costs. They are
manufacturing expensed on the
overhead. income statement.
Inventory Cost of Good Sold Expense
S l
Sale
Balance Income Income

Sheet Statement Statement
2-16
Balance Sheet
Merchandiser Manufacturer
C rrent Assets
Current C rrent Assets
Current
Cash Cash
Receivables Receivables
Prepaid Expenses Prepaid Expenses
Merchandise Inventory Inventories
Raw Materials
Work in Process
Finished Goods

2-9
2-17
Balance Sheet
Merchandiser Manufacturer
C rrent Assets
Current C rrent Assets
Current
Cash Cash
Receivables Materials
Receivables
waiting to
Prepaid Expenses Prepaid
be processed.
Expenses
Merchandise Inventory
Partially complete Inventories
products – some Raw Materials
material, labour, or Work in Process
overhead has been Finished Goods
added.
Completed products
awaiting sale.
2-18
The Income Statement

Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $248,350
248 350 Goods available
- Ending for sale $248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $236,250 = Cost of goods
sold $236,250

2-10
2-19
Manufacturing Cost Flows

Income
Balance Sheet Statement
Costs Inventories Expenses
Material Purchases Raw Materials
2-20

Income
Direct labour Work in

Process
Manufacturing
Overhead

2-11
2-21

Income

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold
2-22

Income

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold
Selling and Period Costs Selling and

Administrative Administrative
2-12
2-23
Inventory Flows
Beginning
Additions Available
balance + $$$ = $$$$$
$$
_
Withdrawals
$$$
=
Ending
balance
$$
2-24
Product Costs - A Closer Look

Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
Beginning inventory
is the inventory
carried over from
the prior period.

2-13
2-25

Manufacturing Work
Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
As items are removed from raw
in production materials inventory and placed into
the production process, they are
called direct materials.
2-26

Manufacturing Work
Conversion
C i
Beginning raw Direct materials
costs are costs
materials inventory + Direct labour
+ Raw materials + Mfg. overhead incurred to
purchased = Total manufacturing convert the
= Raw materials costs direct material
available for use
in production into a finished
– Ending raw materials product
product.
inventory
= Raw materials used
in production

2-14
2-27

Manufacturing Work
Beginning raw Direct materials Beginning work in

materials inventory + Direct labour process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory All manufacturing costs incurred
process inventory
= Raw materials used during the period are added
= Cost to the
of goods
in production beginning balance of manufactured.
work in
process.
2-28

Manufacturing Work
Beginning raw Direct materials Beginning work in

materials inventory + Direct labour process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
Costs associated with the goods that
inventory process inventory
= Raw materials used = Cost of goods
are completed during the period are
in production manufactured.
transferred to finished goods
inventory.

2-15
2-29

Work
In Process Finished Goods
Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– E di
Ending workk in
i - Ending
E di finished
fi i h d
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost B
C Behaviour:
h i
Analysis and Use
2-16
2-31
Cost Classifications for Predicting

Cost Behaviour
How a cost will react to

changes in the level of
business activity.
Total variable costs
change when activity
changes.
Total
T t l fixed
fi d costs
t
remain unchanged
when activity changes.
2-32
Total Variable Cost
Your total long distance telephone bill is

b
basedd on hhow many minutes
i t you ttalk.
lk
ng Distance
phone Bill
Total Lon
Telep
Minutes Talked
2-17
2-33
Variable Cost Per Unit
The cost per long distance minute talked is

constant.
t t For
F example,
l 10 cents
t per minute.
i t
Telephone Charge
Per Minute
Minutes Talked
2-34
Total Fixed Cost

Your monthly basic telephone bill probably
does not change when you make more local
calls.
hly Basic
hone Bill
Teleph
Month
Number of Local Calls

2-18
2-35
Fixed Cost Per Unit

The average cost per local call decreases as
more local calls are made
made.
asic Telephone
Bill perr Local Call
Monthly Ba Number of Local Calls
2-36
Cost Classifications for Predicting

Cost Behaviour
Behaviour of Cost (within the relevant range)

Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.

2-19
2-37
Cost Behaviour
Fixed costs are usually characterized by:
a. Unit costs that remain constant.

b. Total costs that increase as activity
decreases.
c. Total costs that increase as activity
increases.
d. Total costs that remain constant.
2-38
Cost Behaviour
Fixed costs are usually characterized by:
a. Unit costs that remain constant.

decreases.
increases.

2-20
2-39
Cost Behaviour
Variable costs are usually characterized by:

a. Unit
U it costs
t th
thatt decrease
d as activity
ti it
increases.
decreases.
c
increases.
2-40
Cost Behaviour
Variable costs are usually characterized by:

a. Unit
U it costs
t th
thatt decrease
d as activity
ti it
increases.
decreases.
c
increases.

2-21
2-41
Direct Costs and Indirect Costs
Direct costs Indirect costs

z Costs
C t that
th t can be
b z Costs
C t cannott be
b easily
il
easily and conveniently and conveniently traced
traced to a unit of to a unit of product or
product or other cost other cost object.
objective. z Example:
z Examples: direct manufacturing
material
t i l and
d di
directt overhead
h d
labour
2-42
Differential Costs and Revenues
Costs and revenues that differ among

alternatives.
lt ti
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a
neighbouring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.
Differential revenue is:

$2,000 – $1,500 = $500

2-22
2-43
Differential Costs and Revenues
Costs and revenues that differ among

alternatives.
lt ti
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a
neighbouring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.
Differential revenue is:

$2,000 – $1,500 = $500
Differential cost is:
$300
2-44
Opportunity Costs
The potential benefit that
is g
given up
p when one
alternative is selected
over another.
Example: If you were not

attending college, you could
be earning $15,000 per
year. Your opportunity cost
of attending college for one
year is $15,000.

2-23
2-45
Sunk Costs
Sunk costs cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions.
decisions
Example: You bought an automobile that cost

$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it,
trade it
it, or sell itit, you cannot change the
$10,000 cost.
2-46
Cost Behaviour
Examples of normally variable costs
Merchandisers Service Organizations
C
Cost off G
Goods S
Sold S
Supplies
li and
d travel
t l
Manufacturers Merchandisers and

Direct Material, Direct Manufacturers
Labour, and Variable Sales commissions and
Manufacturing Overhead shipping costs
E
Examples
l off normally
ll fixed
fi d costs
t
Merchandisers, manufacturers, and
service organizations
Real estate taxes, Insurance, Sales salaries
Amortization, Advertising
2-24
2-47
The Linearity Assumption and the

Relevant Range
Economist’s
Economist s
Curvilinear Cost
Function
Total Cost
Activity
2-48

Relevant Range
Economist’s
Economist s
Curvilinear Cost
Function
Total Cost
Accountant’s
A t t’ Straight-Line
St i ht Li
Approximation (constant
unit variable cost)
Activity
2-25
2-49

Relevant Range A straight line
closely
approximates
Economist’s
Economist s a curvilinear
Curvilinear Cost variable cost
Function line within the
relevant
Relevant range.
Total Cost
Range
Accountant’s
A t t’ Straight-Line
St i ht Li
Approximation (constant
unit variable cost)
Activity
2-50
Types of Fixed Costs

Fixed Costs
Committed Discretionary
Long-term, cannot be May be altered in the
reduced in the short short-term by current
term. managerial decisions
Examples Examples
Amortization on Advertising and
Buildings and Research and
Equipment Development
2-26
2-51
Trend Toward Fixed Costs
Increased automation.
Increase in salaried “knowledge” workers
who are difficult to train and replace.
Implications
Managers
g are more “locked-in” with fewer decision
alternatives.
Planning becomes more crucial because fixed costs are
difficult to change with current operating decisions.
2-52
Fixed Costs and Relevant Range
Example: Office space is

available at a rental rate
of $30,000 per year in
increments of 1,000
square feet. As the
business grows more
p
space is rented,,
increasing the total cost.
Continue

2-27
2-53
Fixed Costs and Relevant Range
sands of Dollars
s 90
Total cost doesn’t
change for a wide
Cost in
Relevant
60 range of activity,
Range
and then jumps to a
new higher cost for
Rent
30 the next higher

Thous
R
range of activity.
00 1,000 2,000 3,000

Rented Area (Square Feet)
2-54
Mixed Costs
A mixed
i d costt
has both fixed
and variable
p
components.
Consider
C id th
the
following electric
utility example.

2-28
Cost-Volume-Profit
C V l P fi
Relationships
2-56
The Basics of Cost-Volume-Profit

(CVP) Analysis
WIND BICYCLE CO.
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (500 bikes) $ 250,000 $ 500
Less: variable expenses 150,000 300
Contribution margin 100,000 $ 200
C t ibLess:
ti fixed
Contribution M expenses
Margini (CM) isi the 80 000 t remaining
80,000
th amount i i from
f
Net income $ 20,000
sales revenue after variable expenses have been
deducted.

2-29
2-57

(CVP) Analysis
WIND BICYCLE CO.
Total Per Unit
Sales (500 bikes) $ 250,000 $ 500
Less: fixed expenses 80 000
80,000
Net
CMincome $ 20,000
is used to cover fixed expenses.
2-58

(CVP) Analysis
WIND BICYCLE CO.
Total Per Unit
Sales (500 bikes) $ 250,000 $ 500
Less: fixed expenses 80 000
80,000
Net income $ 20,000
After covering fixed costs, any remaining CM
contributes to income.

2-30
2-59
The Contribution Approach
For each additional unit Wind sells, $200

more in
i contribution
t ib ti margin
i will
ill h
help
l tto
cover fixed expenses and profit.
Total Per Unit
Sales (500 bikes) $250,000 $ 500
Contribution margin $100,000 $ 200
Less: fixed expenses 80,000
Net income $ 20,000
2-60
Each month Wind must generate at least

$80 000 in
$80,000 i total
t t l CM tto b
break
k even.
Total Per Unit

Sales (500 bikes) $250,000 $ 500
Contribution margin $100,000 $ 200
Net income $ 20,000

2-31
2-61
If Wind sells 400 units in a month, it will be

operating
ti att the
th break-even
b k point.
i t
WIND BICYCLE CO.
Total Per Unit
Sales (400 bikes) $ 200,000 $ 500
Less: variable expenses 120 000
120,000 300
Net income $ 0
2-62
If Wind sells one additional unit (401

bik ) nett iincome will
bikes), ill iincrease b
by $200
$200.
WIND BICYCLE CO.
Total Per Unit
Sales (401 bikes) $ 200,500 $ 500
Net income $ 200

2-32
2-63

The break-even point can be defined either as:
°The point where total sales revenue equals total
expenses (variable and fixed).
±The point where total contribution margin equals
total fixed expenses.
2-64
Contribution Margin Ratio
The contribution margin ratio is:

Contribution margin
CM Ratio =
Sales
For Wind Bicycle Co. the ratio is:

$200
= 40%
$500

2-33
2-65
At Wind, each $1.00 increase in sales

revenue results
lt iin a ttotal
t l contribution
t ib ti
margin increase of 40¢.
If sales increase by $50,000, what will be

the increase in total contribution margin?
2-66

400 Bikes 500 Bikes
Sales $200,000 $250,000
Less: variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed expenses 80,000 80,000
Net income $ - $ 20,000
A $50,000
$ increase in sales revenue

2-34
2-67

400 Bikes 500 Bikes
Sales $200,000 $250,000
Net income $ - $ 20,000
A $50,000
$ increase in sales revenue
results in a $20,000 increase in CM
or ($50,000 × 40% = $20,000)
2-68
Changes in Fixed Costs and Sales

Volume
Wind is currently selling 500 bikes per month.
The company’s
company s sales manager believes that
an increase of $10,000 in the monthly
advertising budget would increase bike sales
to 540 units.
S
Should we authorize the requested increase
in the advertising budget?

2-35
2-69

Volume
$80,000 + $10,000 advertising = $90,000
Current Sales Projected Sales

(500 bikes) (540 bikes)
Sales $ 250,000 $ 270,000
Net income $ 20 000
20,000 $ 18 000
18,000
Sales increased by $20,000, but net

income decreased by $2,000..
2-70

Volume
The Shortcut Solution
Increase in CM (40 units X $200) $ 8,000

Increase in advertising expenses 10,000
Decrease in net income $ (2,000)

2-36
2-71
APPLICATIONS OF CVP
Consider the following basic data:

Per unit Percent
Sales Price $250 100
Less: Variable cost 150 60
Contribution margin 100 40
Fixed costs total $35,000
2-72
APPLICATIONS
z Current sales are $100,000. Sales
manager feels $10,000 increase in sales
budget will provide $30,000 increase in
sales. Should the budget be changed?
YES
Incremental CM approach:
$30,000 x 40% CM ratio 12,000
Additional advertising expense 10,000
Increase in net income 2,000

2-37
2-73
APPLICATIONS
z Management is considering increasing
quality of speakers at an additional cost of
$10 per speaker. Plan to sell 80 more units.
Should management increase quality?
Expected total CM YES
= (480 speakers x$90) $43,200
Present total CM
= (400 speakers x$100) 40,000
Increase in total contribution margin 3,200
(and net income)
2-74
APPLICATIONS
z Management advises that if selling price
dropped $20 per speaker and
advertising
d ti i iincreased dbby $15
$15,000/month,
000/ th
sales would increase 50%. Good idea?
Expected total CM NO
= (400x150%x$80) $48,000
Present total CM ((400x$100)) 40,000
,
Incremental CM 8,000
Additional advertising cost 15,000
Reduction in net income (7,000)
2-38
2-75
APPLICATIONS
z A plan to switch sales people from flat
salary
l ($6
($6,000
000 per month)
th) tto a sales
l
commission of $15 per speaker could
increase sales by 15%. Good idea? YES
Expected total CM (400x115%x$85) $39,100
Current total CM (400x$100) 40,000
Decrease in total CM (900)
Salaries avoided if commission paid 6,000
Increase in net income $5,100
2-76
APPLICATIONS
z A wholesaler is willing to buy 150 speakers

if we will give him a discount off our price
price.
The sale will not disturb regular sales and
will not change fixed costs. We want to
make $3,000 on this sale. What price
should we quote?
Variable cost per speaker $
$150
Desired profit on order (3,000/150) 20
Quoted price per speaker $170

2-39
2-77
Break-Even Analysis
Break-even analysis can be approached in

two ways:
nEquation method
oContribution margin method.
2-78
Equation Method
Profits = Sales – (Variable expenses + Fixed expenses)
OR
Sales = Variable expenses + Fixed expenses + Profits
At the break-even ppoint

profits equal zero.

2-40
2-79
Equation Method
Here is the information from Wind Bicycle Co.:
Total Per Unit Percent

Sales (500 bikes) $250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $100,000 $ 200 40%
Net income $ 20,000
2-80
Equation Method
We calculate the break-even point as follows:
$500Q = $300Q + $80,000 + $0
Where:
Q = Number of bikes sold
$500 = Unit
U it sales
l price
i
$300 = Unit variable expenses
$80,000 = Total fixed expenses

2-41
2-81
Equation Method
We calculate the break-even point as follows:
$500Q = $300Q + $80,000 + $0
$200Q = $80,000
Q = 400 bikes
2-82
Equation Method
We can also use the following equation to
compute the break-even point in sales dollars.
X = 0.60X + $80,000 + $0
Where:
X = Total sales dollars
0 60
0.60 = Variable expenses as a
percentage of sales
$80,000 = Total fixed expenses

2-42
2-83
Equation Method
We can also use the following equation to
compute the break-even point in sales dollars.
X = 0.60X + $80,000 + $0
0.40X = $80,000
X = $200,000
2-84
Contribution Margin Method
The contribution margin method is a

variation
i ti off the
th equation
ti method.
th d
Break-even point Fixed expenses

=
in units sold Unit contribution margin
Break-even point in Fixed expenses

total sales dollars = CM ratio

2-43
2-85
CVP Relationships in Graphic Form

Viewing CVP relationships in a graph gives managers a
perspective that can be obtained in no other way.
Consider the following information for Wind Co.:
Co :
Income Income Income

300 units 400 units 500 units
Sales $ 150,000 $ 200,000 $250,000
Less: variable expenses 90,000 120,000 150,000
Contribution margin $ 60,000 $ 80,000 $100,000
Less: fixed expenses 80,000 80,000 80,000
Net income (loss) $ (20,000) $ - $ 20,000
2-86
CVP Graph
450,000
400,000
,
350,000
300,000
250,000
Total Expenses
200,000
150,000
, Fixed expenses
p
100,000
50,000
-
- 100 200 300 400 500 600
Units
2-44
2-87
CVP Graph
450,000
400,000
,
350,000
300,000
250,000 Total Sales

200,000
150,000
,
100,000
50,000
-
- 100 200 300 400 500 600
Units
2-88
CVP Graph
450,000
400 000
400,000
350,000
300,000
250,000
200,000
150 000
150,000
B k
Break-even poin
i
100,000
50,000
-
- 100 200 300 400 500 600
Units © McGraw-Hill Ryerson Limited., 2001

2-45
2-89
Target Profit Analysis
Suppose Wind Co. wants to know how

many bikes
bik mustt be
b sold
ld to
t earn a profit
fit
of $100,000.
We can use our CVP formula to determine

the sales volume needed to achieve a
target net profit figure.
2-90
The CVP Equation

$500Q = $300Q + $80,000 + $100,000
$200Q = $180,000
Q = 900 bikes

2-46
2-91
The Contribution Margin Approach
We can determine the number of bikes that

must be sold to earn a profit of $100
$100,000
000
using the contribution margin approach.
Units sold to attain Fixed expenses + Target profit
=
the target profit Unit contribution margin
$80,000 + $100,000
= 900 bikes
$200
2-92
The Margin of Safety
Excess of budgeted (or actual) sales over

th break-even
the b k volume
l off sales.
l Th
The
amount by which sales can drop before
losses begin to be incurred.
Margin of safety = Total sales - Break-even sales
Let’s calculate the margin of safety for Wind.

2-47
2-93
Wind has a break-even point of $200,000. If

actual sales are $250
$250,000,
000 the margin of
safety is $50,000 or 100 bikes.
Break-even
sales Actual sales
400 units 500 units
Sales $ 200,000 $ 250,000
Net income $ - $ 20,000
2-94
The margin of safety can be expressed as

20 percent of sales.
sales
($50,000 ÷ $250,000)
Break-even
sales Actual sales
400 units 500 units
Sales $ 200,000 $ 250,000
Net income $ - $ 20,000

2-48
2-95
Operating Leverage
z A measure of how sensitive net income is to
p
percentage
g changes
g in sales.
z With high leverage, a small percentage
increase in sales can produce a much larger
percentage increase in net income.
Degree of Contribution margin
operating leverage = N t iincome
Net
2-96
Operating Leverage
Actual sales
500 Bikes
Sales $ 250,000
250 000
Less: variable expenses 150,000
Contribution margin 100,000
Net income $ 20,000
$100,000 = 5
$20,000

2-49
2-97
Operating Leverage
With a measure of operating leverage of 5,

if Wind
Wi d iincreases itits sales
l b by 10%
10%, nett
income would increase by 50%.
Percent increase in sales 10%
Degree of operating leverage × 5
Percent increase in profits 50%
Here’s the proof!
2-98
Operating Leverage
Actual sales Increased
(500) sales (550)
Sales $ 250,000
250 000 $ 275,000
275 000
Less variable expenses 150,000 165,000
Less fixed expenses 80,000 80,000
Net income $ 20,000 $ 30,000
10% iincrease in
i sales
l from
f
$250,000 to $275,000 . . .
. . . results in a 50% increase in
income from $20,000 to $30,000.
2-50
2-99
The Concept of Sales Mix

z Sales mix is the relative proportions in
which a company’s products are sold.
z Different products have different selling
prices, cost structures, and contribution
margins.
Let s assume Wind sells bikes and carts and

Let’s
see how we deal with break-even analysis.
2-
100
The Concept of Sales Mix
Wind Bicycle Co. provides us with the

following information:
Bikes Carts Total
Sales $ 250,000 100% $ 300,000 100% $ 550,000 100%
Var. exp. 150,000 60% 135,000 45% 285,000 52%
Contrib. margin $ 100,000 40% $ 165,000 55% 265,000 48%
Fixed exp. $265,000 170,000
Net income = 48% (rounded) $ 95,000
,
$550 000
$550,000
Break-even point in sales dollars:

$170,000 = $354,167 (rounded)
0.48
2-51
2-
101
Assumptions of CVP Analysis
nSelling price is constant throughout

the entire relevant range.
range
oCosts are linear throughout the
entire relevant range.
pIn multi-product companies, the
sales mix is constant.
qI manufacturing
qIn f t i companies, i
inventories do not change (units
produced = units sold).

C T C D Cost Terms, Concepts, and Classifications: Cost Volume Profit Analysis

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2-1

Cost Volume Profit Analysis

z Cost Volume Profit ( CVP ) Analysis

© McGraw-Hill Ryerson Limited., 2001

Managerial Accounting and

Managerial accounting Financial accounting

© McGraw-Hill Ryerson Limited., 2001

© McGraw-Hill Ryerson Limited., 2001

Planning and Control Cycle

Comparing Actual Implementing

Differences Between Financial and

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance

4. Precision versus Emphasis on Emphasis on

5. Subject Primary focus is on Focuses on segments

6. Requirements Must follow GAAP Need not follow GAAP

© McGraw-Hill Ryerson Limited., 2001

Comparing Merchandising and

© McGraw-Hill Ryerson Limited., 2001

Manufacturing Cost Concepts

© McGraw-Hill Ryerson Limited., 2001

Direct Direct Manufacturing

© McGraw-Hill Ryerson Limited., 2001

Those materials that become an integral part

Example: A radio installed in an automobile

© McGraw-Hill Ryerson Limited., 2001

Example: Wages paid to automobile assembly workers

© McGraw-Hill Ryerson Limited., 2001

Wages paid to employees Materials used to support

© McGraw-Hill Ryerson Limited., 2001

Manufacturing costs are often

© McGraw-Hill Ryerson Limited., 2001

Marketing and selling costs . . .

© McGraw-Hill Ryerson Limited., 2001

Product Costs Versus Period Costs

Product costs include Period costs are not

Balance Income Income

© McGraw-Hill Ryerson Limited., 2001

© McGraw-Hill Ryerson Limited., 2001

The Income Statement

© McGraw-Hill Ryerson Limited., 2001

Manufacturing Cost Flows

© McGraw-Hill Ryerson Limited., 2001

Manufacturing Cost Flows

Direct labour Work in

© McGraw-Hill Ryerson Limited., 2001

Manufacturing Cost Flows

Direct labour Work in

© McGraw-Hill Ryerson Limited., 2001

Manufacturing Cost Flows

Direct labour Work in

Selling and Period Costs Selling and

© McGraw-Hill Ryerson Limited., 2001

Product Costs - A Closer Look

© McGraw-Hill Ryerson Limited., 2001

Product Costs - A Closer Look

Beginning raw Direct materials

© McGraw-Hill Ryerson Limited., 2001

Product Costs - A Closer Look

© McGraw-Hill Ryerson Limited., 2001

Product Costs - A Closer Look

Beginning raw Direct materials Beginning work in