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-if” analysis
Uses relationships among fundamental components of basic “accounting” equation representing income
TWO APPROACHES TO PROFIT
Financial
Managerial
Revenue - Direct materials - Direct labor - Overhead
Revenue - Direct materials (V) - Direct labor (V) - Overhead (V) - Other expenses (V)
= Gross margin - Other expenses = Profit
= 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-if” decisions 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. Selling price Variable costs Fixed costs
Product X
Product Y
$10 $6 $10,000
$15 $12 $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.
Selling price Variable costs Fixed costs
Product X
Product Y
$10 $6 $10,000
$15 $12 $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