Introduction to Management Accounting

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Introduction to Management
Accounting
Chapter 2

Introduction
Introduction to
to
Cost
Cost Behavior
Behavior and
and
Cost-Volume
Cost-Volume
Relationships
Relationships

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Cost Drivers and Cost Behavior

ny
ny output
output measure
measure that
that causes
causes
Cost
behavior
is
how
the
activities
Cost
behavior
is
how
the
activities
the
the use
use of
of costly
costly resources
resources
of
an
organization
affect
its
costs.
of
an
organization
affect
its
costs.
is
is aa cost
cost driver.
driver.

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Value Chain Functions, Costs, and Cost

Drivers
Value
Example
ValueChain
ChainFunction
Functionand
andExample
ExampleCosts
Costs
ExampleCost
Cost
Drivers
Drivers
Production
Production
Labor
Labor
Labor wages
wages
Labor hours
hours
Supervisory
Number
Supervisory salaries
salaries
Number of
of people
people
supervised
supervised
Maintenance
Number
Maintenance wages
wages
Number of
of mechanic
mechanic
hours
hours
Depreciation
Number
Depreciation of
of plant
plant and
and machinery
machinery
Number of
of
machine
machine hours
hours
supplies
supplies
Energy
Kilowatt
Energy cost
cost
Kilowatt hours
hours

Marketing
Marketing
Cost
Number
Cost of
of advertisements
advertisements
Number of
of
ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs
advertisements

Learning
Objective 2

Variable and Fixed Cost

Behavior

AA variable
variable cost
cost
changes
changes in
in direct
direct
proportion
proportion to
to changes
changes
in
in the
the cost-driver
cost-driver level.
level.

AA fixed
fixed cost
cost is
is
not
not immediately
immediately
affected
affected by
by changes
changes
in
in the
the cost-driver.
cost-driver.

Think
Think of
of variable
variable
costs
costs on
on aa per-unit
per-unit basis.
basis.

Think
Think of
of fixed
fixed costs
costs
on
on aa total-cost
total-cost basis.
basis.

The
The per-unit
per-unit variable
variable
cost
cost remains
remains unchanged
unchanged
regardless
regardless of
of changes
changes in
in
the
the cost-driver.
cost-driver.

Total
Total fixed
fixed costs
costs remain
remain
unchanged
unchanged regardless
regardless of
of
changes
changes in
in the
the cost-driver.
cost-driver.

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

CVP Scenario

Cost-volume-profit
Cost-volume-profit(CVP)
(CVP)analysis
analysisisisthe
thestudy
studyof
ofthe
theeffects
effectsof
ofoutput
output
volume
volumeon
onrevenue
revenue(sales),
(sales),expenses
expenses(costs),
(costs),and
andnet
netincome
income(net
(netprofit)
profit
Per
PerUnit
Unit

Percentage
Percentageof
ofSales
Sales
Selling
$1.50
100%
Sellingprice
price
$1.50
100%
Variable
1.20
80
Variablecost
costof
ofeach
eachitem
item
1.20
80
Selling
$$ .30
20%
Sellingprice
priceless
lessvariable
variablecost
cost
.30
20%
Monthly
Monthlyfixed
fixedexpenses:
expenses:
Rent
$3,000
Rent
$3,000
Wages
Wagesfor
forreplenishing
replenishingand
and
servicing
13,500
servicing
13,500
Other
Otherfixed
fixedexpenses
expenses
Total
Totalfixed
fixedexpenses
expensesper
permonth
month

1,500
1,500
$$18,000
18,000

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Learning
Objective 3

Break-Even Point

The
The break-even
break-even point
point is
is the
the level
level of
of sales
sales at
at which
which
revenue
revenue equals
equals expenses
expenses and
and net
net income
income is
is zero.
zero.

Sales
Sales
--Variable
Variableexpenses
expenses
-- Fixed
Fixedexpenses
expenses
Zero
Zeronet
netincome
income(break-even
(break-evenpoint)
point)

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Contribution Margin Method

Contribution
Contribution margin
margin ratio
ratio
Contribution margin
margin
Contribution
Per
Per Unit
Unit
%
Per Unit
Unit
Per
%
Selling
$1.50
Selling price
price
100
Selling price
price
$1.50
Selling
100
Variable
1.20
Variable costs
costs
.80
Variable costs
costs
1.20
Variable
.80
Contribution
Contribution margin
margin .20
.20
Contribution margin
margin $$ .30
.30 Contribution

$18,000
$18,000 fixed
fixed costs
costs
$.30
$.30
=
= 60,000
60,000 units
units (break
(break even)
even)

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Contribution Margin Method

60,000
60,000 units
units $1.50
$1.50 == $90,000
$90,000
in
in sales
sales to
to break
break even
even

Or
$18,000
$18,000 fixed
fixed costs
costs
20%
20% (contribution-margin
(contribution-margin percentage)
percentage)
== $90,000
$90,000 of
of sales
sales to
to break
break even
even

ice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Equation Method

Let
Let NN== number
number of
ofunits
units
to
tobe
besold
soldto
to break
break even.
even.

Sales
Salesvariable
variableexpenses
expensesfixed
fixedexpenses
expenses==net
netincome
income
$1.50N
$1.50N$1.20N
$1.20N$18,000
$18,000==00
$.30N
$.30N==$18,000
$18,000
NN==$18,000
$18,000$.30
$.30
NN==60,000
60,000Units
Units

ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Equation Method
Let
Let SS =
= sales
sales in
in dollars
dollars
needed
needed to
to break
break even.
even.
SS .80S
.80S $18,000
$18,000 =
= 00
.20S
.20S =
= $18,000
$18,000
SS =
= $18,000
$18,000
.20
.20
SS =
= $90,000
$90,000
Shortcut
Shortcut formulas:
formulas:
Break-even
fixed
Break-even volume
volume in
in units
units =
=
fixed expenses
expenses
unit
unit contribution
contribution margin
margin
Break-even
Break-even volume
volume in
in sales
sales =
= fixed
fixed expenses
expenses
contribution
contribution margin
margin ratio
ratio

ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

The End

End of Chapter 2

ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs