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Variable/Fixed

Costs
Relevant Range Managerial Accounting
Mixed Costs
Second Edition
CVP Analysis
Contribution
Weygandt / Kieso / Kimmel
Margin
Break-Even
Point
Margin of Safety
CVP Income
Statement

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5-1
Variable/Fixed Cost-Volume-Profit Relationships
Costs
Relevant Range
Mixed Costs
CVP Analysis
Contribution
Margin
Break-Even
Point
Margin of Safety
CVP Income
Statement

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5-2
Variable/Fixed Cost-Volume-Profit Relationships
Costs
Relevant Range
To manage any size business
Mixed Costs
CVP Analysis you must understand:
Contribution
Margin
how costs respond to
Break-Even
Point
changes in sales volume
Margin of Safety
CVP Income
Statement
the effect of costs and
revenues on profits.
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Cost Behavior Analysis
Variable/Fixed
Costs
Relevant Range
The study of how specific
Mixed Costs
CVP Analysis
costs respond to changes in
Contribution
Margin
the level of business
Break-Even
Point
activity.
Margin of Safety
CVP Income
Statement

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Activity (Volume) Index
Variable/Fixed
Costs
Relevant Range
The activity that causes
Mixed Costs
CVP Analysis
changes in the behavior of
Contribution
Margin
costs. Examples:
Break-Even
Point
Sales dollars in retail company
Margin of Safety
Miles driven in trucking
CVP Income
Statement company
Room occupancy in hotel
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Classes taught at college
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5-5
Activity (Volume) Index
Variable/Fixed
Costs
Relevant Range
Changes in level or volume of
Mixed Costs
CVP Analysis
activity should be correlated
Contribution
Margin
with changes in costs.
Break-Even
Point
Margin of Safety
CVP Income
Statement

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5-6
Three Categories of Costs
Variable/Fixed
Costs
Relevant Range
Mixed Costs
Variable
CVP Analysis
Contribution
Margin
Fixed
Break-Even
Point
Margin of Safety
CVP Income
Mixed
Statement

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5-7
Illustration 5-1

Variable Costs - in Total


Variable/Fixed
Costs Costs that vary in total
Relevant Range
Mixed Costs
directly and proportionately
CVP Analysis with changes in the activity
Contribution
Margin
level.
Break-Even
Point
Margin of Safety
Variable Cost= $10 per unit
CVP Income  0 units = $ 0= total
Statement  2 units = $ 20= total
 4 units = $ 40= total
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 6 units = $ 60=total
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10units = $100=total
5-8
Illustration 5-1

Variable Costs - per Unit


Variable/Fixed
Costs
Relevant Range
Costs that remain the same
Mixed Costs
per unit at every level of
CVP Analysis activity.
Contribution
Margin
Break-Even
Point
Margin of Safety
Variable Cost= $10 per unit
CVP Income  0 units = $ 0 per unit
Statement  2 units = $ 10 per unit
 4 units = $ 10 per unit
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 6 units = $ 10 per unit
Slide Slide  8 units = $ 10 per unit
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10units = $ 10 per unit
5-9
Fixed Costs - in Total
Variable/Fixed
Costs Costs that remain the same in
Relevant Range
Mixed Costs
total regardless of changes
CVP Analysis
in the activity level.
Contribution
Margin
Property Taxes
Break-Even
Point
Insurance
Margin of Safety Rent
CVP Income
Statement
Supervisory Salaries
Depreciation on building,
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equipment
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Illustration 5-2

Fixed Cost - in Total


Variable/Fixed
Costs
Relevant Range
Costs that remain the same in
Mixed Costs
total regardless of changes in
CVP Analysis the activity level.
Contribution
Margin
Break-Even
Point
Total Fixed Costs= $ 10,000
Margin of Safety
CVP Income
2 units = $ 10,000 per month
Statement 4 units = $ 10,000 per month
6 units = $ 10,000 per month
8 units = $ 10,000 per month
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Illustration 5-2

Fixed Cost - per Unit


Variable/Fixed
Costs
Relevant Range
Costs that very inversely with
Mixed Costs
activity. As volume increases,
CVP Analysis unit cost declines.
Contribution
Margin
Break-Even
Point
Total Fixed Costs= $ 10,000
Margin of Safety
CVP Income
2 units = $ 5,000 per unit
Statement 4 units = $ 2,500 per unit
6 units = $ 1,667 per unit
8 units = $ 1,250 per unit
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Relevant Range
Variable/Fixed
Costs
Relevant Range
The range of activity index
Mixed Costs
CVP Analysis
over which the company
Contribution
Margin
expects to operate during the
Break-Even
Point
year.
Margin of Safety
CVP Income
Statement
Often between 40-80 %
of Capacity
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Mixed Costs
Variable/Fixed
Costs
Relevant Range
Costs that contain both a
Mixed Costs
CVP Analysis
variable and a fixed cost
Contribution
Margin
element and change in total
Break-Even
Point
but not proportionately with
Margin of Safety changes in the activity level.
CVP Income
Statement
Rental of U-haul Truck
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$50 a day (Fixed Amount) +
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$.50 a mile (Variable Cost)
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Illustration 5-5

Behavior of a Mixed Costs


High-Low Method
Variable/Fixed
Costs
Relevant Range
A mathematical method that
Mixed Costs
CVP Analysis
uses the total costs incurred
Contribution
Margin
at the high and low levels of
Break-Even
Point
activity.
Margin of Safety
CVP Income
Statement

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Illustration 5-7

High-Low Method
Metro Transit Company has the following maintenance
costs and mileage data for its fleet of buses over a
4-month period:
Month Miles Driven Total Cost Month Miles Driven Total Cost
January 20,000 $30,000 March 35,000 $49,000
February 40,000 $48,000 April 50,000 $63,000

April $63,000 50,000


January 30,000 20,000
Difference $33,000 30,000
$33,000  30,000 = $1.10 variable costs per mile
Illustration 5-8

High-Low Method
Metro Transit Company would compute the fixed portion
as:
Activity Level

High Low
Total Cost $63,000 $30,000
Less: Variable costs
(50,000 x $1.10) 55,000
(20,000 x $1.10) 22,000
Total fixed costs $ 8,000 $ 8,000

Maintenance costs are $8,000 per month fixed plus $1.10


per mile. For example at 45,000 miles, estimated
maintenance costs would be
$49,500 = variable (45,000 x $1.10), and $8,000 fixed.
High-Low Method
Variable/Fixed
Costs
Relevant Range
The high-low method generally
Mixed Costs
CVP Analysis
produces a reasonable (not a
Contribution
Margin
precise) estimate for analysis.
Break-Even
Point
Margin of Safety
CVP Income
Statement

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Illustration 5-9

Cost-Volume-Profit (CVP) Analysis


Variable/Fixed
Costs The study of the effects of
Relevant Range
changes in costs and volume
on a company’s profits.
Mixed Costs
CVP Analysis
Contribution
Margin
Break-Even
Point
Margin of Safety
CVP Income
Statement

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CVP Income Statement
Variable/Fixed
Costs
Relevant Range
A statement for internal use
Mixed Costs
CVP Analysis
that classifies costs and
Contribution
Margin
expenses as fixed or variable
Break-Even
Point
and reports contribution
Margin of Safety margin in the body of the
CVP Income
Statement statement.

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Illustration 5-31

CVP Income Statement

VARGO VIDEO COMPANY


Income Statement
For the Month Ended June 30, 2002
Traditional Format CVP Format
Sales $ 800,000 Sales
Cost of goods sold 520,000 $ 800,000
Variable expenses
Gross profit 280,000 Cost of goods sold $ 400,000
Operating expenses Selling expenses 60,000
Selling expenses $ 100,000 Administrative expenses 20,000
Administrative expenses 60,000 Total variable expenses 480,000
Total operating expenses 160,000 Contribution Margin 320,000
Net income $ 120,000 Fixed expenses
Cost of goods sold 120,000
Selling expenses 40,000
Administrative expenses 40,000
Total fixed expenses 200,000
Net income $ 120,000
Contribution Margin (CM)
Variable/Fixed
Costs
Relevant Range
The amount of revenue
Mixed Costs
CVP Analysis
remaining after deducting
Contribution
Margin
variable costs.
Break-Even
Point
Margin of Safety
CVP Income
Statement

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Contribution Margin Per Unit
Variable/Fixed
Costs
Relevant Range
The amount of revenue
Mixed Costs
CVP Analysis
remaining per unit after
Contribution
Margin
deducting variable costs;
Break-Even
Point
calculated as unit selling
Margin of Safety price minus unit variable
CVP Income
Statement cost.

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Contribution Margin Ratio
Variable/Fixed
Costs
Relevant Range
The percentage of each dollar
Mixed Costs
CVP Analysis
of sales that is available to
Contribution
Margin
contribute to net income;
Break-Even
Point
calculated as contribution
Margin of Safety margin per unit divided by
CVP Income
Statement unit selling price.

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CVP Graph
Variable/Fixed
Costs
Relevant Range
A graph showing the
Mixed Costs relationship between costs,
CVP Analysis
Contribution volume, and profits.
Margin
Break-Even
Point
Margin of Safety
CVP Income
Statement

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Target Net Income
Variable/Fixed
Costs
Relevant Range
The income objective for
Mixed Costs
CVP Analysis
individual product lines.
Contribution
Margin
Break-Even
Point
Margin of Safety
CVP Income
Statement

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Break-Even Point
Variable/Fixed
Costs
Relevant Range
The level of activity at which
Mixed Costs
CVP Analysis
total revenues equal total
Contribution
Margin
costs.
Break-Even
Point
Margin of Safety
CVP Income
Statement

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Break-Even Point
Variable/Fixed
Costs • Is the level of activity where total
Relevant Range
Mixed Costs
revenues equals total costs, both
CVP Analysis
fixed and variable.
Contribution
Margin
• Can be expressed in sales dollars
Break-Even
or sales units.
Point
Margin of Safety
• Is useful to management in
CVP Income
deciding whether:
Statement
– To add new product lines
– Change sales prices on
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– To enter new markets
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Break-Even Point
Variable/Fixed
Costs
Relevant Range
Mixed Costs
CVP Analysis
Contribution
Margin
Break-Even
Point
Margin of Safety
CVP Income
Statement

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Margin of Safety
Variable/Fixed
Costs
Relevant Range
The difference between
Mixed Costs actual or expected sales and
CVP Analysis
Contribution sales at the break-even
Margin
Break-Even point.
Point
Margin of Safety
CVP Income
Statement

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Variable/Fixed
COPYRIGHT
Costs
Relevant Range
Copyright
Mixed Costs © 2002, John Wiley & Sons, Inc. All rights reserved.
Reproduction
CVP Analysis or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
Contribution
Margin
express written permission of the copyright owner is unlawful.
Break-Even
Request for further information should be addressed to the
Point
Permissions Department, John Wiley & Sons, Inc. The purchaser
Margin of Safety
may
CVP make back-up copies for his/her own use only and not for
Income
distribution or resale. The Publisher assumes no responsibility
Statement
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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