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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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5-3
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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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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Illustration 5-1
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Illustration 5-2
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Illustration 5-2
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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
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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
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
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Illustration 5-9
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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
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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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