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by: Zelda McCullough


Zelda McCullough
GPA 3.63

C. Seifried

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C. Seifried
Class Notes
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This 32 page Class Notes was uploaded by Zelda McCullough on Tuesday October 13, 2015. The Class Notes belongs to KIN 4501 at Louisiana State University taught by C. Seifried in Fall. Since its upload, it has received 19 views. For similar materials see /class/222613/kin-4501-louisiana-state-university in Kinesiology at Louisiana State University.




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Date Created: 10/13/15
CHAPTER COST VOLUME PROFIT Accounting Fourth Edition Sfudy Objec ves 1 DisTinguish beTween variable and fixed cosTs 2 Explain The concepT of mixed cosTs 3 LisT The five componenTs of cosTvolumepr39ofiT analysis 4 IndicaTe whaT conTr39ibuTion margin is and how iT can be expressed 5 IdenTify The Three ways To deTer39mine The breakeven oinT Chapter 182 Preview of Chapfer 0 To manage any business you musT under39sTand How costs respond 139o changes in sales volume and The effect of costs and revenues on profit 0 To under39sTand cosTvolumepr39ofiT CVP you musT know how cosTs behave Chapter 183 Chapter 184 Casf Valume Prof391 Cost Behavior Analysis 0 Variable costs 0 Fixed costs 0 Mixed costs 0 Identifying variable and fixed costs CostVolume Profit Analysis 0 Basic components 0 CVP income statement 0 Breakeven analysis 0 Target netincome 6057 Behavior Analysis 0 6031 Behavior Analysis is fhe study of how speci c casfs respond fa changes in le level of business acfivify I Some cosTs change oTher39s remain The same 0 A knowledge of cosT behavior helps managemenT plan oper39aTions and decide beTween alTer39naTive courses of acTion I 6031 behavior39 analysis applies To all Types of enTiTies Chapter 185 6057 Behavior Analysis Con nuea Chapter 186 STarTing poinT in cosT behavior analysis is measuring key business acTiviTies AcTiviTy levels may be expressed in Terms of Sales dollars in a reTail company Miles driven in a Trucking company Room occupancy in a hoTel Dance classes TaughT by a dance sTudio Many companies use more Than one measuremenT base Cosf Behavior Analysis Confirmed I For an acTiviTy level To be useful Chanfes in The level or volume of acTiviTy shau d be carrelafed wifh changes in costs 0 The acTiviTy level selecTed is called The acTiviTy or volume index 0 The acTiviTy index IdenTifies The acTiviTy ThaT causes changes in The behavior of cosTs Allows cosTs To be classified according To Their response To changes in acTiviTy as eiTher Variable CosTs Fixed CosTs Mixed CosTs Chapter 187 Variable Costs 0 Variable cosTs are cosTs ThaT vary in fafa drecfy and propor onafey WIT7 changes in re acfVfy e ve o Exampe If The ac rivi39ly level increases 10 percen r To ral variable cosfs will increase 10 percemL o Exampe39If The ac rivi ly level decreases by 25 percent ToTal variable cosTs will decrease by 25 percem 0 Variable cosTs remain The same ger um39f at every level of activify 022 50 I DILs fhgwls h befween variable and fixed costs Variable Casts Examples of Variable CosTs DirecT MaTer39ials DirecT Labor39 6031 of Goods Sold Sales Commissions FreighTOuT for39 a Merchandiser Gasoline aT a Taxi Company C23 50 1 Dis nguish between variable and xed costs Variable Casts Example Chapter 1810 Damon Company manufacTures radios ThaT conTain a 10 digiTaI clock The acTiviTy index is The number of radios produced For each radio produced The ToTaI cosT of The clocks increases by 10 If 2000 radios are produced The ToTaI cosT of The clocks is 20000 2000 x 10 If 10000 radios are produced The ToTaI cosT of The clocks is 100000 10000 x 10 50 1 Dis nguish barncan variable and fixed costs Variable Casfs Graphs a b Total Variable Costs Variable Costs per Unit Digital Clocks Digital Clocks 00 25 g 80 20 U 60 g I5 a 40 5 IO 20 5 o I I I o I l 0 2 4 6 8 IO 0 2 4 6 8 IO Radios produced in 000 Radios produced in 000 Illusfr39a rion 181 0133 50 I DILs fthZs39h befween variable and fixed costs I Fixed cosTs ar39e cosTs ThaT remain fhe same in 1390 127 regarde55 of changes in fhe acfivify e ve o Fixed cosTs per uni39r cos139 var39y inversely with acTiviT As V0 ume increases unif cast declines and Vice versa 0 Examples include DepreciaTion on buildings and equipmenT ProperTy Taxes Insurance and RenT 01h 3 50 1 Distinguish befween variable and fixed costs Fixed Casts Example I Damon Company leases iTs pr39oducTive faciliTies aT a cosT of 10000 per39 monTh I ToTaI fixed cosTs of The faciliTies remain consTanT aT every level of acTiviTy 10000 per39 monTh I Fixed cosTs on a per unif basis var39y inversely wiTh acTiviTy as acTiviTy incr39eases uniT cosT declines and vice versa AT 2000 r39adios The uni i cost is 5 10000 2000 units AT 10000 r39adios The uni i cosT is 1 10000 10000 units angst 50 I DIST7191029 befween variable and fixed costs Fixed 6051 s Graphs a b Total Fixed Costs Fixed Costs per Unit Rent Expense Rent Expense 25 quot 5 g 20 4 j 5 g 3 U3 a 0 8 2 5 I 0 I I I I 0 I I I I I 0 2 4 6 8 IO 0 2 4 6 8 l0 Radios produced in 000 Radios produced in 000 Illus rm rion 182 01 3 50 1 DIS39fngws39h befween variable and fixed costs I CosTs Thcn have bofI a variable cos r elemem and a fixed 100 Cw cosT element 50 Viriable Cost Element I SomeTimes called we semivariabe cosr 1 Change 0 Fixed Cost Element bljf 0 so IOD 200 250 300 ro rfianare p 39 p0 Illus rr39a rion 185 Mr7 changes In ac vfy e vel 01h 3 50 3 Explain fhe concept of mixed casts Cos39f Vaume Profit Analysis 0 CVP Analysis the study of the effects of changes in costs and volume on a company39s profits a Important in profit planning o A critical factor in setting 0 selling prices 0 determining product mix and o maximizing use of production facilities 03 0 4 Lka flie five components of casf wume profit analysis Cosf Voume Prafif Analysis I CVP analysis considers The inferrela rionships among five basic componenTs l i ii g law 31quot Q g I me E H U ufdadon I gt g 53 M l 9 E 9 v g 8 Units Units Volume or level Unit selling Variable cost Total xed Sales mix of activity prices per unit costs Illus rr a rion 189 Chapter 50 4 Lisf fhe five components of casf volume prof392 anays s 1817 Assumptions Underlying CVP Analysis Chapter 1818 CosTs can be classified accur39aTely as eiTher39 variable or39 fixed Changes in acTiviTy are The only facTor39s ThaT affecT cosTs All uniTs produced are sold When more Than one Type of pr39oducT is sold The sales mix will remain consTanT 50 4 List the five components of cast volume profif analysis Confribufion Margin Per Unit 0 ConTr39ibuTion margin is The amounT available fa cover fixed casfs and fa canfribufe fa income o The formula for confribufion margin per uniT and The compuTaTion of The conTr39ibuTion margin per39 uniT for Var39go Video ar39e Unit Selling Unit Variable Contribution Margin Price Costs per Unit 500 300 2 200 IllusTraTion 18 12 0 Thus for every DVD player39 sold Var39go Video has 200 To cover fixed cosTs and conTr39ibuTe To neT income C1 833 50 5 Indicafe wlmf canfribufion margin is and new if can be expressed 639 VP Income Sfafemenf Confrbu on Margin Effect 0 Since Var39go Video hasfixed costs of 200000 it must sell 1000 DVD players 200000 200 before it can earn any net income o Var39go39s CVP income statement assuming a zero net income is VARGO VIDEO COMPANY CVP Income Statement For the Month Ended June 30 2012 Total Per Unit Sales 000 camcorders 500000 500 Van39able cosls 300000 3 00 Contribution margin 200000 Fixed costs 200000 Net income 5 0 Illustration 1813 C1 3 50 5 Indicafe wlmf canfribufion margin is and how if can be expressed C39lP Income Sfafemenf Confrbu on Margin Effect 0 For every DVD player iha i Vargo sells above 1000 units net income increases by The amount of the contribution margin 200 0 Vargo39s CVP income statement assuming 1001 units sold is VARGO VIDEO COMPANY CVP Income Statement For the Month Ended June 30 2012 Total Per Unit Sales 1 DUI camcorders 500500 500 Variable costs 300300 Contrihution margin 200200 Fixed c0513 200000 Net income 55 200 Illustration 18 14 C1 32 50 5 Indicafe wlmf canfribufion margin is and how if can be expressed Contriburian Margin Ratio 0 Shows The percenTage of each sales dollar available To apply Toward fixed cosTs and profiTs o The conTribuTion margin r39a o is The conTribuTion margin per uniT divided by The uniT selling price For Vargo Company The compuTaTion is Contribution Margin Unit Selling Contribution Margin per Unit 39 Price Ratio 200 500 40 IllusTraTion 1815 0 In This case The conTribuTion margin raTio of 40 means ThaT 040 of each sales dollar is available To apply To fixed cosTs and conTribuTe To neT income C1 3 50 5 Indicafe wlmf canfribufion margin is and how if can be expressed Confribufion Margin Raf390 As shown below The contribution margin r39atio helps to determine the effect of changes in sales on net income VARGO VIDEO COMPANY CVP Income Statements For the Month Ended June 30 2012 No Change With Change Total Per Unit Total Per Unit Sales 500000 500 600000 500 Variable costs 300000 300 360000 300 Contribution margin 200000 55200 240000 200 Fixed costs 200000 200000 Net income 3 S 40000 Illustration 18 16 0132 50 5 Indcafe whaf canfrbu an margin is and how if can be expressed Break Even Analysis 0 A key relaTionship in CVP analysis is The level of acTiviTy aT which fol39al revenue equals fofa cas39fs39 boTh fixed and variable 7775 level of acfivify is called The break even painl39 0 AT This volume of sales The company will realize no income buT will also suffer no loss 0 Can be compuTed or derived 0 from a mafiema ca equalon o by using confrbu on margin or o from a cosTvolume profiT ClPgrap1 0 The breakeven poinT can be expressed eiTher in sales unifs or in sales dollars 0132 50 6 Identify the Three ways to defermine ve break even point Break Even Ana is Mafhemafica Equation 0 Breakeven occurs where fofa sales equal variable casfs plus fixed c0513 139 e nef income is zero 0 The formula for The breakeven poinr in unifs and The compuTaTion for Vargo Video are Variable Fixed Net 5 I 3 es Costs Costs Income 500Q 300Q 200000 0 2000 200000 Q I000 units where Q sales volume in units 500 selling price 300 variable cost per unit 200000 total xed costs Illus rr39a rion 1818 a To find saes d0ar5 required To breakeven 1000 uni rs x 500 500000 breakeven sales dollar39s Chapter 1825 50 6 Idenfify re fnree ways fa defermine the break even paint Break Even Analysis Confribufian Margin Technique 0 AT The breakeven poim confribu on margin musf equal fafa fixed casfs Confribu iion Margin To ial revenues Variable costs 0 The breakeven poin i BEP can be computed using e fier confribu iion margin per uni i or confribu iion margin ra iio 0132 50 6 Iden fy fie firee ways fa determine fhe break even paint CanTribuTion Margin Technique 0 When The conTribuTion margin per um39T is used The formula To compuTe The BEP in units for Vargo Video IS Fixed Contribution Breakeven Costs 39 Margin per Unit Point in Units 200000 200 1000 units Illustration 1819 0 When The BEP in dollarsis desired conTribuTion margin raTo is used in The following formula for Vargo Video Fixed Contribution Breakeven Costs 39 Margin Ratio Point in Dollars 200000 40 500000 Illustration 1820 0132 50 6 IdenTify The Three ways To defermine The break even painT Break Even Analysis Graphic Presenfafion 900 lt Sales Line mm 1 TotzlCost Line Area Breakeven polnl In dollars Variable Costs Dollars 000 leedCost Line Break even point Fixed Costs In unit I I I I I 200 400 600 800 000 200 L400 L600 800 Units of Sales Illus rr a rion 1821 0132 50 6 Idenfl39fy file three ways to determine the breakeven paint Break Even Analysis Target Net Income Chapter 1829 RaTher39 Than jusT breaking even managemem usually seTs an income objecTive called fargef net income Indicates sales or unifs necessary 7 0 achieve fhis speci ed level of income Can be deTer mined from each of The approaches used To deTer mine breakeven salesuniTs From a mafhemafica equa on By using con fribufion margin or39 From a costvolume profit 639 VP graph Expressed eiTher39 in sales uniTs or39 in sales dollar39s 50 7 6ive fne formulas for defermining sales required fo earn fargef nef income Break Even Ana lls Target Net Income Mathematical Equation 0 Using the basic formula for the breakeven point simply include the desired net income as a factor The computation for Vargo Video is as follows Required Variable Fixed Target Net Sales Costs Costs Income 5000 3000 200000 120000 2000 320000 Q 1600 where Q sales volume 500 selling price 300 variable costs per unit 200000 total xed costs 120000 target net income Illustration 1823 03 50 239 Give the formulas for determining sales required to earn target net income Break Even Analysis Target Net Income Contribution Margin Technique 0 To determine the required sales in units for Vargo Video Fixed Costs Target Net Income 200000 120000 Contribution Margin per Unit 200 Required Sales in Units L600 units 0 To determine the required sales in dollars for Vargo Video Fixed Costs Target Net Income 200000 120000 Contribution Margin Ratio 40 Required Sales in Dollars 800000 Chapter 1861 50 7 Give the formulas for determining sale required to earn forget net income Chapfer Review Brief Exercise MonThly production cosTs in The Loder Company for Two levels of producTion are as follows COST 3000 UniTs 6 000 UniTs IndirecT Labor 10000 20000 Supervisory salaries 5000 5000 MainTenance 4000 7000 IndicaTe which cosTs are variable fixed and mixed and give The reason why Z IndirecT labor is variable cosT because iT increases in ToTal plirelchy and proporTionaTely wiTh The changes in The acTiviTy eve Z Supervisory salaries is a fixed cosT because iT remains The same in ToTal regardless of The changes in The acTiviTy level otoMainTenance is a mixed cosT because iT increases in ToTal buT noT proporTionaTely wiTh changes in acTiviTy level Chapter 1832


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