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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
2-1
Learning Objective 1
Explain how cost drivers
affect cost behavior.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cost Behavior
What is cost behavior?
It is how costs are related to, and affected
by, the activities of an organization.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cost Drivers
What are cost drivers?
Output measures of resources and
activities are called cost drivers.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cost Drivers
Production Example
Example costs:
Example cost drivers:
Labor wages
Labor hours
Supervisory salaries
No. of people supervised
Maintenance wages
No. of mechanic hours
Depreciation
No. of machine hours
Energy
Kilowatt hours
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cost Drivers
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Learning Objective 2
Show how changes in cost-driver
activity levels affect variable
and fixed costs.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Comparison of
Variable and Fixed Costs
A variable cost is a cost that changes in direct
proportion to changes in the cost driver.
A fixed cost is not immediately affected
by changes in the cost driver.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Rules of Thumb
Think of fixed costs as a total.
Total fixed costs remain unchanged
regardless of changes in cost-driver activity.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Rules of Thumb
Think of variable costs on a per-unit basis.
The per-unit variable cost remains
unchanged regardless of changes
in the cost-driver activity.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
2 - 10
Relevant Range
This rule of thumb holds true only within
reasonable limits.
The relevant range is the limit of costdriver activity within which a specific
relationship between costs and the cost
driver is valid.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Relevant Range
Fixed Costs
$16,000
$12,000
Relevant Range
$8,000
500
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
$4,000
2,500
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Learning Objective 3
Calculate break-even sales
volume in total dollars
and total units.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cost-Volume-Profit
Analysis (CVP)
What is cost-volume-profit analysis?
It is the study of the effects of output
volume on revenue (sales), expenses
(costs), and net income (net profit).
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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CVP Scenario
Selling price
Variable cost
Difference
Per Unit
$5
4
$1
Percentage
100
80
20
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Margin of Safety
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Break-Even Point
Techniques
1
2
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Contribution Margin
Technique to find BE in Units
Per Unit
Selling price
$5
Variable cost
4
Contribution margin
$1
$8,000 $1 = 8,000 units
i.e. Fixed Cost Contribution per unit
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Contribution Margin
Technique - to find BE in $
8,000 units $5.00 = $40,000
i.e. BE point in units x Selling price per unit
OR
$8,000 20% = $40,000
i.e. Fixed Cost Contribution to Sales ratio
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Equation Technique
Net income equals zero at the break-even point.
Sales
Variable expenses
Fixed expenses
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Equation Technique
to find BE in Units
Let N = number of units to be sold to break even
$5N $4N $8,000 = 0
$1N = $8,000
N = $8,000 $1
N = 8,000 Units
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Equation Technique
- to find BE in $
Let S = sales in dollars needed to break even
S 0.80S $8,000 = 0
.20S = $8,000
S = $8,000 .20
S = $40,000
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Learning Objective 4
Create a cost-volume-profit
graph and understand the
assumptions behind it.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Cost-Volume-Profit Graph
Break even sales point
8,000 units or $40,000
$50,000
Dollars
$40,000
$30,000
ne
i
l
e
lin
ue
e
n
s
e
n
e
v
p
e
r
ex
s
l
e
a
l
Tot
Sa
$20,000
$10,000
$0
0
10
12
Units (thousands)
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Learning Objective 5
Calculate sales volume in total
dollars and total units to reach
a target profit.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Operating Leverage
The ratio of fixed to variable costs is called
operating leverage.
In high leveraged companies, small changes
in sales volume result in large changes in net
income.
Companies with less leverage are not
affected as much by changes in sales
volume.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Learning Objective 6
Calculate contribution
margin and gross margin.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Contribution Margin
and Gross Margin
Gross margin (which is also called gross profit)
is the excess of sales over the cost of goods sold.
Contribution margin is the excess of sales over
all variable costs.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Learning Objective 7
Explain the effects of sales
mix on profits.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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$58 + (2 $11) =
$58 + $22 = $80
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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$ 72,000
108,000
$180,000
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Dresses: 1 $58
=
Blouses: 2 $11
$80 3 = $26.67
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Learning Objective 8
Compute cost-volume-profit
relationships on an after-tax
basis.
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
2 - 45
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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$228,150
81,120
$147,030
96,000
$ 51,030
15,309
$ 35,721
THE END
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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