Gíao trình kế toán bằng tiếng anh ch05

Chapter 5

Cost-Volume-Profit

Learning Objectives
After studying this chapter, you should be able to:
[1] Distinguish between variable and fixed costs.
[2] Explain the significance of the relevant range.
[3] Explain the concept of mixed costs.
[4] List the five components of cost-volume-profit analysis.
[5] Indicate what contribution margin is and how it can be expressed.
[6] Identify the three ways to determine the break-even point.
[7] Give the formulas for determining sales required to earn target net income.
[8] Define margin of safety, and give the formulas for computing it.
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Preview of Chapter 5

Managerial Accounting
Sixth Edition
Weygandt Kimmel Kieso
5-2


Cost Behavior Analysis
Cost Behavior Analysis is the study of how specific costs
respond to changes in the level of business activity.

5-3



Some costs change; others remain the same.



Helps management plan operations and decide between
alternative courses of action.



Applies to all types of businesses and entities.



Starting point is measuring key business activities.


Cost Behavior Analysis
Cost Behavior Analysis is the study of how specific costs
respond to changes in the level of business activity.




5-4

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.


Cost Behavior Analysis
Cost Behavior Analysis is the study of how specific costs
respond to changes in the level of business activity.

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

Changes in the level or volume of activity should be
correlated with changes in costs.



Activity level selected is called activity or volume index.



Activity index:
►

Identifies the activity that causes changes in the
behavior of costs.

►

Allows costs to be classified as variable, fixed, or mixed.


Cost Behavior Analysis
Variable Costs




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Costs that vary in total directly and proportionately with
changes in the activity level.
►

Example: If the activity level increases 10 percent,
total variable costs increase 10 percent.

►

Example: If the activity level decreases by 25 percent,
total variable costs decrease by 25 percent.

Variable costs remain the same per unit at every level of
activity.
LO 1 Distinguish between variable and fixed costs.


Cost Behavior Analysis
Illustration: Damon Company manufactures tablet computers
that contain a $10 camera. The activity index is the number of
tablets produced. As Damon
Illustration 5-1
manufactures each tablet, the total
cost of the camera increases by $10.
As part (a) of Illustration 5-1 shows,
total cost of the cameras will be
$20,000 if Damon produces 2,000
tablets, and $100,000 when it
produces 10,000 tablets. We also can
see that a variable cost remains the
same per unit as the level of activity
changes.
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LO 1 Distinguish between variable and fixed costs.

Cost Behavior Analysis
Illustration: Damon Company manufactures tablet computers
that contain a $10 camera. The activity index is the number of
tablets produced. As Damon
Illustration 5-1
manufactures each tablet, the total
cost of the camera increases by $10.
As part (b) of Illustration 5-1 shows,
the unit cost of $10 for the camera is
the same whether Damon produces
2,000 or 10,000 tablets.

5-8

LO 1 Distinguish between variable and fixed costs.


Cost Behavior Analysis
Variable Costs

5-9

Illustration 5-1
Behavior of total and
unit variable costs

LO 1 Distinguish between variable and fixed costs.


Cost Behavior Analysis

Fixed Costs

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

Costs that remain the same in total regardless of
changes in the activity level.



Per unit cost varies inversely with activity: As volume
increases, unit cost declines, and vice versa



Examples:
►

Property taxes

►

Insurance

►

Rent

►

Depreciation on buildings and equipment
LO 1 Distinguish between variable and fixed costs.


Cost Behavior Analysis
Illustration: Damon Company leases its productive facilities at a
cost of $10,000 per month. Total fixed costs of the
Illustration 5-2
facilities will remain constant at every
level of activity, as part (a) of
Illustration 5-2 shows.

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LO 1 Distinguish between variable and fixed costs.


Cost Behavior Analysis
Illustration: Damon Company leases its productive facilities at a
cost of $10,000 per month. Total fixed costs of the
Illustration 5-2
facilities will remain constant at every
level of activity. But, on a per unit
basis, the cost of rent will decline as
activity increases, as part (b) of
Illustration 5-2 shows. At 2,000 units,
the unit cost per tablet computer is $5
($10,000 ÷ 2,000). When Damon
produces 10,000 tablets, the unit cost

is only $1 ($10,000 ÷ 10,000).

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LO 1 Distinguish between variable and fixed costs.


Cost Behavior Analysis
Fixed Costs

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Illustration 5-2
Behavior of total and
unit fixed costs

LO 1 Distinguish between variable and fixed costs.


Cost Behavior Analysis
Review Question
Variable costs are costs that:
a. Vary in total directly and proportionately with
changes in the activity level.
b. Remain the same per unit at every activity level.
c. Neither of the above.
d. Both (a) and (b) above.

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LO 1 Distinguish between variable and fixed costs.


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Cost Behavior Analysis
Relevant Range

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

Throughout the range of possible levels of activity, a
straight-line relationship usually does not exist for either
variable costs or fixed costs.



Relationship between variable costs and changes in
activity level is often curvilinear.



For fixed costs, the relationship is also nonlinear –
some fixed costs will not change over the entire range
of activities, while other fixed costs may change.

LO 2 Explain the significance of the relevant range.

Cost Behavior Analysis
Relevant Range

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Illustration 5-3
Nonlinear behavior of
variable and fixed costs

LO 2 Explain the significance of the relevant range.


Cost Behavior Analysis
Relevant Range – Range of activity over which
a company expects to operate during a year.

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Illustration 5-4
Linear behavior within
relevant range

LO 2 Explain the significance of the relevant range.


Cost Behavior Analysis
Review Question
The relevant range is:
a. The range of activity in which variable costs will be

curvilinear.
b. The range of activity in which fixed costs will be
curvilinear.
c. The range over which the company expects to
operate during a year.
d. Usually from zero to 100% of operating capacity.
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LO 2 Explain the significance of the relevant range.


Cost Behavior Analysis
Mixed Costs


Costs that have both a variable cost element and
a fixed cost element.
Illustration 5-5



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Change in total
but not
proportionately
with changes in
activity level.

LO 3 Explain the concept of mixed costs.

Helena Company, reports the following total costs at two levels
of production.
Classify each cost as variable, fixed, or mixed.

Variable
Fixed
Mixed

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LO 3 Explain the concept of mixed costs.


Cost Behavior Analysis
High-Low Method

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

Mixed costs must be classified into their fixed and
variable elements.



High-Low Method uses the total costs incurred at both
the high and the low levels of activity to classify mixed
costs.



The difference in costs between the high and low levels
represents variable costs, since only variable costs
change as activity levels change.

LO 3 Explain the concept of mixed costs.


Cost Behavior Analysis
High-Low Method
STEP 1: Determine variable cost per unit using the
following formula:
Illustration 5-6

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LO 3 Explain the concept of mixed costs.


Cost Behavior Analysis
High-Low Method
Illustration: Metro Transit Company has the following
maintenance costs and mileage data for its fleet of buses over
a 6-month period.
Illustration 5-7

Change in Costs (63,000 - 30,000)
High minus Low

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(50,000 - 20,000)

$33,000
30,000

=

$1.10
cost per
unit

LO 3 Explain the concept of mixed costs.


Cost Behavior Analysis
High-Low Method
STEP 2: Determine the fixed cost by subtracting the total
variable cost at either the high or the low activity level from
the total cost at that level.
Illustration 5-8

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LO 3