21 - 3
C1
Fixed Costs
Monthly Basic Telephone Bill per Local Call Number of Local Calls
Monthly Basic Telephone Bill Number of Local Calls
Total fixed costs remain constant as activity increases.
Cost per call declines as activity increases.
21 - 4
C1
Variable Costs
Cost per Minute Minutes Talked Minutes Talked Total Costs
Total variable costs increase as activity increases.
Least-squares regression is usually covered in advanced cost accounting courses. It is commonly used with spreadsheet programs or calculators.
The objective of the cost analysis remains the same: determination of total fixed cost and the variable unit cost.
0 4 5 6 Activity, 1,000’s of Units Produced
21 - 11
P1
The High-Low Method
The following relationships between units produced and total cost are observed:
Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 200,000 140,000 $ 60,000 24,000 $ 36,000 Unit $ 100 70 $ 30
21 - 9
P1
Scatter Diagrams
Draw a line through the plotted data points so that about equal numbers of points fall above and below the line.
20
Total Cost in 1,000’s of Dollars
Total Utility Cost
Variable Cost per KW
Activity (Kilowatt Hours)
Fixed Monthly
Utility Charge
21 - 6
C1
Step-Wise Costs
Total cost increases to a new higher cost for the next higher range of activity, but remains constant within a range of activity.
Unit sales price less unit variable cost ($30 in previous example)
21 - 19
P2
Computing the Break-Even Point
21 - 16
A1
Contribution Margin and its Measures
Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 200,000 140,000 $ 60,000 24,000 $ 36,000 Unit $ 100 70 $ 30
Using these two levels of activity, compute: the variable cost per unit. the total fixed cost.
21 - 12
P1
The High-Low Method
High activity level - October Low activity level - February Change in activity Units 67,500 17,500 50,000 Cost $ 29,000 20,500 $ 8,500
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21 - 2
Identifying Cost Behavior
Cost-volume-profit analysis is used to answer questions such as: – What sales volume is needed to earn a target income? – What is the change in income if selling prices decline and sales volume increases? – How much does income increase if we install a new machine to reduce labor costs? – What is the income effect if we change the sales mix of our products or services?
21 - 15
A1
Contribution Margin and its Measures
Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 200,000 140,000 $ 60,000 24,000 $ 36,000 Unit $ 100 70 $ 30
21 - 14
A1
Using Break-Even Analysis
The break-even point (expressed in units of product or dollars of sales) is the unique sales level at which a company earns neither a profit nor incurs a loss.
20 Total Cost in 1,000’s of Dollars
Δ in cost Δ in units
Vertical distance is the change in cost.
10
* * * *
0 1 2 3
* ** * **
Horizontal distance is the change in activity.
How much contribution margin must Rydell Company have to cover its fixed costs (break-even)? Answer: $24,000 How many units must Rydell sell to cover its fixed costs (break-even)? Answer: $24,000 ÷ $30 per unit = 800 units
Contribution margin ratio
= =
Contribution margin per unit Sales price per unit
Contribution margin ratio
$30 per unit $100 per unit
=
30%
21 - 17
P2
Computing the Break-Even Point
10
* * * *
0 1 2 3
* ** * **
Estimated fixed cost = 10,000
0 4 5 6 Activity, 1,000’s of Units Produced
21 - 10
P1
Scatter Diagrams
Unit Variable Cost = Slope =
21 - 7
C1
Curvilinear Costs
Costs that increase when activity increases, but in a nonlinear manner.
21 - 8
P1
Measuring Cost Behavior
The objective is to classify all costs as either fixed or variable. We will look at three methods: 1.Scatter diagrams. 2.The high-low method. 3.Least–squares regression. A scatter diagram is a plot of cost data points on a graph. It is almost always helpful to plot cost data to be able to observe a visual picture of the relationship between cost and activity.