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Managerial Accounting Wild and Shaw Third Edition Wild and Shaw Third Edition McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 5 Cost Behavior and Cost-Volume-Profit Analysis

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Conceptual Learning Objectives C1: Describe different types of cost behavior in relation to production and sales volume. C2: Describe several applications of cost- volume-profit analysis. 5-3

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A1: Compute the contribution margin and describe what it reveals about a companys cost structure. A2: Analyze changes in sales using the degree of operating leverage. Analytical Learning Objectives 5-4

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P1: Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs. P2: Compute the break-even point for a single product company. P3: Graph costs and sales for a single product company. P4: Compute the break-even point for a multiproduct company. Procedural Learning Objectives 5-5

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CVP 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? CVP 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? Questions Addressed by Cost-Volume-Profit Analysis C2 5-6

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Cost Behavior Summary C1 5-7

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Mixed costs contain a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage. Example: monthly electric utility charge Fixed service fee Variable charge per kilowatt hour used Mixed Costs C1 5-8

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Activity Cost Total cost remains constant within a narrow range of activity. Step-Wise Costs C1 5-9

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We have just seen one of the basic CVP relationships – the break-even computation. Break-even point in units = Fixed costs Contribution margin per unit Computing The Break-Even Point Unit sales price less unit variable cost Exh P2 5-10

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Sales Volume in Units Costs and Revenue in Dollars Preparing a CVP Chart Break- even Point Total costs Total fixed costs P3 5-11

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A limited range of activity called the relevant range, where CVP relationships are linear. 4 Unit selling price remains constant. 4 Unit variable costs remain constant. 4 Total fixed costs remain constant. Production = sales (no inventory changes). Assumptions of CVP Analysis C1 5-12

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Break-even formulas may be adjusted to show the sales volume needed to earn any amount of income. Unit sales = Fixed costs + Target income Contribution margin per unit Dollar sales = Fixed costs + Target income Contribution margin ratio Computing Sales for a Target Income C2 5-13

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The CVP formulas may be modified for use when a company sells more than one product. The unit contribution margin is replaced with the contribution margin for a composite unit. A composite unit is composed of specific numbers of each product in proportion to the product sales mix. Sales mix is the ratio of the volumes of the various products. Computing Multiproduct Break-Even Point P4 5-14

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End of Chapter

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