1. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 12-1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 12 Managerial Accounting and Cost— Volume—Profit Relationships

2. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-2 12-2 Decision Making Strategic, Operational, and Financial (Planning) Planning and Control Cycle Executing operational activities (Managing) Performance analysis: Plans vs. actual results (Controlling) Implement Plans Revisit Plans Data collection and Performance Feedback L O 1

3. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-3 12-3 Managerial Accounting versus Financial Accounting L O 2

4. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-4 12-4 How a cost will react to changes in the level of business activity. –Total variable costs change when activity changes. –Total fixed costs remain unchanged when activity changes. How a cost will react to changes in the level of business activity. –Total variable costs change when activity changes. –Total fixed costs remain unchanged when activity changes. Relationship of Total Cost to Volume of Activity L O 3

5. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-5 12-5 Total Fixed Cost Your monthly basic telephone bill probably does not change when you make more local calls. Your monthly basic telephone bill probably does not change when you make more local calls. Number of Local Calls Monthly Basic Telephone Bill L O 4

6. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-6 12-6 Fixed Cost per Unit Number of Local Calls Monthly Basic Telephone Bill per Local Call The average cost per local call decreases as more local calls are made. L O 4

7. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-7 12-7 Total Variable Cost Your total long distance telephone bill is based on how many minutes you talk. Your total long distance telephone bill is based on how many minutes you talk. Minutes Talked Total Long Distance Telephone Bill L O 5

8. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-8 12-8 Variable Cost Per Unit Minutes Talked Per Minute Telephone Charge The cost per long distance minute talked is constant. For example, $0.10 per minute. The cost per long distance minute talked is constant. For example, $0.10 per minute. L O 5

9. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-9 12-9  Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit  Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600  Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $1,600 + $0.90X The High-low Method L O 6

10. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-10 12-10 Used primarily for external reporting. Used primarily by management. The Contribution Margin Format Both formats report the same operating income! L O 7

11. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-11 12-11 Contribution margin ratio The Contribution Margin Format L O 9

12. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-12 12-12 Multiple Products and Sales Mix Considerations Sales mix is the relative combination in which a company’s different products are sold. Different products have different selling prices, costs, and contribution margins. A change in the sales mix will result in a different contribution margin ratio. Sales mix is the relative combination in which a company’s different products are sold. Different products have different selling prices, costs, and contribution margins. A change in the sales mix will result in a different contribution margin ratio. L O 10

13. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-13 12-13 Multiple Products and Sales Mix Considerations $347,500 $700,000 = 50% (rounded) Average total contribution margin ratio provided from all products: How will average total contribution margin change if Jones sold 1,500 lawn tractors, all other factors held constant? Due to selling more product with a higher CM ratio. Increases L O 10

14. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-14 12-14 Break-Even Point Analysis How many units must Evans sell to cover its fixed costs (break even)? Answer: $30,000 ÷ $4 per unit = 7,500 units How many units must Evans sell to cover its fixed costs (break even)? Answer: $30,000 ÷ $4 per unit = 7,500 units L O 11

15. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-15 12-15 Break-Even Point Analysis The break-even formula may also be expressed in sales dollars. Break-even point in dollars = Fixed costs Contribution margin ratio Unit sales price Unit variable cost L O 11

16. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-16 12-16 Break-Even Point Analysis Break-even formulas may be adjusted to show the sales volume needed to earn any amount of operating income. Unit sales = Fixed costs + Desired income Contribution margin per unit Dollar sales = Fixed costs + Desired income Contribution margin ratio L O 11