PP for Chapter 8 - Cost Volume Profit - Final

8/11/2019 PP for Chapter 8 - Cost Volume Profit - Final

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Accounting: A Malaysian Perspective,

4

th

ed

(Adapted from Accounting 22

nd

ed

)

Warren, Reeve and

Duchac

Cost Behaviourand Cost-

Volume-ProfitAnalysis

8


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1. Classify costs by their behavior as variable costs,

fixed costs, or mixed costs.

2. Compute the contribution margin, the contribution

margin ratio, and the unit contribution margin, and

explain how they may be useful to managers.

After studying this chapter, you should be able to:


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3

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3. Use the unit contribution margin, determine the

break-even point and the volume necessary to

achieve a target profit.

4. Use a cost-volume-profit chart and a profit-

volume chart, determine the break-even pointand the volume necessary to achieve a target

profit.



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5. Compute the margin of safety and the operating

leverage, and explain how managers use these

concepts6. List the assumptions underlying cost-volume-

profit analysis.



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Classify costs by theirbehavior as var iable

costs, f ixed costs, or

mixed costs.

Objective 1

8-1


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Cost Behavior 8-1

Cost behaviorrefers to the manner in

which a cost changes as a related

activity changes. Such activities arecalled activity base(or activity

drivers). The range of activity over

which the changes in the cost are of

interest is called the relevant range.


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Variable Costs 8-1

Variable costsare

costs that vary inproportion to

changes in the level

of activity.


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Syarikat Tah produces stereo sound systems

under the brand name of T-Sound. The parts forthe T-Sound stereos are purchased from outsidesuppliers for RM10 per unit (a variable cost) andassembled in Syarikat Tahs Sintok plant.

8-1Syarikat Tah


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Total Variable Cost Graph

TotalDirect

MaterialsCost

RM300,000

RM250,000

RM200,000

RM150,000

RM100,000

RM50,000

10 20 300Total Units (Model TS-12)

Produced (thousands)

Variable Cost Graphs 8-1

(Continued)


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Unit Variable Cost Graph

RM20

RM15

RM10

RM5

0

DirectMaterials

CostperUnit

10 20 30Total Units (Model TS-

12) Produced (thousands)

8-1

(Concluded)


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TotalCosts

RM300,000

RM250,000

RM200,000

RM150,000

RM100,000

RM50,000

10 20 300

RM20

RM15RM10

RM5

0CostperUnit

10 20 30

Number of

Units of Model

JS-12 Produced

Units Produced (000)

Units Produced (000)

Direct

Materials Cost

per Unit

Total Direct

Materials Cost

5,000 units RM10 RM 50,00010,000 10 l00,000

15,000 10 150,000

20,000 10 200,000

25,000 10 250,000

30,000 10 300,000

8-1Unit Cost Compared to Total Cost


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Fixed Costs 8-1

F ixed costsare costs that

remain the same in total

dollar amount as the level

of activity changes.


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The production supervisor for Syarikat

Mons Jitra plant is Siti Maimon. She ispaid RM75,000 per year. The plantproduces from 50,000 to 300,000 bottles ofLa Fleur Perfume.

Syarikat Mons Jitra Plant 8-1


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Number of

Bottles of Perfume

Produced

Total Salary for

Siti Maimon

50,000 bottles RM75,000 RM1.500

100,000 75,000 0.750

150,000 75,000 0.500

200,000 75,000 0.375

250,000 75,000 0.300300,000 75,000 0.250

Salary per Bottle

of Perfume

Produced

Fixed Versus Variable Cost of Siti

Maimons Salary

8-1


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15

15

15

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TotalCosts

RM150,000RM125,000

RM100,000

RM75,000

RM50,000

RM25,000

100 200 3000Bottles Produced (000)

Number of

Bottles of Perfume

Produced

UnitCost

RM1.50RM1.25

RM1.00

RM.75

RM.50

RM.25

100 200 3000Units Produced (000)

Total Salary

for Siti Maimon

50,000 bottles RM75,000 RM1.500

100,000 75,000 0.750

150,000 75,000 0.500

200,000 75,000 0.375

Salary per Bottle

of Perfume

Produced

8-1

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Mixed Costs 8-1

A mixed cost(sometimes calledsemivariableor semifixedcosts) has

characteristics of both a variable and

a fixed cost. Over one range of

activity, the total mixed cost may

remain the same. Over another

range of activity, the mixed cost may

change in proportion to changes inlevel of activity.

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Syarikat Syed manufactures sails usingrented equipment. The rental chargesare RM15,000 per year, plus RM1 foreach machine hour used over 10,000hours.

Syarikat Syed Example 8-1

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TotalCosts

0

Total Machine Hours (000)

RM45,000

RM40,000

RM35,000

RM30,000

RM25,000

RM20,000

RM15,000

RM10,000

RM5,000

10 20 30 40

Mixed costs are

usually separated into

their fixed andvariable components

for management

analysis.

Mixed Cost Graph for Syarikat Syed

Equipment Rental Charges

8-1

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The high-low methodis asimple cost estimate

technique that may beused for separating mixedcosts into their fixed and

variable components.

High-Low Method 8-1

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First, select the

highest and lowest

levels of activity.

8-1

Variable Cost per Unit =Difference in Total cost

Difference in Production

Estimating Variable Cost Using High-Low

Production Total

(Units) Cost

June 1,000 RM45,550

July 1,500 52,000August 2,100 61,500

September 1,800 57,500

October 750 41,250

Actual costs incurred

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Production Total

(Units) Cost

June 1,000 RM45,550

July 1,500 52,000August 2,100 61,500


October 750 41,250

8

Then, fill in the

formula.

8-1

Variable Cost per Unit =Difference in Total Cost


RM61,50041,250

RM20,250


RM20,250

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8-1

Variable Cost per Unit =Difference in total cost


2,100750

1,350

RM20,250

1,350


Then, fill in the

formula.

Production Total

(Units) Cost

June 1,000 RM45,550

July 1,500 52,000August 2,100 61,500


October 750 41,250

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Variable cost per

unit is RM15

8-1Estimating Variable Cost Using High-Low

= RM15RM20,250

1,350Variable Cost per Unit =

Production Total

(Units) Cost

June 1,000 RM45,550

July 1,500 52,000August 2,100 61,500


October 750 41,250

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Next, insert the

variable cost of RM15into the formula.

Total cost = (RM15x Units of Production) + Fixed cost

8-1Estimating Fixed Cost Using High-Low

Total Cost = (Variable Cost per Unit x Units of Production)+ Fixed cost

Production Total

(Units) Cost

June 1,000 RM45,550

July 1,500 52,000August 2,100 61,500


October 750 41,250

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Using the highest

level of production,

we insert the total costand units produced in

the formula.

Total cost = (RM15 x Units of Production) + Fixed Cost


RM61,500 2,100 units)

Production Total

(Units) Cost

June 1,000 RM45,550

July 1,500 52,000August 2,100 61,500


October 750 41,250

Total Cost = (Variable Cost per Unit x Units of Production)+ Fixed cost

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RM61,500 = (RM15 x 2,100 units) + Fixed cost

RM61,500 = RM31,500 + Fixed cost

RM61,500RM31,500 = Fixed cost

RM30,000= Fixed cost

If the lowest level had been

chosen, the results of the

formula would provide the

same fixed cost of RM30,000.

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Example Exercise 8-1

8-1

The manufacturing cost of Perusahaan Alisa for

the first three months of the year are provided

below:

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Using the high-low method, determine the(a) variable cost per unit, and (b) the total fixed

cost.

Total Cost ProductionJanuary RM80,000 1,000 units

February RM125,000 2,500

March RM100,000 1,800

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For Practice: PE8-1

Follow My Example 8-1

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8-1

b. RM50,000 = RM125,000(RM30 x 2,500)

or RM80,000(RM30 x 1,000)

a. RM30 per unit = RM125,000RM80,000

(2,5001,000)

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Total

Variable

Costs

Total Units Produced

Unit

VariableCosts

Total Units Produced

TotalCosts

PerUnitCo

st

Total costs

increase and

decrease

proportionately

with activity level.

8-1Summary of Cost Behavior Concepts

Unit costs remain

the same per unitregardless of

activity.

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Total Units ProducedT

otalCosts

Total Units ProducedPerUnitCost

Unit costs remain

the same

regardless of

activity.

Total costs

increase anddecrease with

activity level.

8-1Summary of Cost Behavior Concepts

Total

Fixed Costs

Unit

Fixed Costs

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Compute the contr ibution

margin, the contr ibution margin

ratio, and the unit contr ibution

margin, and explain how they

may be useful to managers.

Objective 2

8-2

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8-2Cost-Volume-Profit Relationships

Cost-volume-profitanalysisis the systematic

examination of the relationships among selling

prices, sales and production volume, costs,expenses, and profits.

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8-2

Thecontribution marginis the excess of sales

revenues over variable costs. It contributes

first toward covering fixed costs, then

contributes to profit.

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Sales (50,000 units) RM1,000,000

Variable costs 600,000Contribution margin RM 400,000

Fixed costs 300,000

Income from operations RM 100,000

8-2Contribution Margin

Income Statement4

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8-2Contribution Margin Ratio

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100%

60%

Contribution Margin Ratio = 40%

Sales (50,000 units) RM1,000,000

Variable costs 600,000

Contribution margin RM 400,000

Fixed costs 300,000


Contribution Margin Ratio =SalesVariable Costs

Sales

RM1,000,000RM600,000RM1,000,000Contribution Margin Ratio =

40%30%

10%

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8-2Unit Contribution Margin

The unit contr ibution margin

is also useful for analyzing the

profit potential of proposedprojects. The unit contribution

margin is the sales pr ice less

the var iable cost per unit.

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8-2Using Contribution Margin per

Unit as a Shortcut

The increase in income from operations ofRM120,000 could have been determined quickly

by multiplying the increase in unit sales (15,000)

by the contribution margin per unit (RM8).

Sales (RM20) RM1,000,000

Variable costs (RM12) 600,000

Contribution margin (RM8)RM400,000Fixed costs 300,000


50,000

units

65,000

units

RM1,300,000

780,000

RM 520,000300,000

RM220,000

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100%

60%

40%

30%10%

RM20

12

RM 8

Sales (50,000 units) RM1,000,000



Fixed costs 300,000Income from operations RM 100,000

8-2

Unit contribution marginanalyses can provide useful

information for managers.

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100%

60%

40%

30%10%

1. Total contribution margin in dollars.

RM20

12

RM 8

Sales (50,000 units) RM1,000,000



Fixed costs 300,000


2. Contribution margin ratio (percentage).

The contribution margin can be expressed three ways:

3. Unit contribution margin (dollars per unit).

Review 8-2

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8-2

Syarikat Molly sells 20,000 units at RM12 per

unit. Variable costs are RM9 per unit, and

fixed costs are RM25,000. Determine the (a)contribution margin ratio, (b) unit contribution

margin, and (c) income from operations.

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For Practice: PE 8-2


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8-

2

a. 25% = (RM12RM9)/RM12 or (RM240,000

RM180,000)/RM240,000

b. RM3 per unit = RM12RM9

c. Sales RM240,000 (20,000 x RM12)

Variable costs 180,000 (20,000 x RM9)

Contribution margin RM 60,000 [20,000 x (RM12RM9)]

Fixed costs 25,000

Income from operationsRM 35,000

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Using the unit contr ibution

margin, determine the break-even

point and the volume necessary to

achieve a target profi t.

Objective 3

8-3

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8-3Break-Even Point

The break-even pointis the level of

operations at which a businesss

revenues and expired costs areexactly equal.

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8-3

Syarikat Bakar fixed costs are estimated to

be RM90,000. The unit contribution margin

is calculated as follows:Unit selling price RM25

Unit variable cost 15

Unit contribution margin RM10

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8-3

The break-even point is calculated using thefollowing equation:

Break-Even Sales (units) =

Fixed Costs

Unit Contribution Margin

Break-Even Sales (units) =RM90,000

RM10

Break-Even Sales (units) = 9,000units

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8-3Proof of the Preceding

Computation

Sales (RM25 x 9,000) RM225,000

Variable costs (RM15 x 9,000) 135,000


Fixed costs 90,000

Income from operations RM 0

Income from operations is zero when

9,000 units are soldhence, break-even is 9,000 units.

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8-3Effect of Changes in Fixed Costs

Fixed

CostsIfBreak-

EvenThen

Fixed

CostsIfThen Break-

Even

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8-3

Syarikat Lazer is evaluating a

proposal to budget an additional

RM100,000 for advertising. Fixedcosts before the additional

advertising are estimated at

RM600,000, and the unit

contribution margin is RM20.

Increasing Fixed Costs

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8-3

Without additional advertising:

Break-Even in Sales (units) =Fixed Costs


Break-Even in Sales (units) =

RM600,000

RM20 =30,000

units

With additional advertising:


RM700,000

RM20 =

35,000

units

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8-3Effect of Changes in Unit

Variable Costs

Unit

Variable

Cost

If Break-

Even

Then

Unit

VariableCosts

If Then Break-

Even

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8-3

Syarikat Antah. is evaluating a proposal to pay anadditional 2% commission on sales to its

salespeople (a variable cost) as an incentive to

increase sales. Fixed costs are estimated at

RM840,000. The unit contribution margin beforethe additional 2% commission is determined as

follows:

Unit selling price RM250Unit variable cost 145

Unit contribution marginRM105

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8-3

Without additional 2% commission:

RM250[RM145 + (RM250 x 2%)]

= RM100


RM840,000

RM105 = 8,000 units

With additional 2% commission:


RM840,000

RM100 =8,400 units



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8-3Effect of Changes in the Unit

Selling Price

Unit

Selling

Price

If

Break-

Even

Then

Unit

Selling

Price

If Then

Break-

Even

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8-3

Syarikat Jendi is evaluating a proposal to increase

the unit selling price of a product from RM50 to

RM60. The following data have been gathered:

Unit selling price RM50 RM60

Unit variable cost 30 30

Unit contribution margin RM20 RM30

Current Proposed

Total fixed costs RM600,000RM600,000

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8-3

Without price increase:




RM600,000

RM20 =30,000

units

With price increase:


RM600,000

RM30 =

20,000

units

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8-3Summary of Effects of Changes

on Break-Even Point

Effect of Change

Direction of on Break-Even

Change Sales (Units)Type of Change

Fixed cost Increase IncreaseDecrease Decrease

Variable cost per unit Increase IncreaseDecreaseDecrease

Unit sales price Increase DecreaseIncreaseDecrease

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8-3

Nik Enterprise sells a product for RM60 per unit. The

variable cost is RM35 per unit, while fixed costs are

RM80,000. Determine the (a) break-even point in sales

units, and (b) break-even point if the selling price wereincreased to RM67 per unit.

57For Practice: PE 8-3


a. 3,200 units = RM80,000/(RM60RM35)

b. 2,500 units = RM80,000/(RM67RM35)

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8-3Target Profit

The sales volume required to earn a target profit is

determined by modifying the break-even equation.

Sales (units) =Fixed Costs + Target Profit


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8-3Units Required for Target Profit

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Fixed costs are estimated at RM200,000, andthe desired profit is RM100,000. Unit

contribution margin is RM30.

Unit selling price RM75Unit variable cost 45

Unit contribution margin RM30

Sales (units) = Fixed Costs + Target ProfitUnit Contribution MarginRM30

Sales (units) = 10,000 units

RM200,000RM100,000

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Sales (10,000 units x RM75) RM750,000

Variable costs (10,000 x RM45) 450,000

Contribution margin (10,000

x RM30) RM300,000Fixed costs 200,000

Income from operations RM100,000

Proof that sales of 10,000 units will provide aprofit of RM100,000.

8-3

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8-3

Syarikat Fika sells a product for RM140 per unit. The

variable cost is RM60 per unit, and fixed costs are

RM240,000. Determine the (a) break-even point in

sales units, and (b) break-even point in sales units if thecompany desires a target profit of RM50,000.

61For Practice: PE 8-4


a. 3,000 units = RM240,000/(RM140RM60)

b. 3,625 units = (RM240,000 + RM50,000)/(RM140RM60)

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Using a cost-volume-profi t chart

and a prof i t-volume chart,

determine the break-even point

and the volume necessary to

achieve a target profi t.

Objective 4

8-4

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8-4Cost-Volume-Profit (Break-

Even) Chart

A cost-volume-profitchart,

sometimes called a break-even

chart, may assist management in

understanding relationships amongcosts, sales, and operating profit or

loss.

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Unit selling price RM 50Unit variable cost 30

Unit contribution margin RM 20

Total fixed costs RM100,000

The cost-volume-profit chart in Exhibit 5 (Slide 65)is

based on the following data:

8-4

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SalesandCosts(inthousands)

0

Units of Sales (in thousands)

RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

8-4Cost-Volume-ProfitChart

Dollar

amounts

are

indicatedalong the

vertical

axis.

65

1 2 3 4 5 6 7 8 9 10

(Continued)Volume is shown on the horizontal axis.

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8-4Cost-Volume-ProfitChart (Continued)


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

1 2 3 4 5 6 7 8 9 10

At sales of RM500,000 and knowing that each unit sells for RM50, we

can find the values of the two axis. Where the horizontal sales and

costs line intersects the vertical 10,000 unit of sales line is Point A.

Point A

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

1 2 3 4 5 6 7 8 9 10

Now, beginning at zero on the left corner of the graph, connect

a straight line to the dot (Point A). Note: Point A could have

been plotted at any sales level because linearity is assumed.

Cost-Volume-Profit

Chart (Continued)

Point A

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

Fixed cost of RM100,000 is a horizontal line.

1 2 3 4 5 6 7 8 9 10

Cost-Volume-Profit

Chart (Continued)

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

Similar to the sales line, a point is determined on the cost

line (10,000 x RM30) + RM100,000 = RM400,000

1 2 3 4 5 6 7 8 9 10

Cost-Volume-Profit

Chart (Continued)

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

Beginning with the total fixed cost at the vertical axis

(RM100,000), draw a line to the red dot. This is the total cost

line.

1 2 3 4 5 6 7 8 9 10

Cost-Volume-Profit

Chart (Continued)

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

1 2 3 4 5 6 7 8 9 10

Cost-Volume-Profit

Chart (Continued)

Horizontal and vertical lines are drawn at the

intersection point of the sales lineand the costsline,

which is the break-even point.

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

Break-even is sales of 5,000 units or RM250,000.

1 2 3 4 5 6 7 8 9 10

Cost-Volume-Profit

Chart (Continued)

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

1 2 3 4 5 6 7 8 9 10

Profit area

Cost-Volume-Profit

Chart (Concluded)

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8-4Revised Cost-Volume-Profit Chart

Using the data in Slide 73, assume that

a proposal to reduce fixed cost byRM20,000 is to be evaluated. A cost-

volume-profit chart can be created to

assist in this evaluation.

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8-4


0


RM500

RM450

RM400

RM350

RM300

RM250

RM200

RM150

RM100

RM 50

1 2 3 4 5 6 7 8 9 10

RM80,000

If fixed costs can be reduced to RM80,000, the new break-

even point is sales of RM200,000, or 4,000 units.

Revised Cost-Volume-

Profit Chart

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8-4Profit-Volume Chart

Another graphic approach to cost-volume-

profit analysis, the profit-volumechart,

plots only the difference between total

sales and total costs (or profits). Again, thedata from Exhibit 5 will be used.

Unit selling price RM 50

Unit variable cost 30

Unit contribution margin RM 20

Total fixed costs RM100,000

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Sales (10,000 units x RM50) RM500,000

Variable costs (10,000 units x RM30) 300,000

Contribution margin (10,000 units x RM20) 200,000

Fixed costs 100,000Operating profit RM100,000

8-4

The maximum operating loss is equal to the

fixed costs of RM100,000. Assuming that the

maximum unit sales within the relevant range is

10,000 units, the maximum operating profitis

RM100,000, computed as follows:

Maximum profit

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1 2 3 4 5 6 7 8 9 10

Profit Line

Operating

loss

Operating

profit

RM100,000RM75,000

RM50,000

RM25,000

RM 0

RM(25,000)

RM(50,000)

RM(75,000)

RM(100,000)Operatin

gProfit(Loss)

Maximum loss is

RM100,000, the fixed costs.

8-4Profit-Volume Chart

Break-Even Point

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Compute the margin of safety and

the operating leverage, and

explain how managers use these

concepts.

Objective 5

8-2

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8-5

The relative mix of a businesss variable costs

and fixed costs is measured by the operating

leverage. It is computed as follows:

Operating Leverage =Contribution Margin

Income from Operations

Operating Leverage

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8189

Both companies have the same

contribution margin.

Syarikat Salam Syarikat Sinar

Sales RM400,000 RM400,000

Variable costs 300,000 300,000

Contribution margin RM100,000 RM100,000

Fixed costs 80,000 50,000

Income from operations RM 20,000 RM 50,000

Operating leverage ? ?

8-5Operating Leverage Example

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8290

Contribution Margin


RM100,000

RM20,000= 5Syarikat Salam


Sales RM400,000 RM400,000






8-5

5

8383

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8391

Contribution Margin


RM100,000

RM50,000= 2Syarikat Sinar:


Sales RM400,000 RM400,000






8-5

25

8484

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8492

High Versus Low Operating Leverage 8-5

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8 5

Syarikat Tariq reports the following data:

93For Practice: PE8-5


4.0 = (RM750,000RM500,000)/(RM750,000RM500,000

RM187,500) = RM250,000/RM62,500

Sales RM750,000

Variable costs RM500,000

Fixed costs RM187,500

Determine Syarikat Tariqs operating leverage.

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Margin of Safety 8-5

The difference between the current sales

revenue and the sales revenue at the

break-even point is called the margin of

safety.

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8795

Margin of Safety =

SalesSales at Break-Even Point

Sales

Margin of Safety = 20%

8-5

If sales are RM250,000, the unit selling price is RM25,and the sales at the break-even point are RM200,000, the

margin of safety is 20%, computed as follows:

Margin of Safety =RM250,000RM200,000

RM250,000

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The margin of safety may also be stated interms of units. In this illustration, for example,

the margin of safety of 20% is equivalent to

RM50,000 in sales (RM250,000 x 20%). In

units, the margin of safety is 2,000 units(RM50,000/RM25).

8-5

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Syarikat Rafiq has sales of RM400,000, and the break-

even point in sales dollars is RM300,000. Determine

the companys margin of safety.

97For Practice: PE8-6


25% = (RM400,000RM300,000)/RM400,000

9090

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90

L ist the assumptions underlying

cost-volume-profit analysis.

Objective 6

8-2

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91

8-6Assumptions of Cost-Volume-Profit

Analysis

The primary assumptions are:

1. Total sales and total costs can be represented by a

straight line.

2. Within the relevant range of operating activity, the

efficiency of operations does not change.

3. Costs can be accurately divided into fixed and

variable components.

4. The sales mix is constant.

5. There is no change in the inventory quantities duringthe period.

Documents

PP for Chapter 8 - Cost Volume Profit - Final