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Chapter 6Chapter 6Cost Cost

Behavior Behavior AnalysisAnalysis

Fall 2007Crosson

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Learning Objectives:Cost Formula Y=a+bXCost Behavior: Fixed, Variable, or MixedMethods to Split Mixed Cost into its Fixed and Variable componentsCVP Income Statement and AssumptionsFinding Breakeven in units and dollarsWhat Ifs using CVPSales Mix and CVP

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Cost Formula Cost Formula Y=a+bXY=a+bXFixed Costs:Fixed Costs:

Y=aGraphExamples: Rent, Depreciation, Salaries

Variable Costs:Variable Costs:Y=bXGraphExamples: DM, DL, Sales Commissions

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Mixed Costs:Mixed Costs:Y=a+bXGraphExamples: Water bill, Rent at the Mall

What about your telephone costs?What about your telephone costs?

Mixed Cost Mixed Cost BehaviorBehavior

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Methods to Split Mixed Methods to Split Mixed Costs into their Fixed and Costs into their Fixed and Variable componentsVariable componentsEngineering methodEngineering methodScattergraph or Visual Fit methodScattergraph or Visual Fit methodHigh-Low methodHigh-Low methodLeast Squares methodLeast Squares methodSimple and Multiple Regression Simple and Multiple Regression methodsmethods

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What Do You Know? What Do You Know? Mixed CostsMixed Costs

E3C3

Look and listen to SE3

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CVP AssumptionsCVP AssumptionsWithin a Relevant Range:•Costs and Revenues have close linear relationship. •Behavior of fixed and variable costs can be measured accurately.•Efficiency and productivity remain steady.•Cost and price variables remain steady.•The sales mixed does not change.•Production and sales volumes are roughly equal.

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CVP Income StatementCVP Income StatementSales-Variable CostsContribution Margin

-Fixed CostsNet Income

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CVP Income CVP Income Statement-Statement-Finding Finding Breakeven in Breakeven in Units soldUnits sold

S= SP x units sold-VC=Variable rate x units sold

CM=(CM/unit) x units sold-Fixed CostsNet Income

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What Do You Know?What Do You Know?CVP using Units soldCVP using Units sold

 

SE6SE4E5

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CVP Income CVP Income Statement-Statement-Finding Breakeven in Finding Breakeven in Sales dollarsSales dollarsS= 100% Sales in dollars-VC= (VC/S) x Sales in dollarsCM=(CM/S) x Sales in dollars-Fixed CostsNet Income

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CVP using SCVP using Sales dollarsales dollarsTotal revenue for February was $400,000 and total costs were $320,000; total revenue in March was $480,000 and total cost were $380,000. 

Given these CVP relationships: (a) what is the breakeven point in sales and (b) what is income if sales are $460,000?

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More CVP using SMore CVP using Sales ales dollarsdollars

A company has fixed costs of $20,000 per period and variable costs equal to 60% of sales. 

What sales volume is necessary (a) to breakeven  (b) to earn $8,000 per period

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What Do You Know?What Do You Know?CVP CVP

E6P6C5

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What Do You Know?What Do You Know?Sales Mix: What Ifs using Sales Mix: What Ifs using

CVPCVPSE8E10

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HomeworkHomework

P2P2