Pertemuan 11 Chap007-008 Hilton_edit

8/10/2019 Pertemuan 11 Chap007-008 Hilton_edit

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Copyright

2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 7-8

Cost-Volume-Profit Analysis &

Inventory Costing


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8-2

Cost-Volume-Profit Analysis

CVP includes all fixed costs to computebreakeven.

Variable costing and CVP are consistent as bothtreat fixed costs as a lump sum.

Absorption costing defers fixed costs intoinventory.

Absorption costing is inconsistent with CVPbecause absorption costing treats fixed costs ona per unit basis.


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7-3

The Break-Even Point

The break-even point is the point in thevolume of activity where the organizations

revenues and expenses are equal.

Sales 250,000$

Less: variable expenses 150,000

Contribution margin 100,000Less: fixed expenses 100,000

Net income -$


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7-4

Equation Approach

Sales revenueVariable expensesFixed expenses = Profit

Unitsalesprice

Salesvolumein units

Unit

variableexpense

Salesvolumein units

($500 X) ($300 X) $80,000 = $0

($200X) $80,000 = $0

X = 400 surf boards


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7-5

Contribution-Margin Approach

For each additional surf board sold,Curl generates $200 in contributionmargin.

Total Per Unit Percent

Sales (500 surf boards) 250,000$ 500$ 100%

Less: variable expenses 150,000 300 60%

Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000

Net income 20,000$

Consider the following informationdeveloped by the accountant at Curl, Inc.:


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7-6


Fixed expensesUnit contribution margin

=Break-even point

(in units)


Sales (500 surf boards) 250,000$ 500$ 100%


Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000

Net income 20,000$

$80,000

$200

= 400 surf boards


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7-7


Here is the proof!


Sales (400surf boards) 200,000$ 500$ 100%



Less: fixed expenses 80,000Net income -$

400 $500 = $200,000400 $300 = $120,000


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7-8

Contribution Margin Ratio

Calculate the break-even point in sales dollarsrather than units by using the contribution margin

ratio.

Contribution marginSales

= CM

RatioFixed expense

CM RatioBreak-even point(in sales dollars)

=


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Sales (400surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%


Less: fixed expenses 80,000

Net income -$

Contribution Margin Ratio

$80,000

40%

$200,000 sales=


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Graphing Cost-Volume-ProfitRelationships

Viewing CVP relationships in a graph givesmanagers a perspective that can be obtained inno other way.

Consider the following information for Curl, Inc.:

300units 400units 500units

Sales 150,000$ 200,000$ 250,000$

Less: variable expenses 90,000 120,000 150,000Contribution margin 60,000$ 80,000$ 100,000$

Less: fixed expenses 80,000 80,000 80,000

Net income (loss) (20,000)$ -$ 20,000$


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Cost-Volume-Profit Graph

Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

Break-even

point


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Profit-Volume GraphSome managers like the profit-volume

graph because it focuses on profits and volume.

100 200 300 400 500 600 700

Units

Profit

0

100,000

(20,000)

(40,000)

(60,000)

80,000

60,000

40,000

20,000

Break-evenpoint


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Target Net Profit

We can determine the number of surfboardsthat Curl must sell to earn a profit of $100,000

using the contribution margin approach.

Fixed expenses + Target profitUnit contribution margin

=Units sold to earnthe target profit

$80,000 + $100,000$200

= 900 surf boards


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Effect of Income Taxes

Target after-tax net income1 - t = Before-taxnet income

Income taxes affect a companys

CVP relationships. To earn aparticular after-tax net income, a

greater before-tax income will berequired.


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Equation Approach

Sales revenueVariable expensesFixed expenses = Profit

($500 X) ($300 X) $80,000 = $100,000

($200X) = $180,000

X = 900 surf boards


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Applying CVP Analysis

Safety Margin The difference between budgeted sales

revenue and break-even sales revenue.

The amount by which sales can drop beforelosses begin to be incurred.


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Safety Margin

Curl, Inc. has a break-even point of $200,000.If actual sales are $250,000, the safety margin is$50,000or 100 surf boards.

Break-even

sales

400 units

Actual sales

500 units

Sales 200,000$ 250,000$

Less: variable expenses 120,000 150,000Contribution margin 80,000 100,000

Less: fixed expenses 80,000 80,000

Net income -$ 20,000$


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Changes in Fixed Costs

Curl is currently selling 500 surfboards peryear.

The owner believes that an increase of$10,000 in the annual advertising budget,would increase sales to 540 units.

Should the company increase the advertisingbudget?


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Current

Sales

(500 Boards)

Proposed

Sales

(540 Boards)

Sales 250,000$ 270,000$Less: variable expenses 150,000 162,000

Contribution margin 100,000$ 108,000$


Net income 20,000$ 18,000$


$80,000 + $10,000 advertising = $90,000

540 units $500 per unit = $270,000


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Current

Sales

(500 Boards)

Proposed

Sales

(540 Boards)

Sales 250,000$ 270,000$

Less: variable expenses 150,000 162,000Contribution margin 100,000$ 108,000$


Net income 20,000$ 18,000$


Sales will increase by$20,000, but net income

decreasedby $2,000.


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Changes in UnitContribution Margin

Because of increases in cost of raw materials,Curls variable cost per unit has increased

from $300 to $310 per surfboard. With nochange in selling price per unit, what will be

the new break-even point?

($500 X) ($310 X) $80,000 = $0

X = 422 units (rounded)


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Changes in UnitContribution Margin

Suppose Curl, Inc. increases the price of

each surfboard to $550. With no changein variable cost per unit, what will be the

new break-even point?

($550 X) ($300 X) $80,000 = $0

X = 320 units


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Predicting Profit Given ExpectedVolume

Fixed expensesUnit contribution margin

Target net profit

Find: {reqd sales volume}Given:

Fixed expensesUnit contribution marginExpected sales volume

Find: {expected profit}Given:


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Predicting Profit GivenExpected Volume

In the coming year, Curls owner expects to sell

525 surfboards. The unit contribution margin isexpected to be $190, and fixed costs are

expected to increase to $90,000.

($190 525) $90,000 = X

X = $9,750 profit

X = $99,750 $90,000

Total contribution - Fixed cost = Profit


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CVP Analysis with MultipleProducts

For a company with more than one product,sales mixis the relative combination in which a

companys products are sold.

Different products have different selling prices,cost structures, and contribution margins.

Lets assume Curl sells surfboards and sailboards and see how we deal with break-

even analysis.


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Curl provides us with the followinginformation:

Description

Selling

Price

Unit

Variable

Cost

Unit

Contribution

Margin

Number

of

BoardsSurfboards 500$ 300$ 200$ 500

Sailboards 1,000 450 550 300

Total sold 800

DescriptionNumberof Boards

% ofTotal

Surfboards 500 62.5% (500 800)

Sailboards 300 37.5% (300 800)

Total sold 800 100.0%


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Weighted-average unit contribution margin

Description

Contribution

Margin % of Total

Weighted

ContributionSurfboards 200$ 62.5% 125.00$

Sailboards 550 37.5% 206.25

Weighted-average contribution margin 331.25$

$200 62.5%

$550 37.5%


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7-28


Break-even point

Break-even

point

=Fixed expenses

Weighted-average unit contribution margin

Break-evenpoint

=$170,000$331.25

Break-evenpoint

= 514 combined unit sales


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7-29


Break-even pointBreak-even

point= 514 combined unit sales

Description

Breakeven

Sales

% of

Total

Individual

Sales

Surfboards 514 62.5% 321

Sailboards 514 37.5% 193Total units 514

A i U d l i


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7-30

Assumptions UnderlyingCVP Analysis

1. Selling price is constant throughoutthe entire relevant range.

2. Costs are linear over the relevant

range.3. In multi-product companies, the

sales mix is constant.

4. In manufacturing firms, inventoriesdo not change (units produced =units sold).

C t St t d O ti


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7-31

Cost Structure and OperatingLeverage

The cost structure of an organization is therelative proportion of its fixed and variablecosts.

Operating leverage is . . . the extent to which an organization uses fixed

costs in its cost structure.

greatest in companies that have a highproportion of fixed costs in relation tovariable costs.


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7-32

Measuring Operating Leverage

Contribution marginNet income

Operating leveragefactor

=

Actual sales

500 BoardSales 250,000$

Less: variable expenses 150,000

Contribution margin 100,000

Less: fixed expenses 80,000Net income 20,000$

$100,000

$20,000

= 5


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7-33


A measure of how a percentage change insales will affect profits. If Curl increases itssales by 10%, what will be the percentage

increase in net income?

Percent increase in sales 10%

Operating leverage factor 5

Percent increase in profits 50%


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7-34


A firm with proportionately high fixed costs hasrelatively high operating leverage On the otherhand, a firm with high operating leverage has a

relatively high break-even point.


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8-35

Absorption Costing

A system of accounting for costs in whichboth fixed and variable production costs

are considered product costs.

FixedCosts

VariableCosts

Product


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Variable Costing

A system of cost accounting that onlyassigns the variable cost of production to

products.

FixedCosts

VariableCosts

Product


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Absorption and Variable Costing

Absorption

Costing

Variable

Costing

Direct materials

Direct labor Product costsProduct costs Variable mfg. overhead

Fixed mfg. overhead

Period costs

Period costs Selling & Admin. exp.


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8-38


Absorption

Costing

Variable

Costing

Direct materials

Direct labor Product costsProduct costs Variable mfg. overhead

Fixed mfg. overhead

Period costs

Period costs Selling & Admin. exp.

The difference between absorption and variablecosting is the treatment of fixed manufacturing overhead.


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8-39

Lets put some numbers to an example andsee what we can learn about the differencebetween absorption and variable costing.



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8-40

Mellon Co. produces a single product withthe following information available:

Number of units produced annually 25,000

Variable costs per unit:Direct materials, direct labor

and variable mfg. overhead 10$

Selling & administrative

expenses 3$

Fixed costs per year:Mfg. overhead 150,000$


expenses 100,000$



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Unit product cost is determined as follows:

Absorption

Costing

Variable

CostingDirect materials, direct labor, and

variable mfg. overhead 10$ 10$

Fixed mfg. overhead

($150,000 25,000 units) 6 -

Unit product cost 16$ 10$


Selling and administrative expenses are always treated as periodexpenses and deducted from revenue.

Ab ti C ti


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8-42

Absorption Costing

Sales (20,000 $30) 600,000$Less cost of goods sold:

Beginning inventory -$

Add COGM (25,000 $16) 400,000

Goods available for sale 400,000$

Ending inventory (5,000 $16) 80,000 320,000

Gross margin 280,000$Less selling & admin. exp.

Variable (20,000 $3) 60,000$

Fixed 100,000 160,000

Net income 120,000$

Mellon Co. had no beginning inventory, produced25,000 units and sold 20,000 units this year at $30

each.

Absorption CostingIncome Statements

V i bl C ti


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8-43

Variable CostingSales (20,000 $30) 600,000$

Less variable expenses:

Beginning inventory -$Add COGM (25,000 $10) 250,000


Ending inventory (5,000 $10) 50,000

Variable cost of goods sold 200,000$

Variable selling & administrative

expenses (20,000 $3) 60,000 260,000Contribution margin 340,000$

Less fixed expenses:

Manufacturing overhead 150,000$

Selling & administrative expenses 100,000 250,000

Net income 90,000$

Variable CostingIncome Statements

Now lets look at variable costing by MellonCo.

C i Ab ti d


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8-44

Cost of

Goods

Sold

Ending

Inventory

Period

Expense Total

Absorption costing

Variable mfg. costs 200,000$ 50,000$ -$ 250,000$

Fixed mfg. costs 120,000 30,000 - 150,000

320,000$ 80,000$ -$ 400,000$

Variable costing

Variable mfg. costs 200,000$ 50,000$ -$ 250,000$Fixed mfg. costs - - 150,000 150,000

200,000$ 50,000$ 150,000$ 400,000$

Comparing Absorption andVariable Costing

Lets compare the methods.

Reconciling Income Under


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8-45

Reconciling Income UnderAbsorption and Variable Costing

We can reconcile the difference betweenabsorption and variable net income as

follows:Variable costing net income 90,000$Add: Fixed mfg. overhead costs

deferred in inventory

(5,000 units $6 per unit) 30,000

Absorption costing net income 120,000$

Fixed mfg. overhead $150,000Units produced 25,000

= $6.00 per unit=


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Extending the Example

Lets look at

the secondyear ofoperationsfor MellonCompany.


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8-47

Mellon Co. Year 2

In its second year of operations, Mellon Co. started withan inventory of 5,000 units, produced 25,000 units and

sold 30,000 units at $30 each.

Number of units produced annually 25,000

Variable costs per unit:Direct materials, direct labor

and variable mfg. overhead 10$


expenses 3$

Fixed costs per year:

Mfg. overhead 150,000$


expenses 100,000$


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8-48

Mellon Co. Year 2

Unit product cost is determined asfollows:

Absorption

Costing

Variable

CostingDirect materials, direct labor,

and variable mfg. overhead 10$ 10$

Fixed mfg. overhead

($150,000 25,000 units) 6 -

Unit product cost 16$ 10$

There has been nochange in Mellonscost structure.


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Absorption CostingSales (30,000 $30) 900,000$

Less cost of goods sold:

Beg. inventory (5,000 x $16) 80,000$

Add COGM (25,000 $16) 400,000Goods available for sale 480,000$

Ending inventory - 480,000

Gross margin 420,000$

Less selling & admin. exp.

Variable (30,000 $3) 90,000$Fixed 100,000 190,000

Net income 230,000$

Mellon Co. Year 2

25,000 units produced in the current period.


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8-50

Variable CostingSales (30,000 $30) 900,000$Less variable expenses:

Beg. inventory (5,000 $10) 50,000$

Add COGM (25,000 $10) 250,000


Ending inventory -Variable cost of goods sold 300,000$

Variable selling & administrative

expenses (30,000 $3) 90,000 390,000

Contribution margin 510,000$

Less fixed expenses: Manufacturing overhead 150,000$

Selling & administrative expenses 100,000 250,000

Net income 260,000$

Mellon Co. Year 2

Excludes fixed manufacturing overhead.


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8-51

Summary

In the first period, production (25,000 units)was greater than sales (20,000).

Income Comparison

Costing Method 1st Period 2nd Period Total

Absorption 120,000$ 230,000$ 350,000$

Variable 90,000 260,000 350,000

In the second period, production (25,000 units)was less than sales (30,000).


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8-52

Summary

Lets see if we can get an overviewof what we have done.

Summary Comparison of Absorption


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8-53

Production versusSales

Total

InventoryEffect Period Expense Effect Profit Effect

Fixed mfg. Fixed mfg.

Produced > Sold Increase costs expensed < costs expensed AC > VC

AC VC


Produced < Sold Decrease costs expensed > costs expensed AC < VC

AC VC


Produced = Sold No change costs expensed = costs expensed AC = VCAC VC

Summary Comparison of Absorption(AC) and Variable Costing (VC)

For the two-year period, units producedequals units sold, so total absorption incomeequals total variable income.


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Advantages

Management finds iteasy to understand.

Consistent withCVP analysis.

Emphasizes contribution inshort-run pricing decisions.

Profit for period notaffected by changesin fixed mfg. overhead.

Impact of fixedcosts on profitsemphasized.

Evaluation of Variable Costing


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AdvantagesConsistent with long-runpricing decisions that mustcover full cost.

External reportingand income tax lawrequire absorption costing.

Evaluation of Absorption Costing

Fixed manufacturing overhead istreated the same as the other productcosts, direct material and direct labor.


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8-56

Throughput Costing

Example

In an automated process direct material may bethe only unit-level cost and so is the only product cost.

All other manufacturing costs are expensed as period costs.

Incentive to

overproduceis reduced

Average unit cost does

not vary with changesin production levels.

Advantages


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Throughput Income Statement

Sales Revenue $600,000Throughput cost of goods sold (dir. mat.) 150,000

Gross Margin $450,000

Less: Operating costs

Direct labor 100,000Variable mfg overhead 60,000

Fixed mfg overhead 150,000

Variable sales & admin costs 50,000

Fixed sales & admin costs 125,000

Total operating costs 375,000

Net Income $ 75,000


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End of Chapter 8

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Pertemuan 11 Chap007-008 Hilton_edit