uaa - acct 202 principles of managerial accounting dr. fred barbee cost structure
TRANSCRIPT
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UAA - ACCT 202 Principles of Managerial
Accounting Dr. Fred Barbee
Cost Structure
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Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 2
Introduction
Cost structure is defined as the relationship between a firm’s fixed and variable costs.
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Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 3
Cost Structure
Cost Structure
Labor-Intensive = High Variable Costs
Machine-Intensive = High Fixed Costs
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Abacus Computers Performs computer services for
other firms:
– Owns 2 computers
– Employs two people
Bulk of costs are . . .
– Rent Expense; and
– Depreciation (S/L)
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Abacus ComputersIncome Statement
For Year Ended December 31, 2003
Abacus ComputersIncome Statement
For Year Ended December 31, 2003
Sales $500,000 100%
Fixed Costs 300,000
Net Income $100,000
Variable Costs 100,000 20%
Contribution Margin $400,000 80%
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Tailor Made Company
Manufactures custom made men’s suits
– Owns one sewing machine
– Employs six people
Bulk of costs are . . .
– Materials; and
– Labor
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Tailor Made CompanyIncome Statement
For Year Ended December 31, 2003
Tailor Made CompanyIncome Statement
For Year Ended December 31, 2003
Sales $500,000 100%
Fixed Costs 100,000
Net Income $100,000
Variable Costs 300,000 60%
Contribution Margin $200,000 40%
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Sales $500
VC 300
CM $200
FC 100
NI $100
Sales $500
VC 300
CM $200
FC 100
NI $100
Abacus
Abacus and Tailor Made CompanyIncome Statement Comparison
For Year Ended December 31, 2003
Abacus and Tailor Made CompanyIncome Statement Comparison
For Year Ended December 31, 2003
Tailor Made
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Abacus ComputersIncome Statement
For Year Ended December 31, 2003
Abacus ComputersIncome Statement
For Year Ended December 31, 2003
Sales $500,000 100%
Fixed Costs 300,000
Net Income $100,000
Variable Costs 100,000 20%
Contribution Margin $400,000 80%
Abacus Computers will increase its profits by $0.80 for each additional dollar of
sales.
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Tailor Made CompanyIncome Statement
For Year Ended December 31, 2003
Tailor Made CompanyIncome Statement
For Year Ended December 31, 2003
Sales $500,000 100%
Fixed Costs 100,000
Net Income $100,000
Variable Costs 300,000 60%
Contribution Margin $200,000 40%
Tailor-Made Company will increase its profits by $0.40 for each additional dollar of
sales.
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Periods of Decreased Activity . . .
Assuming no change in selling prices, unit VC and FC . . .
– Abacus Computers will reduce its profits by $0.80 for each additional dollar of sales.
– Tailor Made Company will reduce its profits by $0.40 for each additional dollar of sales.
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Periods of Increased Activity . . .
Assuming no change in selling prices, unit VC and FC . . .
– Abacus Computers will increase its profits by $0.80 for each additional dollar of sales.
– Tailor Made Company will increase its profits by $0.40 for each additional dollar of sales.
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Leverage . . .
To the scientist . . .
– Leverage explains how one is able to move a large object with a small force.
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Operating Leverage
Is a measure of the extent to which fixed costs are being used in an organization.
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Financial Leverage
Financial leverage is the financing of a portion of the firm’s assets with securities bearing a fixed (limited) rate of return.
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Consider this . . .
Labor-Intensive Firms
Machine-Intensive Firms
FC:TC%
% FC:TC
Therefore, machine-intensive firms use more operating
leverage than labor-intensive firms.
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Consider two firms . . .Firm A
Labor-IntensiveFirm B
Machine-Intensive
Both increase sales by 20%.
Which one will have the larger increase in profits?
Why?
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Degree of Operating Leverage
The DOL is the measure of how a percentage change in sales volume at a given level of sales activity will affect profits.
A measure of how sensitive net operating income is to percentage changes in sales.
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Degree of Operating Leverage
The Formula . . .
Contribution Margin ------------------------------------ = DOL Net Income
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Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 20
Sales $500
VC 300
CM $200
FC 100
NI $100
Sales $500
VC 300
CM $200
FC 100
NI $100
Abacus
Abacus and Tailor Made CompanyIncome Statement Comparison
For Year Ended December 31, 2003
Abacus and Tailor Made CompanyIncome Statement Comparison
For Year Ended December 31, 2003
Tailor Made
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Degree of Operating Leverage
For Abacus Computers . . .
$400,000 DOL = ------------------------- = 4 $100,000
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Degree of Operating Leverage
For Tailor Made Company
$200,000 DOL = ------------------------- = 2 $100,000
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The Change in Net Income
Abacus Computers
$100,000 x 20% x 4 = $80,000
Tailor Made Company
$100,000 x 20% x 2 = $40,000
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Observations on DOL
The DOL varies at different levels of sales activity . . .
– Highest near the breakeven point
– Undefined at breakeven point
– Lessens with increased sales volume
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The Margin of Safety
Excess of budgeted (or actual) sales over the break-even volume of sales. The amount by which sales can drop before losses begin to be incurred.
Margin of safety = Total sales - Break-even sales
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The Margin of Safety
Exhaustion Unlimited has a break-even point of $200,000. If actual sales are $250,000, the margin of safety is $50,000 or 100 exercise bikes.
Break-even sales
400 unitsActual sales
500 unitsSales 200,000$ 250,000$ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net operating income -$ 20,000$
Break-even sales
400 unitsActual sales
500 unitsSales 200,000$ 250,000$ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net operating income -$ 20,000$
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The Margin of Safety
The margin of safety can be expressed as 20% of sales.
($50,000 ÷ $250,000)Break-even
sales 400 units
Actual sales 500 units
Sales 200,000$ 250,000$ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net operating income -$ 20,000$
Break-even sales
400 unitsActual sales
500 unitsSales 200,000$ 250,000$ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net operating income -$ 20,000$
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Sales Mix
Sales mix is the relative proportions in which a company’s products are sold.
Different products have different selling prices, cost structures, and contribution margins.
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Multi-product break-even analysis
Wind Bicycle Co. provides the following information:
Bikes Carts TotalSales 250,000$ 100% 300,000$ 100% 550,000$ 100.0%Var. exp. 150,000 60% 135,000 45% 285,000 51.8%Contrib. margin 100,000$ 40% 165,000$ 55% 265,000 48.2%
Fixed exp. 170,000 Net operating income 95,000$
Sales mix 250,000$ 45% 300,000$ 55% 550,000$ 100.0%
$265,000 $550,000
= 48.2% (rounded)
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Multi-product break-even analysis
Bikes Carts TotalSales 158,714$ 100% 193,983$ 100% 352,697$ 100.0%Var. exp. 95,228 60% 87,293 45% 182,521 51.8%Contrib. margin 63,485$ 40% 106,691$ 55% 170,176 48.2%
Fixed exp. 170,000 Net operating income 176$
Sales mix 158,714$ 45% 193,983$ 55% 352,697$ 100.0%
Rounding error
Fixed expensesCM Ratio
Break-even sales =
$170,0000.482
= $352,697
=