uaa - acct 202 principles of managerial accounting dr. fred barbee cost structure
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UAA - ACCT 202 Principles of Managerial
Accounting Dr. Fred Barbee
Cost Structure
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.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 3
Cost Structure
Cost Structure
Labor-Intensive = High Variable Costs
Machine-Intensive = High Fixed Costs
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 4
Abacus Computers Performs computer services for
other firms:
– Owns 2 computers
– Employs two people
Bulk of costs are . . .
– Rent Expense; and
– Depreciation (S/L)
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 5
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%
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 6
Tailor Made Company
Manufactures custom made men’s suits
– Owns one sewing machine
– Employs six people
Bulk of costs are . . .
– Materials; and
– Labor
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 7
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%
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 8
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
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 9
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.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 10
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.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 11
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.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 12
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.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 13
Leverage . . .
To the scientist . . .
– Leverage explains how one is able to move a large object with a small force.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 14
Operating Leverage
Is a measure of the extent to which fixed costs are being used in an organization.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 15
Financial Leverage
Financial leverage is the financing of a portion of the firm’s assets with securities bearing a fixed (limited) rate of return.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 16
Consider this . . .
Labor-Intensive Firms
Machine-Intensive Firms
FC:TC%
% FC:TC
Therefore, machine-intensive firms use more operating
leverage than labor-intensive firms.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 17
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?
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 18
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.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 19
Degree of Operating Leverage
The Formula . . .
Contribution Margin ------------------------------------ = DOL Net Income
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
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 21
Degree of Operating Leverage
For Abacus Computers . . .
$400,000 DOL = ------------------------- = 4 $100,000
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 22
Degree of Operating Leverage
For Tailor Made Company
$200,000 DOL = ------------------------- = 2 $100,000
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 23
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
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 24
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
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 25
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
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 26
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$
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 27
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$
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 28
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.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 29
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 $550,000
= 48.2% (rounded)
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 30
Multi-product break-even analysis
Bikes Carts TotalSales 158,714$ 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
=
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