Chapter 2 Managerial Accounting Answers

Document Sample
Chapter 2 Managerial Accounting Answers Powered By Docstoc
					        BA 512: Managerial
        Accounting

                           6. Activity Analysis, Cost Behavior &
                           Estimation




Schiller International University        BA 512
Today’s Class
               Attendance
               Schedule

               Review last class

               Activity Analysis, Cost
                Behavior & Cost Estimation




Schiller International University   BA 512   2
  Day          Class                 Reading                            Subject
  1-Fri          4 Sep              Chapter 1 & 2                 Introduction & Review
                 5 Sep               Chapter 3               Traditional Managerial Accounting
 1-Sat           5 Sep                                            Activity-Based Costing
                                     Chapter 5
                 5 Sep                                          Activity-Based Management
                 6 Sep               Chapter 7                  Cost/Volume/Profit Analysis
 1-Sun           6 Sep               Chapter 6      Activity Analysis, Cost Behavior & Estimation
                 6 Sep               Chapter 8                Absorption & Variable Costing
  2-Fri          9 Oct                                  Mid-Term Exam
                10 Oct               Chapter 9       Profit-Planning & Activity-Based Budgeting
 2-Sat          10 Oct               Chapter 10         Standard Costing & Balanced Scorecard
                10 Oct               Chapter 12                  Responsibility Accounting
                11 Oct               Chapter 13         Investment Centers & Transfer Pricing
 2-Sun          11 Oct               Chapter 14      Decision-Making: Relevant Costs & Benefits
                11 Oct               Chapter 15      Target Costing & Pricing Decisions; Review
  3-Fri          4 Dec                                       Final Exam
 3-Sat-
               5-6 Dec                              Case Study Presentations
  Sun
Schiller International University                   BA 512                                    3
We have classified costs from one
perspective so far - - -
                              Direct                      Indirect
                                   Material               Material
                                   Labor                  Labor

 But there is another way that every one of
 these same costs can be classified:
                             Fixed                        Variable

       To do that, let’s examine cost behavior.

Schiller International University              BA 512                  4
Confusing? It can be. Let’s summarize:
             Recall the summary of our cost behavior
                discussion from Day 4/Lecture 2.




                                       Note that it is total cost which
                                     defines the way the term is used.

Schiller International University   BA 512                          5
Step-Fixed Costs

                          90
   Thousands of Dollars
       Rent Cost in




                          60


                          30


                          00        1,000     2,000       3,000
                                    Rented Area (Square Feet)

Schiller International University          BA 512                 6
Step-Variable Costs
                          90
  Thousands of Dollars
   Direct Labor Cost in




                          60


                          30


                          00        100       200      300
                                                    Cost Driver

Schiller International University         BA 512                  7
Semi-variable Cost
                                      Slope is
                                    variable cost
                                      per unit
                                     of activity.
       Total Telephone Cost




                                                                 Variable
                                                             Telephone Charge

                                                              Fixed Monthly
                                                             Telephone Charge
                              Activity (Minutes Phone Use)

Schiller International University              BA 512                 8
The Break-Even Point
         The break-even point is the sales volume
           where the organization’s revenues and
         expenses are equal. It answers the question:

     How Many Widgets Do We Need to
           Sell to Break-Even?
  To answer the question, the first step is to break your
      company’s costs into fixed and variable costs.


Schiller International University   BA 512         9
Important Term: Unit Contribution
Margin
     In order to calculate the break-even point, we
      introduce a new term, the unit contribution
      margin.
              Unit Selling Price                    USP
           - Unit Variable Costs             OR   - UVC
          Unit Contribution Margin                 UCM
     How many units must we sell to cover our
      fixed costs?

Schiller International University   BA 512          10
 Deriving the Break-Even Equation from
 the Income Statement I
 Revenues – Variable Costs – Fixed Costs = Operating Income*
                                             OR
                    (USP x Q) – (UVC x Q) – FC = OI
                                             OR
                                     (UCM x Q) – FC = OI
     Where USP = unit selling price                   FC = fixed cost
           UVC = unit variable cost                   OI = operating income
           UCM = unit contribution margin             Q = quantity

* You can also think of operating income as profit, as we shall explain shortly.

 Schiller International University           BA 512                   11
 Deriving the Break-Even Equation II
                                     (UCM x Q) – FC = OI
But at Break-Even, Operating Income is zero (0). Therefore,

                                       UCM x QBE = FC
                                             OR

                                       QBE = FC/UCM

     Where UCM = unit contribution margin             OI = operating income
           FC = fixed cost                            QBE = quantity



 Schiller International University           BA 512                   12
Finding the Break-Even Point Graphically


                   378
                   336
                   294
                   252
          $(000)




                   210
                   168
                   126                                     Fixed Costs
                    84
                    42
                     0
                               0    1000   2000     3000   4000     5000
                                               Units

Schiller International University          BA 512                    13
  Operating Leverage
          Lower Profits Above Break-Even                   Higher Profits Above Break-Even

Lower Losses Below Break-Even                        Higher Losses Below Break-Even

              Low Fixed Costs                               High Fixed Costs
  $                                                   $




                                     # of Units                       # of Units
           Low Operating Leverage                          High Operating Leverage

 Schiller International University                BA 512                       14
Assumptions Underlying CVP
Analysis
    Selling price is constant
     throughout the entire relevant
     range.
    Costs are linear over the relevant
     range.
    In multi-product companies, the
     sales mix is constant.
    In manufacturing firms,
     inventories do not change (units
     produced = units sold).                 16
Schiller International University   BA 512
Some New Terminology (to learn)
     Committed Cost                                   Discretionary Cost
  Long-term, cannot be                                May be altered in the
   reduced in the short                               short term by current
          term.                                       managerial decisions.

                                     Engineered Cost
                                    Physical relationship
                Fixed                                           Variable
                                    with activity measure.

                                           Variable
Depreciation on                                               Advertising;
 Buildings and                             Direct              Research &
  equipment                               Materials           Development

Schiller International University            BA 512                 25
In the New Manufacturing
Environment (JIT & FMS)
     A trend toward more fixed costs because of
           Increased automation (more machines).
           Smaller & stable workforce.

                                    Implications
      Managers are more “locked-in” with fewer decision
                       alternatives.
Planning becomes more crucial because fixed costs are
committed, i.e. difficult to change with current operating
                         decisions.

Schiller International University       BA 512      26
Cost Behavior in Types of Companies
          Merchandisers                        Service Organizations
      Cost of Goods Sold                         Supplies and travel




                           Examples of variable costs


           Manufacturers                        Merchandisers and
                                                 Manufacturers
 Direct Material, Direct
  Labor, and Variable                          Sales commissions and
Manufacturing Overhead                             shipping costs
Schiller International University     BA 512                 27
Cost Behavior in Types of Companies
                                    Examples of fixed costs


                           Merchandisers, manufacturers, and
                                 service organizations
                                         Real estate taxes
                                            Insurance
                                          Sales salaries
                                           Depreciation
                                           Advertising



Schiller International University              BA 512          28
29
Account Classification Method




                     Cost estimates are based on a
                   review of each account making up
                              the total cost.

Schiller International University   BA 512            30
Account Classification Method
Example         NOTE: These costs are semi-variable.




Schiller International University   BA 512      31
Visual-Fit Method

             A scatter diagram of past cost behavior
             may be helpful in analyzing semi-variable
                               costs.




Schiller International University   BA 512        32
Visual-Fit Method
   Total variable cost = Total cost – Total fixed cost
                          Plot the – points on a about
Draw a line through the plotted data $10,000so thatgraph
   Total variable cost = $16,000 data points= $6,000
   Unit variable of points fall above and below
 equal numbers cost = $6,000(total cost vs. = $2the line.
                                ÷ 3,000 units activity).
                              Estimated fixed portion of cost = $10,000
                        20
   1,000’s of Dollars




                                                  * ** *
     Total Cost in




                                      * *
                                                * * Vertical distance at
                        10          * *                  any point
                                                         is total cost, fixed
                                                           plus variable.
                        0
                             0       1      2       3      4
                             Activity, 1,000’s of Units Produced

Schiller International University            BA 512                 33
 We can also do the calculation shown on
 the previous slide mathematically:
                                     TC = F + VX

     Total Cost is the                               The number of units
    dependent variable.                                   (X) is the
                                                        independent
                                                          variable.

 The y-intercept term (F) is                      The X term coefficient (V)
the estimate of fixed costs.                      is the estimate of variable
                                                   cost per unit of activity,
                                                  the slope of the cost line.
 Schiller International University       BA 512                     34
Finding F and V




                                              1,000’s of Dollars)
                                                                                                        *   *




                                               TC (Total Cost in
for our example:                                                                           *
                                                                    16
                                                                                 * *                *
                                                                                         * *
                                                                             *    *
                                                                    10



             TC = F + VX                                                 0      1       2      3      4
                                                                             X (1,000’s of Units Produced)



     To find F, solve equation for x = 0:
           F = TC or in other words, F = $10,000.
     Now, solve for V at any point on the line, e.g.
           X = 3,000: $16,000 = $10,000 + V(3,000)
           V = ($16,000 – $10,000)/$3,000 = $2.00 per unit
     So our fixed costs are $10,000 and our unit variable costs are $2.00.

Schiller International University    BA 512                                                    35
BUT--

     This still requires us to pull points from a
      chart that we have drawn by hand. This is not
      very precise.
     There is a more precise way to do this, if we
      have access to a computer.
     It is called the:

    Least-Squares Regression Method

Schiller International University   BA 512   36
    Review: Least Squares Regression Method
     When we have data points that we think are related, we can
      plot them on a graph.
     The vertical axis is known as y; the horizontal as x.
     We then want to know if we can draw a straight line through
      the points in such a way that the distance from the points to
      the line is minimized.
     This line is called a regression line and is defined as:
       Y = mx + b

       Where m is the slope of the line

       And b is the y-intercept: where the line crosses the y-axis.

     MS Excel makes it easy to calculate m (slope) and b (y-
      intercept)
    Schiller International University   BA 512            38
 Review: Least-Squares Regression Method
      Use Excel to solve following equation for us.
                                     TC = F + VX

   Total Cost is the                                 The number of units
 dependent variable, y.                                   (x) is the
                                                        independent
                                                          variable.

 The y-intercept term (F) is                      The X term coefficient (V)
the estimate of fixed costs.                      is the estimate of variable
                                                   cost per unit of activity,
                                                  the slope of the cost line.
 Schiller International University       BA 512                     39
Schiller International University   BA 512   40
41
One More Thing: Multiple Regression

                Multiple regression includes two or more
                          independent variables:
                                    TC = F + V1X1 + V2X2


                   Terms in this equation have the same
                    meaning as in simple regression with
                      only one independent variable.

Schiller International University           BA 512         42
  The High-Low Method




Schiller International University   BA 512   43
Example: Owl Company recorded the
following production activity and
maintenance costs for five months.
                                    Month      Units        Cost
                                      1        6,000       $7,200
                                      2        5,000       $6,100
                                      3        8,000       $8,500
                                      4        9,000       $9,700
                                      5        8,000       $8,700

                          Compute:
                                    the variable cost per unit.
                                    the total fixed cost.

Schiller International University                 BA 512            44
  We could plot the results and use the
  Visual Fit method shown earlier.
                                    Month   Units      Cost
                                      1     6,000      $7,200
                                      2     5,000      $6,100
                                      3     8,000      $8,500
                                      4     9,000      $9,700
                                      5     8,000      $8,700


Or we can use the High-Low method. First, we
identify the high and low production months.
Schiller International University             BA 512            45
46
47
48
    A High-Low Method Question for You

      If sales commissions are $10,000 when 80,000
         units are sold (low month) and $14,000 when
       120,000 units are sold (high month), what is the
        variable portion of sales commission per unit
                              sold?

                            a.      $.08 per unit
                            b.      $.10 per unit
                            c.      $.12 per unit
                             d.
Schiller International University   $.125 per unit
                                              BA 512   49
50
A High-Low Method Question for You

        If sales commissions are $10,000 when
         80,000 units are sold and $14,000 when
         120,000 units are sold, what is the fixed
         portion of the sales commission?

                                   a.   $ 2,000
                                   b.   $ 4,000
                                   c.   $10,000
                                   d.   $12,000
Schiller International University              BA 512   51
    Another High-Low Method
    Question
     If sales commissions are $10,000 when 80,000
      units are sold and $14,000 when 120,000 units
       are sold, what is the fixed portion of the sales
                        commission?

                           a.      $ 2,000
                           b.      $ 4,000
                           c.      $10,000
                           d.      $12,000
Schiller International University             BA 512   52
Engineering Method of Cost Estimation

        Instead of asking for historical data to
         estimate costs (needed for the other four
         methods), this method asks not what costs
         were but what they should have been.
        These are called engineering cost studies.




Schiller International University   BA 512    53
54
Let’s Take a Break - - -




Schiller International University   BA 512   55
But it is not usually so easy. The available
historic data is plagued with:

                   Missing data.
                   Outlier data points.
                   Mismatched time periods costs.
                   Trade-offs in choosing the time period.
                   Committed and discretionary costs.
                   Inflation.

Schiller International University   BA 512            56
    Obviously, there is lots of
    room for judgment when
    estimating costs but that is
    the nature of –

    MANAGERIAL
    ACCOUNTING

Schiller International University   BA 512   57
Let’s try some problems:

     6-24
     6-33




Schiller International University   BA 512   58
    End of Today’s
       Lecture


    Thanks again for your case study presentations.



Schiller International University   BA 512       59

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:151
posted:1/4/2011
language:English
pages:49
Description: Chapter 2 Managerial Accounting Answers document sample