Kế toán, kiểm toán - Chapter 12: Managerial accounting and cost - Volume - profit relationships

CHAPTER 12MANAGERIAL ACCOUNTING AND COST-VOLUME-PROFIT RELATIONSHIPSMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat is the managerial planning and control cycle?What are the major differences between financial accounting and managerial accounting?What is the difference between variable and fixed cost behavior patterns, and what simplifying assumptions are made in this classification method?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhy are fixed costs expressed on a per unit of activity basis misleading, and why may this result in faulty decisions?What kinds of costs are likely to have a variable cost behavior pattern, and what kinds of costs are likely to have a fixed costs behavior pattern?How can the high-low method be used to determine the cost formula for a cost that has a mixed behavior pattern?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat is the difference between the traditional income statement format and the contribution statement format?What is the importance of using the contribution margin format to analyze the impact of cost and sales volume changes on operating income?How is the contribution margin ratio calculated, and how can it be used in CVP analysis?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow can changes in sales mix affect the projections using CVP analysis?What are the meaning and significance of the break-even point, and how is the break-even point calculated?What is the concept of operating leverage?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1What is the managerial planning and control cycle?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Managerial Accounting Contrasted to Financial AccountingManagerial accounting supports the internal planning decision made by managementFinancial accounting has more of a score-keeping, historical orientationPlanning is a key part of the management processMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Strategic, Operational, and Financial PlanningPlanning and Control CyclePerformance Analysis: Plans vs. Actual Results (Controlling)Executing Operational Activities (Managing)Revisit PlansImplement PlansData Collection and Performance FeedbackMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Planning and ControlThe management process consists of planning, organizing, and controlling an entity’s activitiesControl provides feedback in which actual results are compared to planned results, and if a variance exists, the plan or actions or both are changedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2What are the major differences between financial accounting and managerial accounting?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Managerial AccountingEmphasis is on the futureConcerned with units within the organizationReports issued frequently and promptlyRelevance more important than reliabilityNo reporting standardsIntended to management’s useMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial AccountingIntended for external investors and creditorsDeals with the past – historicalReports are prepared for the company as a wholeReports are issued monthly – a week or more after the end of the monthHigh accuracy is desiredGenerally Accepted Accounting Standards are used for reportsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002The Management AccountantWorks extensively with people in other functions of the organizationHelps develop production standardsHelps production people interpret production reportsHelps marketing and sales predict future salesAids in the information system developmentMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What is the difference between variable and fixed cost behavior patterns, and what simplifying assumptions are made in this classification method?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cost ClassificationsDifferent costs for different purposes:Relationship between total cost and volume of activityRelationship to product or activityFor cost accounting purposesTime frame perspectiveOther analytical purposesThese classifications are not mutually exclusiveMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Relationship of Total Cost to Volume of ActivityThe relationship of total cost to volume of activity describes the cost behavior patternA variable cost changes in TOTAL as the volume of activity changesA fixed cost does NOT change in TOTAL as the volume of activity changesVariable cost example is raw materialsFixed cost example is depreciationMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Graphical RepresentationVariable costs Fixed costsTotal activity (units)Total activity (units)Total costsTotal costsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Semivariable CostsSome costs have components of both fixed and variable costsA cost formula for such a cost is:Total cost = Fixed cost + Variable cost orTotal cost = Fixed cost + (Variable rate per unit X Activity)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4Why are fixed costs expressed on a per unit of activity basis misleading, and why may this result in faulty decisions?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Fixed Cost UnitizationDo NOT unitize fixed expenses because they do not behave on a per unit basisDividing fixed expenses by activity level will give varying results depending on the activity levelMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5What kinds of costs are likely to have a variable cost behavior pattern, and what kinds of costs are likely to have a fixed cost behavior pattern?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cost Behavior PatternTwo assumptions made in determining cost behavior patterns:The behavior pattern is true only within a relevant rangeThe behavior pattern is assumed to be linear in the relevant rangeThe relevant range is the level of activity over which a particular pattern existsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6How can the high-low method be used to determine the cost formula for a cost that has a mixed behavior pattern?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002The High-Low MethodA cost behavior pattern can be analyzed using a technique that employs a scattergram to identify high and low cost-volume dataA scattergram is a graph with total units produced as the horizontal axis and cost as the vertical axisPoints are plotted on the graph for various production levels and costsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Steps in Using the High-Low MethodIdentify the high and low cost-volume pointsCompute the variable rate by using the following formula:Variable rate = High cost – Low cost High activity – Low activityMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Steps in Using the High-Low MethodCompute the fixed rate by using the following formula and inserting the variable rate computed above and either the high activity level or the low activity levelTotal cost = Fixed cost + Variable costTotal cost = Fixed cost + (Activity level x Variable rate)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7What is the difference between the traditional income statement format and the contribution statement format?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Modified Income Statement FormatReferred to as the contribution margin formatClassifies costs according to their behaviorRevenues and operating income are the same as under the traditional format of revenues minus cost of goods sold, etc.McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Contribution Margin Format Revenues XX- Variable expenses XX= Contribution margin XX- Fixed expenses XX= Operating income XX McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 8What is the importance of using the contribution margin format to analyze the impact of cost and sales volume changes on operating income?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Contribution MarginContribution margin is the amount that is available to cover fixed expenses and operating incomeThe traditional approach does not consider cost behavior patternsThe contribution margin approach avoids the errors that may result from viewing fixed costs on a per unit approachMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 9How is the contribution margin ratio calculated, and how can it be used in CVP analysis?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Contribution Margin RatioContribution margin ratio is the ratio of contribution margin to revenuesUsing either total dollars or dollars per unit, divide the contribution margin by the revenueThe result is a percentageMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Contribution Margin Model Per unit X Volume = Total %Revenue $XXVariable expenses XXContribution margin $XX x XX = $XX X% Fixed expenses XXOperating income $XX McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Using the ContributionMargin ModelSteps in using the model are as follows:Express revenue, variable expense, and contribution on a per unit basisMultiply the contribution per unit by the volume to get the total contribution marginSubtract fixed expenses from the total contribution margin to get operating income (Fixed expenses are NOT unitized!)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Contribution Margin in ActionFour relationships to notice as you study:Revenue - Variable expenses = Contribution marginContribution margin / Revenue = Contribution margin ratioTotal contribution margin depends on the volume of activityContribution margin must cover fixed expenses before an operating income is earnedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 10How can changes in sales mix affect the projections using CVP analysis?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Multiple Products and Sales Mix ConsiderationsWhen using the contribution margin model with more than one product, the sales mix must be consideredSales mix is the relative proportion of total sales accounted for by different productsDifferent products usually have different contribution marginsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 11What are the meaning and significance of the break-even point, and how is the break-even point calculated?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Break-Even Point AnalysisBreak-even point is usually expressed as the amount of revenue that must be realized in order to have neither a profit nor a lossExpresses minimum target revenueUse the contribution margin model to determine the break-even point by setting operating income to zeroMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Break-Even Point FormulasTotal revenues at break-even =  Fixed expenses Contribution margin ratioVolume in units at bread-even =  Fixed expenses Contribution margin per unitVolume in units at break-even = Total revenues required Revenue per unitMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Target Operating IncomeThe revenues and units necessary may be determined as follows:Total revenues for desired level of operating income = Fixed expenses + Desired operating income Contribution margin ratioVolume in units for desired level of operating income = Fixed expenses + Desired operating income Contribution margin per unitMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Break-Even GraphLossProfitBreak-even pointVariable expensesFixed expenseTotal expensesTotal revenuesSales volume in units$000McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 12What is the concept of operating leverage?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Operating LeverageOperating income will change proportionately more than changes in revenues because fixed expenses do not change with changes in volumeThis magnification effect on operating income due to a change in revenues is called operating leverageMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Operating Leverage EffectsThe higher a firm’s contribution margin ratio, the greater its operating leverageHigh operating leverage increases the risk that a small percentage decline in revenues will cause a large percentage decline in operating incomeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002