Download - UAA - ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Cost Structure

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.


Cost Structure

Cost Structure

Labor-Intensive = High Variable Costs

Machine-Intensive = High Fixed Costs


Abacus Computers Performs computer services for

other firms:

– Owns 2 computers

– Employs two people

Bulk of costs are . . .

– Rent Expense; and

– Depreciation (S/L)


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%


Tailor Made Company

Manufactures custom made men’s suits

– Owns one sewing machine

– Employs six people

Bulk of costs are . . .

– Materials; and

– Labor


Tailor Made CompanyIncome Statement




Sales $500,000 100%

Fixed Costs 100,000

Net Income $100,000




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




Tailor Made






Sales $500,000 100%

Fixed Costs 300,000

Net Income $100,000



Abacus Computers will increase its profits by $0.80 for each additional dollar of

sales.






Sales $500,000 100%

Fixed Costs 100,000

Net Income $100,000



Tailor-Made Company will increase its profits by $0.40 for each additional dollar of

sales.


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.


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.


Leverage . . .

To the scientist . . .

– Leverage explains how one is able to move a large object with a small force.


Operating Leverage

Is a measure of the extent to which fixed costs are being used in an organization.


Financial Leverage

Financial leverage is the financing of a portion of the firm’s assets with securities bearing a fixed (limited) rate of return.


Consider this . . .

Labor-Intensive Firms

Machine-Intensive Firms

FC:TC%

% FC:TC

Therefore, machine-intensive firms use more operating

leverage than labor-intensive firms.


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?


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.



The Formula . . .

Contribution Margin ------------------------------------ = DOL Net Income


Sales $500

VC 300

CM $200

FC 100

NI $100

Sales $500

VC 300

CM $200

FC 100

NI $100

Abacus





Tailor Made



For Abacus Computers . . .

$400,000 DOL = ------------------------- = 4 $100,000



For Tailor Made Company

$200,000 DOL = ------------------------- = 2 $100,000


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


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


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



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





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




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.


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)


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

=

Download - UAA - ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Cost Structure

Top Related