ACCTG 211 1st Edition Lecture 21 Outline of Last Lecture I. Important things to know for Block 2 ExamOutline of Current Lecture II. Methods for Splitting mixed costsa. Visual Fit Methodb. High-low Method c. Least Squares Regression Method III. Contribution Margin IV. CVP Analysis Current Lecture Methods for splitting mixed costs Visual Fit” Method: First, graph various data points based on the association between total mixed cost and volume- X-axis: volume (independent variable)- Y-axis: total cost (dependent variable)- Line formula: y = ax + b- y = total cost, a = slope of line, x = volume, b = total fixed costs- the connecting line is the “trend” “High-Low” Method: First, find the highest level of activity (in terms of units) Second, find the lowest level of activity (in terms of units)- Important: you must use both the “x” and “y” from each of the highest and lowest levels of activity Third, plug into the following formula to find the variable cost per unit (or the slope of the trend line):These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Variable Cost Per Unit = (Total Cost of Highest Level of Activity – Total Cost of Lowest Level ofActivity) / ( Units of Highest Level of Activity – Units of Lowest Level of Activity) Equations- TC = FC + VC - TC = (VC per Unit X # of Units) + Total FC formula for a line: y = ax + b- y = total cost, x = volume- a = slope of the line, b = y-intercept- Slope of the line = variable costs per unit- Y-intercept = total fixed costs Least Squares Regression Method Contribution Margin - Sales – Variable Costs = Contribution Margin- CM ratio = CM / Sales (in total, per unit, by percentage)- Think of contribution margin (CM) as the amount “contributed” to covering fixed costs- Once fixed costs are covered by CM, entirety of additional CM goes straight to profit Traditional Income Statement - Sales – COGS = Gross Profit – Expenses = Net Income Contribution Margin Income Statement - Sales – VC = CM – Fixed Costs = Net Income Cost Volume Profit Analysis (CVP) Goal: project profits (“P” for “profit”) for different production levels (“V” for “volume”) assumingdifferent cost structures (“C” for “cost”) Assumptions: Costs included in calculation are either fixed or variable (i.e., mixed costs are split) Revenue per unit is held constant over relevant range of production Sales mix is held constant for multi-product firms Units produced = units sold (i.e., no inventory build-up allowed) Profit = Total Revenue – Total Costs “Kitchen Sink CVP Formula” ( Total Fixed Costs + Any Desired Profit )/ ( Contribution Margin Per Unit )= # Units Required to Cover Fixed Costs and Desired Profit Break even calculation is when no profit is desired To calculate revenue needed:- Multiply units required by the revenue each unit
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