ACCTG 211 1st Edition Lecture 26Review Areas for Focus Cost Behavior: Variable costs (VC) when stated on a per unit basis, variable costs remain constant across all production levels within the relevant range fixed costs (FC) Fixed costs do not vary with the production level. Mixed costs If, within a relevant range, a cost is neither fixed nor variable, it is called semi-variable or mixed. Relevant range issues The relevant range is the range of activity (e.g., production or sales) over which these relationships are valid Graphing the concepts: Total Costs FC Total Revenue Contribution Margin Income Statement format Using the High/Low Method to separate Mixed Costs into the respective Variable and Fixed Costs “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): 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 Unit Contribution Margin Contribution Margin - Sales – Variable Costs = Contribution Margin 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 Contribution Margin Ratio- CM ratio = CM / Sales (in total, per unit, by percentage) Break-even analysis & Cost-Volume-Profit In units &/or dollars Income Statement Approach Using the Contribution Margin Sales in dollars using the Contribution Margin Ratio The formulas What happens when? (Cost behavior dynamics) Production: increases, decreases VC, FC, &/or Selling Price changes Weighted Average Contribution Margin (more than 1 product) Relevant/irrelevant information Incremental analysis Short-term decisions to deal with: Special Order Pricing Target Costing Cost-Plus Keep/Drop (i.e., Discontinue?) segments under the following scenarios: Avoidable Fixed Costs Unavoidable Fixed Costs If we drop a segment, there is impact on another segment Product Mix (constrained resources) Outsourcing (we'll limit the discussion to Make or Buy) Sell-As-Is or Process Further Joint Production Costs Capital Budgeting Minimum desired rates of return: why we use them and how to calculate the weighted average cost of capital Capital investment decision methods: Payback period Accounting rate of return Net present value Time value of money Equal and unequal cash flows Comparing the Cash flows vs. Income flows of potential
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