Date post: | 20-Jan-2016 |
Category: |
Documents |
Upload: | amber-wade |
View: | 219 times |
Download: | 0 times |
4 - 4 - 11© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Planning for andPlanning for and
Predicting PerformancePredicting Performance
Chapter 4Chapter 4
4 - 4 - 22© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 1Learning Objective 1
Classify costs by cost objectsClassify costs by cost objects
and cost drivers and describeand cost drivers and describe
the characteristics of activity-the characteristics of activity-
based cost systems andbased cost systems and
standard cost systems.standard cost systems.
4 - 4 - 33© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Classifying CostsClassifying Costs
The type of decision managementThe type of decision managementmust make determines the typemust make determines the type
of cost information needed.of cost information needed.
The type of decision managementThe type of decision managementmust make determines the typemust make determines the type
of cost information needed.of cost information needed.
4 - 4 - 44© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Cost ObjectsCost Objects
ActivityActivityProductProductServiceService
ActivityActivityProductProductServiceService
ProjectProjectGeographic regionGeographic region
DepartmentDepartment
ProjectProjectGeographic regionGeographic region
DepartmentDepartment
Cost objects are those entitiesCost objects are those entitiesfor which management desiresfor which management desiresa separate cost measurement.a separate cost measurement.
Cost objects are those entitiesCost objects are those entitiesfor which management desiresfor which management desiresa separate cost measurement.a separate cost measurement.
4 - 4 - 55© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Cost ObjectsCost Objects
Direct costsDirect costsDirect costsDirect costs
Indirect costsIndirect costs(common costs)(common costs)
Indirect costsIndirect costs(common costs)(common costs)
4 - 4 - 66© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Activity-Based CostingActivity-Based Costing(ABC) Systems(ABC) Systems
uses that activity as the basisuses that activity as the basisfor common cost allocation.for common cost allocation.
uses that activity as the basisuses that activity as the basisfor common cost allocation.for common cost allocation.
A cost driver is the activity thatA cost driver is the activity thatcauses the expense to occur.causes the expense to occur.
A cost driver is the activity thatA cost driver is the activity thatcauses the expense to occur.causes the expense to occur.
It identifies the specific activity thatIt identifies the specific activity thatcauses the cost to occur and...causes the cost to occur and...
It identifies the specific activity thatIt identifies the specific activity thatcauses the cost to occur and...causes the cost to occur and...
4 - 4 - 77© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Standard Cost SystemsStandard Cost Systems
Standards are used to evaluateStandards are used to evaluateactual performance.actual performance.
Standards are used to evaluateStandards are used to evaluateactual performance.actual performance.
A A standardstandard is a pre-established is a pre-establishedbenchmark for desirable performance.benchmark for desirable performance.
A A standardstandard is a pre-established is a pre-establishedbenchmark for desirable performance.benchmark for desirable performance.
4 - 4 - 88© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 2Learning Objective 2
Distinguish between Distinguish between
productproduct
and period costs.and period costs.
4 - 4 - 99© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Product CostsProduct Costs
Product costs are all costs of acquiringProduct costs are all costs of acquiringor manufacturing to make themor manufacturing to make themavailable for sale to customers.available for sale to customers.
Product costs are all costs of acquiringProduct costs are all costs of acquiringor manufacturing to make themor manufacturing to make themavailable for sale to customers.available for sale to customers.
4 - 4 - 1010© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Product CostsProduct Costs
Manufactured goods:Manufactured goods: MaterialsMaterials LaborLabor Other plant expensesOther plant expenses Transportation costsTransportation costs Make-ready expenseMake-ready expense
Manufactured goods:Manufactured goods: MaterialsMaterials LaborLabor Other plant expensesOther plant expenses Transportation costsTransportation costs Make-ready expenseMake-ready expense
Purchased goods:Purchased goods: Invoice priceInvoice price Transportation costsTransportation costs Make-ready expenseMake-ready expense
Purchased goods:Purchased goods: Invoice priceInvoice price Transportation costsTransportation costs Make-ready expenseMake-ready expense
Balance sheetBalance sheet
Assets:Assets: InventoryInventory
Balance sheetBalance sheet
Assets:Assets: InventoryInventory
WhenWhen
purchasedpurchased
WhenWhenmanufacturedmanufactured
Income statementIncome statement
Cost of goods soldCost of goods sold
Income statementIncome statement
Cost of goods soldCost of goods sold
WhenWhensoldsold
4 - 4 - 1111© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Period CostsPeriod Costs
These are the costs of operating aThese are the costs of operating abusiness that are not product costs.business that are not product costs.
These are the costs of operating aThese are the costs of operating abusiness that are not product costs.business that are not product costs.
Selling costsSelling costsSelling costsSelling costs Administrative costsAdministrative costsAdministrative costsAdministrative costs
4 - 4 - 1212© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Income Statement forIncome Statement forFamily Dollar Stores, Inc.Family Dollar Stores, Inc.
Consolidated Income StatementConsolidated Income StatementFor the Year Ended August 31, 2002For the Year Ended August 31, 2002
(in thousands)(in thousands)
Net salesNet sales $4,162,652$4,162,652Costs and expenses:Costs and expenses:
Cost of salesCost of sales 2,766,733 2,766,733Selling, general, and admin.Selling, general, and admin. 1,054,298 1,054,298
Income before income taxesIncome before income taxes $ 341,621$ 341,621Income taxesIncome taxes 124,692 124,692Net incomeNet income $ 216,929$ 216,929
Net salesNet sales $4,162,652$4,162,652Costs and expenses:Costs and expenses:
Cost of salesCost of sales 2,766,733 2,766,733Selling, general, and admin.Selling, general, and admin. 1,054,298 1,054,298
Income before income taxesIncome before income taxes $ 341,621$ 341,621Income taxesIncome taxes 124,692 124,692Net incomeNet income $ 216,929$ 216,929
ProductProductcostscosts
PeriodPeriodcostscosts
4 - 4 - 1313© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 3Learning Objective 3
Differentiate between fixed Differentiate between fixed
and variable costs and and variable costs and
classify costs by cost classify costs by cost
behavior.behavior.
4 - 4 - 1414© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Cost BehaviorCost Behavior
Variable costsVariable costs change proportionately change proportionatelywith the volume of sales or production.with the volume of sales or production.
Variable costsVariable costs change proportionately change proportionatelywith the volume of sales or production.with the volume of sales or production.
Mixed costsMixed costs have both a fixed have both a fixedand a variable component.and a variable component.
Mixed costsMixed costs have both a fixed have both a fixedand a variable component.and a variable component.
Fixed costsFixed costs remain the same in remain the same intotal regardless of the volumetotal regardless of the volume
of sales or production.of sales or production.
Fixed costsFixed costs remain the same in remain the same intotal regardless of the volumetotal regardless of the volume
of sales or production.of sales or production.
4 - 4 - 1515© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Graph of Fixed, Variable,Graph of Fixed, Variable,and Mixed Costsand Mixed Costs
00
200200
400400
600600
800800
10001000
12001200
14001400
00 3030 6060 9090
Production LevelProduction Level
$ C
osts
$ C
osts Fixed costsFixed costs
Variable costVariable costMixed costMixed cost
4 - 4 - 1616© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 4Learning Objective 4
Explain the concept of aExplain the concept of a
relevant range and its relevant range and its
effecteffect
on cost information.on cost information.
4 - 4 - 1717© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Relevant RangeRelevant Range
It is a range of business activityIt is a range of business activityin which cost behavior patternsin which cost behavior patterns
remain unchanged.remain unchanged.
It is a range of business activityIt is a range of business activityin which cost behavior patternsin which cost behavior patterns
remain unchanged.remain unchanged.
4 - 4 - 1818© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Relevant Ranges of Fixed Relevant Ranges of Fixed Costs by Number of ShiftsCosts by Number of Shifts
0
100
200
300
400
500
600
700
Production in Millions of Cases
$ F
ixed
Costs
(th
ou
san
ds)
RelevantRelevantrangerange1 shift1 shift
RelevantRelevantrangerange
2 shifts2 shifts
RelevantRelevantrangerange
3 shifts3 shifts
4 - 4 - 1919© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 5Learning Objective 5
Analyze cost information toAnalyze cost information to
construct a total cost construct a total cost
formulaformula
for a business activity.for a business activity.
4 - 4 - 2020© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Total Cost FormulaThe Total Cost Formula
Variable costs = Unit variable cost × VolumeVariable costs = Unit variable cost × VolumeVariable costs = Unit variable cost × VolumeVariable costs = Unit variable cost × Volume
Total cost = Fixed costs + Variable costsTotal cost = Fixed costs + Variable costsTotal cost = Fixed costs + Variable costsTotal cost = Fixed costs + Variable costs
4 - 4 - 2121© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Total Cost FormulaThe Total Cost Formula
FixedFixedcostscosts
$250,000$250,000$350,000$350,000$450,000$450,000
Unit variableUnit variablecosts per casecosts per case
$12.00$12.00$11.75$11.75$11.40$11.40
NumberNumberof shiftsof shifts
112233
4 - 4 - 2222© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Total Cost FormulaThe Total Cost Formula
TC = $350,000 + ($11.75 × 6,000,000)TC = $350,000 + ($11.75 × 6,000,000)TC = $350,000 + ($11.75 × 6,000,000)TC = $350,000 + ($11.75 × 6,000,000)
TC = $350,000 + $70,500,000TC = $350,000 + $70,500,000TC = $350,000 + $70,500,000TC = $350,000 + $70,500,000
TC = $70,850,000TC = $70,850,000TC = $70,850,000TC = $70,850,000
What is the cost of producing 6 millionWhat is the cost of producing 6 millioncases employing 2 shifts of workers?cases employing 2 shifts of workers?
What is the cost of producing 6 millionWhat is the cost of producing 6 millioncases employing 2 shifts of workers?cases employing 2 shifts of workers?
4 - 4 - 2323© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Operating IncomeOperating Income
Sales revenuesSales revenues $455,000$455,000Cost of goods soldCost of goods sold 245,000 245,000Gross profitGross profit $210,000$210,000Operating expensesOperating expenses Selling expensesSelling expenses $105,000$105,000 Administrative expensesAdministrative expenses 60,000 60,000 Total operating expensesTotal operating expenses 165,000 165,000Operating incomeOperating income $ 45,000$ 45,000
Sales revenuesSales revenues $455,000$455,000Cost of goods soldCost of goods sold 245,000 245,000Gross profitGross profit $210,000$210,000Operating expensesOperating expenses Selling expensesSelling expenses $105,000$105,000 Administrative expensesAdministrative expenses 60,000 60,000 Total operating expensesTotal operating expenses 165,000 165,000Operating incomeOperating income $ 45,000$ 45,000
Jason’s Furniture Gallery, Inc.Jason’s Furniture Gallery, Inc.Income StatementIncome Statement
For the Year Ended December 31, 2004For the Year Ended December 31, 2004
Product costsProduct costsPeriod costsPeriod costs
4 - 4 - 2424© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Contribution IncomeContribution IncomeStatementStatement
Sales revenuesSales revenues $455,000$455,000Variable expensesVariable expenses Cost of goods soldCost of goods sold $245,000$245,000 Selling expensesSelling expenses 55,000 55,000 Administrative expensesAdministrative expenses 9,400 9,400 309,400 309,400Contribution marginContribution margin $145,600$145,600Fixed expensesFixed expenses Selling expensesSelling expenses $ 50,000$ 50,000 Administrative expensesAdministrative expenses 50,600 50,600 100,600 100,600Operating incomeOperating income $ 45,000$ 45,000
Sales revenuesSales revenues $455,000$455,000Variable expensesVariable expenses Cost of goods soldCost of goods sold $245,000$245,000 Selling expensesSelling expenses 55,000 55,000 Administrative expensesAdministrative expenses 9,400 9,400 309,400 309,400Contribution marginContribution margin $145,600$145,600Fixed expensesFixed expenses Selling expensesSelling expenses $ 50,000$ 50,000 Administrative expensesAdministrative expenses 50,600 50,600 100,600 100,600Operating incomeOperating income $ 45,000$ 45,000
Jason’s Furniture Gallery, Inc.Jason’s Furniture Gallery, Inc.Contribution Income StatementContribution Income Statement
For the Year Ended December 31, 2004For the Year Ended December 31, 2004
4 - 4 - 2525© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Contribution IncomeContribution IncomeStatement ExampleStatement Example
What is the unit selling price?What is the unit selling price?What is the unit selling price?What is the unit selling price?
What is the unit variable cost?What is the unit variable cost?What is the unit variable cost?What is the unit variable cost?
What is the unit contribution margin?What is the unit contribution margin?What is the unit contribution margin?What is the unit contribution margin?
Assume that Jason’s sole product is one styleAssume that Jason’s sole product is one styleof sofa and that in 2004 he sold 910 sofas.of sofa and that in 2004 he sold 910 sofas.
Assume that Jason’s sole product is one styleAssume that Jason’s sole product is one styleof sofa and that in 2004 he sold 910 sofas.of sofa and that in 2004 he sold 910 sofas.
4 - 4 - 2626© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Contribution IncomeContribution IncomeStatement ExampleStatement Example
SalesSales SS $455,000$455,000 USPUSP $500$500Variable costsVariable costs VCVC 309,400 309,400 UVCUVC 340 340Contribution marginContribution margin CMCM $145,600$145,600 UCMUCM $160$160Fixed costsFixed costs FCFC 100,600 100,600Operating incomeOperating income OIOI $ 45,000$ 45,000
SalesSales SS $455,000$455,000 USPUSP $500$500Variable costsVariable costs VCVC 309,400 309,400 UVCUVC 340 340Contribution marginContribution margin CMCM $145,600$145,600 UCMUCM $160$160Fixed costsFixed costs FCFC 100,600 100,600Operating incomeOperating income OIOI $ 45,000$ 45,000
Per unitPer unitTotalTotal
4 - 4 - 2727© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 6Learning Objective 6
Conduct cost-volume-profitConduct cost-volume-profit
analysis to determineanalysis to determine
breakeven points.breakeven points.
4 - 4 - 2828© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
BreakevenBreakeven occurs when a company’s occurs when a company’soperating income is zero.operating income is zero.
BreakevenBreakeven occurs when a company’s occurs when a company’soperating income is zero.operating income is zero.
CVP analysis is the analysis of theCVP analysis is the analysis of therelationships between cost andrelationships between cost and
volume, and the effect ofvolume, and the effect of those relationships on profit.those relationships on profit.
CVP analysis is the analysis of theCVP analysis is the analysis of therelationships between cost andrelationships between cost and
volume, and the effect ofvolume, and the effect of those relationships on profit.those relationships on profit.
4 - 4 - 2929© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Breakeven AnalysisBreakeven Analysis
(1) $455,000 – $309,400 – $100,600 = $45,000(1) $455,000 – $309,400 – $100,600 = $45,000(1) $455,000 – $309,400 – $100,600 = $45,000(1) $455,000 – $309,400 – $100,600 = $45,000
(2) Sales – Variable costs = Contribution margin(2) Sales – Variable costs = Contribution margin(2) Sales – Variable costs = Contribution margin(2) Sales – Variable costs = Contribution margin
(2) $455,000 – $309,400 = $145,600(2) $455,000 – $309,400 = $145,600(2) $455,000 – $309,400 = $145,600(2) $455,000 – $309,400 = $145,600
(1) Sales – Variable costs – Fixed costs(1) Sales – Variable costs – Fixed costs= Operating income= Operating income
(1) Sales – Variable costs – Fixed costs(1) Sales – Variable costs – Fixed costs= Operating income= Operating income
4 - 4 - 3030© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Breakeven AnalysisBreakeven Analysis
(3) $145,600 – $100,600 = $45,000(3) $145,600 – $100,600 = $45,000(3) $145,600 – $100,600 = $45,000(3) $145,600 – $100,600 = $45,000
(4) USP – UVC = UCM(4) USP – UVC = UCM$500 – $340 = $160$500 – $340 = $160
(4) USP – UVC = UCM(4) USP – UVC = UCM$500 – $340 = $160$500 – $340 = $160
(5) (USP × V) – (UVC × V) = (UCM × V)(5) (USP × V) – (UVC × V) = (UCM × V)(5) (USP × V) – (UVC × V) = (UCM × V)(5) (USP × V) – (UVC × V) = (UCM × V)
(3) Contribution margin – Fixed costs(3) Contribution margin – Fixed costs= Operating income= Operating income
(3) Contribution margin – Fixed costs(3) Contribution margin – Fixed costs= Operating income= Operating income
4 - 4 - 3131© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Determining Breakeven Determining Breakeven UnitsUnits
(b) Contribution margin – Fixed costs = 0(b) Contribution margin – Fixed costs = 0(b) Contribution margin – Fixed costs = 0(b) Contribution margin – Fixed costs = 0
(c) Contribution margin = Fixed costs(c) Contribution margin = Fixed costs(c) Contribution margin = Fixed costs(c) Contribution margin = Fixed costs
VVBEBE = FC ÷ UCM = FC ÷ UCM$100,600 ÷ $160 = 628.75 $100,600 ÷ $160 = 628.75 629 sofas 629 sofas
VVBEBE = FC ÷ UCM = FC ÷ UCM$100,600 ÷ $160 = 628.75 $100,600 ÷ $160 = 628.75 629 sofas 629 sofas
(a) Sales – Variable costs – Fixed costs = 0(a) Sales – Variable costs – Fixed costs = 0(a) Sales – Variable costs – Fixed costs = 0(a) Sales – Variable costs – Fixed costs = 0
4 - 4 - 3232© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Determining Breakeven Determining Breakeven UnitsUnits
VVDPDP = (FC + DP) ÷ UCM = (FC + DP) ÷ UCMVVDPDP = (FC + DP) ÷ UCM = (FC + DP) ÷ UCM
($100,600 + $75,000) ÷ $160 = 1,097.5 ($100,600 + $75,000) ÷ $160 = 1,097.5 1,098 1,098($100,600 + $75,000) ÷ $160 = 1,097.5 ($100,600 + $75,000) ÷ $160 = 1,097.5 1,098 1,098
How many units must Jason sellHow many units must Jason sellto make a profit of $75,000?to make a profit of $75,000?
How many units must Jason sellHow many units must Jason sellto make a profit of $75,000?to make a profit of $75,000?
4 - 4 - 3333© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Determining BreakevenDetermining BreakevenSales DollarsSales Dollars
SalesSales SS $455,000$455,000 100.0%100.0%Variable costsVariable costs VCVC 309,400 309,400 68.0% 68.0%Contribution marginContribution margin CMCM $145,600$145,600 32.0% 32.0%
SalesSales SS $455,000$455,000 100.0%100.0%Variable costsVariable costs VCVC 309,400 309,400 68.0% 68.0%Contribution marginContribution margin CMCM $145,600$145,600 32.0% 32.0%
PercentPercentof salesof salesTotalTotal
Contribution margin ratio =Contribution margin ratio =Contribution margin ÷ SalesContribution margin ÷ Sales
Contribution margin ratio =Contribution margin ratio =Contribution margin ÷ SalesContribution margin ÷ Sales
4 - 4 - 3434© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Determining BreakevenDetermining BreakevenSales DollarsSales Dollars
SSBEBE = FC ÷ CMR = FC ÷ CMRSSBEBE = FC ÷ CMR = FC ÷ CMR
$100,600 ÷ 0.32 = $314,375 $100,600 ÷ 0.32 = $314,375 $100,600 ÷ 0.32 = $314,375 $100,600 ÷ 0.32 = $314,375
What is the breakeven point in sales dollars?What is the breakeven point in sales dollars?What is the breakeven point in sales dollars?What is the breakeven point in sales dollars?
4 - 4 - 3535© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 7Learning Objective 7
Perform sensitivity Perform sensitivity
analysis.analysis.
4 - 4 - 3636© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Sensitivity AnalysisSensitivity Analysis
Sensitivity helps us to solve “what if” questions.Sensitivity helps us to solve “what if” questions.Sensitivity helps us to solve “what if” questions.Sensitivity helps us to solve “what if” questions.
If Jason raises the selling price of the sofasIf Jason raises the selling price of the sofasto $525 and kept the same volume of 910to $525 and kept the same volume of 910
per year, how much would his profit change?per year, how much would his profit change?
If Jason raises the selling price of the sofasIf Jason raises the selling price of the sofasto $525 and kept the same volume of 910to $525 and kept the same volume of 910
per year, how much would his profit change?per year, how much would his profit change?
Contribution margin increases by $25 to $185.Contribution margin increases by $25 to $185.Contribution margin increases by $25 to $185.Contribution margin increases by $25 to $185.
This is a technique to determine theThis is a technique to determine theeffect of changes on the CVP relationships.effect of changes on the CVP relationships.
This is a technique to determine theThis is a technique to determine theeffect of changes on the CVP relationships.effect of changes on the CVP relationships.
4 - 4 - 3737© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Sensitivity AnalysisSensitivity Analysis
($100,600 + $75,000) ÷ $185 = 949.2 ($100,600 + $75,000) ÷ $185 = 949.2 950 950($100,600 + $75,000) ÷ $185 = 949.2 ($100,600 + $75,000) ÷ $185 = 949.2 950 950
If Jason decreases the selling price by 10%,If Jason decreases the selling price by 10%,what is his new contribution margin?what is his new contribution margin?
If Jason decreases the selling price by 10%,If Jason decreases the selling price by 10%,what is his new contribution margin?what is his new contribution margin?
$160 – $50 = $110$160 – $50 = $110$160 – $50 = $110$160 – $50 = $110
How many units must he sellHow many units must he sellto make a profit of $75,000?to make a profit of $75,000?
How many units must he sellHow many units must he sellto make a profit of $75,000?to make a profit of $75,000?
4 - 4 - 3838© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Sensitivity AnalysisSensitivity Analysis
1.20 × 910 = 1,0921.20 × 910 = 1,0921.20 × 910 = 1,0921.20 × 910 = 1,092
How many units must Jason sellHow many units must Jason sellto make a profit of $75,000?to make a profit of $75,000?
How many units must Jason sellHow many units must Jason sellto make a profit of $75,000?to make a profit of $75,000?
($100,600 + $75,000) ÷ $110 = 1,596.4 ($100,600 + $75,000) ÷ $110 = 1,596.4 1,597 1,597($100,600 + $75,000) ÷ $110 = 1,596.4 ($100,600 + $75,000) ÷ $110 = 1,596.4 1,597 1,597
What would sales be with aWhat would sales be with a20% increase in volume?20% increase in volume?
What would sales be with aWhat would sales be with a20% increase in volume?20% increase in volume?
4 - 4 - 3939© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 8Learning Objective 8
Build initial operatingBuild initial operating
and capital budgets.and capital budgets.
4 - 4 - 4040© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Building an Initial BudgetBuilding an Initial Budget
To launch Elevation Sports, Inc.,To launch Elevation Sports, Inc.,in a fiscally responsible manner,in a fiscally responsible manner,management needs to spendmanagement needs to spend
time and energy preparingtime and energy preparingbudgets to analyze costs, revenues,budgets to analyze costs, revenues,
equipment needs, and financing.equipment needs, and financing.
To launch Elevation Sports, Inc.,To launch Elevation Sports, Inc.,in a fiscally responsible manner,in a fiscally responsible manner,management needs to spendmanagement needs to spend
time and energy preparingtime and energy preparingbudgets to analyze costs, revenues,budgets to analyze costs, revenues,
equipment needs, and financing.equipment needs, and financing.
4 - 4 - 4141© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Building an Initial BudgetBuilding an Initial Budget
Initial budgets focus heavily on costInitial budgets focus heavily on costestimation whereas ongoing budgetsestimation whereas ongoing budgets
begin with revenue estimation.begin with revenue estimation.
Initial budgets focus heavily on costInitial budgets focus heavily on costestimation whereas ongoing budgetsestimation whereas ongoing budgets
begin with revenue estimation.begin with revenue estimation.
4 - 4 - 4242© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Operating CostsOperating Costs
SellingSellingSellingSelling
AdministrativeAdministrativeAdministrativeAdministrative
ManufacturingManufacturingManufacturingManufacturing
4 - 4 - 4343© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Operating Costs ExampleOperating Costs Example
Insurance costs will be $5,000 per yearInsurance costs will be $5,000 per yearplus $1.00 per snowboard manufactured.plus $1.00 per snowboard manufactured.
Insurance costs will be $5,000 per yearInsurance costs will be $5,000 per yearplus $1.00 per snowboard manufactured.plus $1.00 per snowboard manufactured.
Interest expense will be 10%Interest expense will be 10%of the long-term debt of theof the long-term debt of the
equipment loan, or $6,000 per year.equipment loan, or $6,000 per year.
Interest expense will be 10%Interest expense will be 10%of the long-term debt of theof the long-term debt of the
equipment loan, or $6,000 per year.equipment loan, or $6,000 per year.
Rent will be $1,500 per month.Rent will be $1,500 per month.Rent will be $1,500 per month.Rent will be $1,500 per month.
4 - 4 - 4444© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Operating Costs ExampleOperating Costs Example
Utilities:Utilities:Ski shop: $250 per monthSki shop: $250 per month
Plant: $500 per monthPlant: $500 per monthAdministrative space: $75 per monthAdministrative space: $75 per month
Utilities:Utilities:Ski shop: $250 per monthSki shop: $250 per month
Plant: $500 per monthPlant: $500 per monthAdministrative space: $75 per monthAdministrative space: $75 per month
Legal fees:Legal fees:One-time expense: $2,000One-time expense: $2,000
Per month: $300Per month: $300Secure patents, etc.: $12,000Secure patents, etc.: $12,000
Legal fees:Legal fees:One-time expense: $2,000One-time expense: $2,000
Per month: $300Per month: $300Secure patents, etc.: $12,000Secure patents, etc.: $12,000
4 - 4 - 4545© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Operating Costs ExampleOperating Costs Example
USSA membership: $600 per yearUSSA membership: $600 per yearBooth space and travel expenses:Booth space and travel expenses:
$9,000 per year$9,000 per year
USSA membership: $600 per yearUSSA membership: $600 per yearBooth space and travel expenses:Booth space and travel expenses:
$9,000 per year$9,000 per year
Advertising costs:Advertising costs:One-time expense: $3,000One-time expense: $3,000
Per month: $1,000Per month: $1,000
Advertising costs:Advertising costs:One-time expense: $3,000One-time expense: $3,000
Per month: $1,000Per month: $1,000
4 - 4 - 4646© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Operating Costs ExampleOperating Costs Example
Variable cost per unit: $46.90Variable cost per unit: $46.90Variable cost per unit: $46.90Variable cost per unit: $46.90
Monthly fixed costs: $14,329Monthly fixed costs: $14,329Monthly fixed costs: $14,329Monthly fixed costs: $14,329
Internet Web site:Internet Web site:Initial cost: $500Initial cost: $500
Monthly cost: $300Monthly cost: $300
Internet Web site:Internet Web site:Initial cost: $500Initial cost: $500
Monthly cost: $300Monthly cost: $300
4 - 4 - 4747© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Summary of Capital CostsSummary of Capital Costsand One-Time Expensesand One-Time Expenses
Capital items:Capital items:Factory equipmentFactory equipment $75,000$75,000ComputersComputers 4,500 4,500Furniture and fixtures down paymentFurniture and fixtures down payment 2,000 2,000Patents, trademarks, and copyrightsPatents, trademarks, and copyrights 12,000 12,000Total capital itemsTotal capital items $93,500$93,500
One-time costs:One-time costs:Web site costsWeb site costs $ 500$ 500Legal costs for incorporationLegal costs for incorporation 2,000 2,000Initial advertisingInitial advertising 3,000 3,000
Total one-time costsTotal one-time costs $ 5,500$ 5,500
Capital items:Capital items:Factory equipmentFactory equipment $75,000$75,000ComputersComputers 4,500 4,500Furniture and fixtures down paymentFurniture and fixtures down payment 2,000 2,000Patents, trademarks, and copyrightsPatents, trademarks, and copyrights 12,000 12,000Total capital itemsTotal capital items $93,500$93,500
One-time costs:One-time costs:Web site costsWeb site costs $ 500$ 500Legal costs for incorporationLegal costs for incorporation 2,000 2,000Initial advertisingInitial advertising 3,000 3,000
Total one-time costsTotal one-time costs $ 5,500$ 5,500
4 - 4 - 4848© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Breakeven AnalysisBreakeven Analysis
$135.00 – $46.90 = $88.10$135.00 – $46.90 = $88.10$135.00 – $46.90 = $88.10$135.00 – $46.90 = $88.10
$14,329 ÷ $88.10 = 162.64 $14,329 ÷ $88.10 = 162.64 163 163$14,329 ÷ $88.10 = 162.64 $14,329 ÷ $88.10 = 162.64 163 163
Assume that the selling price is $135 perAssume that the selling price is $135 persnowboard, what is the breakeven point?snowboard, what is the breakeven point?
Assume that the selling price is $135 perAssume that the selling price is $135 persnowboard, what is the breakeven point?snowboard, what is the breakeven point?
4 - 4 - 4949© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Initial Monthly Operating Initial Monthly Operating Budget for Elevation Sports, Budget for Elevation Sports,
Inc.Inc.
Budgeted sales ($135.00 × 6 × 30)Budgeted sales ($135.00 × 6 × 30) $24,300$24,300Budgeted variable expenses ($46.90 × 6 × 30)Budgeted variable expenses ($46.90 × 6 × 30) 8,442 8,442
Budgeted contribution margin (88.10 × 6 × 30)Budgeted contribution margin (88.10 × 6 × 30) $15,858$15,858Budgeted fixed expensesBudgeted fixed expenses 14,329 14,329
Budgeted operating incomeBudgeted operating income $ 1,529$ 1,529Estimated income taxes (30%)Estimated income taxes (30%) 459 459
Budgeted net incomeBudgeted net income $ 1,070$ 1,070
Budgeted sales ($135.00 × 6 × 30)Budgeted sales ($135.00 × 6 × 30) $24,300$24,300Budgeted variable expenses ($46.90 × 6 × 30)Budgeted variable expenses ($46.90 × 6 × 30) 8,442 8,442
Budgeted contribution margin (88.10 × 6 × 30)Budgeted contribution margin (88.10 × 6 × 30) $15,858$15,858Budgeted fixed expensesBudgeted fixed expenses 14,329 14,329
Budgeted operating incomeBudgeted operating income $ 1,529$ 1,529Estimated income taxes (30%)Estimated income taxes (30%) 459 459
Budgeted net incomeBudgeted net income $ 1,070$ 1,070
Elevation Sports, Inc.Elevation Sports, Inc.Initial Monthly Operating BudgetInitial Monthly Operating Budget
4 - 4 - 5050© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
End of Chapter 4End of Chapter 4