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Cost Behaviour

This document provides an overview of cost behavior concepts including variable costs, fixed costs, and cost drivers. It then discusses cost-volume-profit (CVP) analysis and how it can be used to determine the break-even point and sales volume needed to achieve a target profit level. Specific techniques for CVP analysis include the contribution margin approach, equation method, and graphical method. The effects of changes in fixed costs, contribution margin per unit, and target profit levels are also reviewed.

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Astu Graito
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17 views

Cost Behaviour

This document provides an overview of cost behavior concepts including variable costs, fixed costs, and cost drivers. It then discusses cost-volume-profit (CVP) analysis and how it can be used to determine the break-even point and sales volume needed to achieve a target profit level. Specific techniques for CVP analysis include the contribution margin approach, equation method, and graphical method. The effects of changes in fixed costs, contribution margin per unit, and target profit levels are also reviewed.

Uploaded by

Astu Graito
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Cost Behaviour

RESOURCES

ACTIVITIES

OUTPUTS

COST DRIVERS

COST DRIVERS:
Activities that affects costs consumption

Variables Costs Vs Fixed


Costs
Variable Cost:
A cost that changes in direct proportion to
changes in the cost driver.
Fixed Cost:
A cost that is not immediately affected by
changes in the cost driver.
Considerations:

Watkins products pays its door to door sales personnel a


40% straight commission on sales.
Dans Bait Shop buys bags of fish bait for $2.00 each.
Sony Corp. rent a factory to produce picture tubes for
colour TV sets for $500,000.00 per year.

Cost Volume Profit Analysis


CVP analysis:
The study of effects of output volume on revenues (sales),
expenses (costs), and net income.
Scenario:
Amy Watkinson, the manager of food services for
Middletown Community College predicts the following
relationships between revenue and expenses:
Per unit % of sales
Selling Price
$0.50
100%
Variable Cost of each item
0.40
80%
Contribution Margin
$0.10
20%

Monthly Fixed Expenses:

Rent
$1,000

Wages
4,500

Other fixed expense


500

Total fixed expenses $6,000

Break Even Point

The level of sales at which revenue equals


to expenses and net income is zero.
In Units

Contribution Margin Technique


Equation Technique

BEP

Graphical Technique

In Dollars

Problems:
1.
2.
3.

Changing in fixed expenses


Changing in CM per unit
Target profit

Gross Margin Vs Contribution


Margin

Exercise:
The budgeted income statement of Port William:

Net Revenue
$800,000

Expenses (including $400,000 fixed)


$880,000
Net Loss ($ 80,000)
The Manager believes that an increase of
$200,000 on advertising outlays will increase
sales.
1. BEP after advertising outlays?
2. What sales volume will result a net profit of
$40,000?

TAX INFLUENCE
Per unit
% of sales
Selling Price
$0.50
100%
Variable Cost of each item
0.40
80%
Contribution Margin $0.10
20%
Monthly Fixed Expenses:
Rent
$ 1,000
Wages
4,500
Other fixed expense
500
Total fixed expenses
$6,000

Target Profit $480.00?


Tax 40%
Target Profit after tax $300?

Exercise
General Mills produces and sells food products such as cereala
and baking products. A condesed 1994 income statement
follows (in millions dollars)
Total for 100 million units

Sales
$ 8,517.00

Cost of Goods Sold


4,458.00

Gross margin
$ 4,059.00

Other operating expenses


3,306.00

Operating income
$ 753.00
Assume that $960 million of cost of goods sold is fixed cost
representing depreciation and other production costs that
do not change with the volume of production. In addition
$2,120 million of other operating expenses is fixed.
1. Compute the contribution margin? Why is it difference from
the gross margin?
2. If target profit for 1995 is $800 million (after tax of 30%);
compute the sales in 1995.

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