Discussion Board # 8 - Cost Volume Profit Analysis
1) Describe the cost behavior most firms face;
2) Describe the various tools management accountants use to measure cost behavior;
3) Discuss the importance of break-even points in accounting.
In: Accounting
In the book Advanced Managerial Accounting, Robert P.
Magee discusses monitoring cost variances. A cost variance
is the difference between a budgeted cost and an actual cost. Magee
describes the following situation:
Michael Bitner has responsibility for control of two
manufacturing processes. Every week he receives a cost variance
report for each of the two processes, broken down by labor costs,
materials costs, and so on. One of the two processes, which we'll
call process A , involves a stable, easily controlled
production process with a little fluctuation in variances. Process
B involves more random events: the equipment is more
sensitive and prone to breakdown, the raw material prices fluctuate
more, and so on.
"It seems like I'm spending more
of my time with process B than with process A,"
says Michael Bitner. "Yet I know that the probability of an
inefficiency developing and the expected costs of inefficiencies
are the same for the two processes. It's just the magnitude of
random fluctuations that differs between the two, as you can see in
the information below."
"At present, I investigate
variances if they exceed $2,789, regardless of whether it was
process A or B. I suspect that such a policy is
not the most efficient. I should probably set a higher limit for
process B."
The means and standard deviations of the cost variances of
processes A and B, when these processes are in
control, are as follows: (Round your z value to 2 decimal
places and final answers to 4 decimal places.):
| Process A | Process B | |
| Mean cost variance (in control) | $ 5 | $ 0 |
| Standard deviation of cost variance (in control) | $5,105 | $10,342 |
Furthermore, the means and standard deviations of the cost
variances of processes A and B, when these
processes are out of control, are as follows:
| Process A | Process B | |
| Mean cost variance (out of control) | $7,048 | $ 6,130 |
| Standard deviation of cost variance (out of control) | $5,105 | $10,342 |
(a) Recall that the current policy is to investigate a cost variance if it exceeds $2,789 for either process. Assume that cost variances are normally distributed and that both Process A and Process B cost variances are in control. Find the probability that a cost variance for Process A will be investigated. Find the probability that a cost variance for Process B will be investigated. Which in-control process will be investigated more often.
Process A = ___
Process B = ___
_(A or B)__ Process is investigated more often
(b) Assume that cost variances are normally distributed and that both Process A and Process B cost variances are out of control. Find the probability that a cost variance for Process A will be investigated. Find the probability that a cost variance for Process B will be investigated. Which out-of-control process will be investigated more often.
Process A = ___
Process B = ___
_(A or B)__ Process is investigated more often
(c) If both Processes A and B are almost always in control, which process will be investigated more often.
_(A or B)__ Process is investigated more often
(d) Suppose that we wish to reduce the probability that Process B will be investigated (when it is in control) to .2912. What cost variance investigation policy should be used? That is, how large a cost variance should trigger an investigation? Using this new policy, what is the probability that an out-of-control cost variance for Process B will be investigated?
Process A = ___
Process B = ___
In: Statistics and Probability
Classify the costs below as: Product-Direct, Product-Indirect, or Period AND Variable cost, Fixed cost, or Mixed cost. Below are budgeted income statements at different team levels, use the information to answer the questions below:
|
Number of Teams |
15 |
25 |
30 |
Product Direct, Product Indirect or Period |
Fixed/ Variable |
|
Sales |
$1,500 |
$2,500 |
$3,000 |
||
|
Cost of Goods Sold |
|||||
|
Direct Materials |
75 |
125 |
150 |
||
|
Direct Labor |
150 |
250 |
300 |
||
|
Applied Overhead |
575 |
625 |
650 |
||
|
Gross Profit |
$700 |
$1,500 |
$1,900 |
||
|
Selling Expenses |
300 |
500 |
600 |
||
|
Administrative Expenses |
280 |
280 |
280 |
||
|
Advertising Expenses |
200 |
200 |
200 |
||
|
Miscellaneous Administrative Expenses |
100 |
100 |
100 |
||
|
Net Income |
$(180) |
$420 |
$720 |
Using the above data and the high/low method, answer the following questions:
|
Units – Number of Teams |
15 |
30 |
|
Net Income |
(180) |
720 |
Determine the variable cost per unit
Determine the fixed cost
What is the cost equation?
Estimate the total cost for 20 teams
In addition to the above data, assume the company has the following sales. Answer the following questions
|
Number of Teams |
15 |
25 |
30 |
|
Sales |
$1,500 |
$2,500 |
$3,000 |
What is the revenue generated per team?
What is the per unit contribution margin?
What is the contribution margin ratio?
Compute break-even point in dollars and in units (round to the next whole number) for each of the three scenarios. Then, choose a scenario for your team.
If CAVALRY wants to have net income of $100.00 from this event, how many teams are needed?
If CAVALRY estimates 20 teams, determine the Margin of Safety in sales dollars.
Perform a sensitivity analysis to determine how an increase in team revenue of $500 would impact Net Income?
If the team revenue changed to $120 per team, and all other expenses remained the same as calculated in your cost equation, what is the new break-even in units?
If the variable costs changed to $50 per team (the fix costs remained the same as in your cost equation and team revenue remained at $100 per team), what is the new break-even in units?
If the fixed costs changed to $980, (variable expenses remained the same as in your cost equation, and sales price remained at $100 per team), what is the new break-even in units?
In: Accounting
Classify the costs below as: Product-Direct, Product-Indirect, or Period AND Variable cost, Fixed cost, or Mixed cost. Below are budgeted income statements at different team levels, use the information to answer the questions below:
|
Number of Teams |
15 |
25 |
30 |
Product Direct, Product Indirect or Period |
Fixed/ Variable |
|
Sales |
$1,500 |
$2,500 |
$3,000 |
||
|
Cost of Goods Sold |
|||||
|
Direct Materials |
75 |
125 |
150 |
||
|
Direct Labor |
150 |
250 |
300 |
||
|
Applied Overhead |
575 |
625 |
650 |
||
|
Gross Profit |
$700 |
$1,500 |
$1,900 |
||
|
Selling Expenses |
300 |
500 |
600 |
||
|
Administrative Expenses |
280 |
280 |
280 |
||
|
Advertising Expenses |
200 |
200 |
200 |
||
|
Miscellaneous Administrative Expenses |
100 |
100 |
100 |
||
|
Net Income |
$(180) |
$420 |
$720 |
In: Accounting
Manufacturing cost data for Orlando Company, which uses a job
order cost system, are presented below.
Indicate the missing amount for each letter. Assume that in all
cases manufacturing overhead is applied on the basis of direct
labor cost and the rate is the same. (Round overhead
rate to 2 decimal places, e.g. 15.25 and final answers to 0 decimal
places, e.g. 5,275.)
|
Case A |
Case B |
||||||
|---|---|---|---|---|---|---|---|
| Direct materials used | $enter a dollar amount | (a) | $91,800 | ||||
| Direct labor | 60,000 | 144,800 | |||||
| Manufacturing overhead applied | 36,000 | enter a dollar amount | (d) | ||||
| Total manufacturing costs | 151,450 | enter a dollar amount | (e) | ||||
| Work in process 1/1/20 | enter a dollar amount | (b) | 22,100 | ||||
| Total cost of work in process | 207,900 | enter a dollar amount | (f) | ||||
| Work in process 12/31/20 | enter a dollar amount | (c) | 14,100 | ||||
| Cost of goods manufactured | 198,600 | enter a dollar amount | |||||
In: Accounting
Voice Com, Inc., uses the product cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 5,010 units of cell phones are as follows:
| Variable costs: | Fixed costs: | |||||||
| Direct materials | $62 | per unit | Factory overhead | $200,200 | ||||
| Direct labor | 38 | Selling and admin. exp. | 69,900 | |||||
| Factory overhead | 26 | |||||||
| Selling and admin. exp. | 20 | |||||||
| Total variable cost per unit | $146 | per unit | ||||||
Voice Com desires a profit equal to a 16% rate of return on invested assets of $599,000.
a. Determine the amount of desired profit from
the production and sale of 5,010 units of cell phones.
$fill in the blank 1
b. Determine the product cost per unit for the
production of 5,010 of cell phones. If required, round your answer
to nearest dollar.
$fill in the blank 2 per unit
c. Determine the product cost markup percentage
(rounded to two decimal places) for cell phones.
fill in the blank 3 %
d. Determine the selling price of cell phones. Round to the nearest dollar.
| Total Cost | $fill in the blank 4per unit |
| Markup | fill in the blank 5per unit |
| Selling price | $fill in the blank 6per unit |
In: Accounting
Cost Behavior Analysis in a Restaurant: High-Low Cost
Estimation
Assume a Potbelly’s restaurant has the following information
available regarding costs at representative levels of monthly sales
(meals served):
| Monthly sales in units | |||
|---|---|---|---|
| 5,000 | 7,000 | 10,000 | |
| Cost of food sold | $ 7,500 | $10,500 | $15,000 |
| Wages and fringe benefits | 5,900 | 5,940 | 6,000 |
| Fees paid delivery help | 6,000 | 8,400 | 12,000 |
| Rent on building | 3,500 | 3,500 | 3,500 |
| Depreciation on equipment | 850 | 850 | 850 |
| Utilities | 600 | 640 | 700 |
| Supplies (soap, floor wax, etc.) | 400 | 480 | 600 |
| Administrative costs | 1,200 | 1,200 | 1,200 |
| Total | $25,950 | $31,510 | $39,850 |
(a) Identify each cost as being variable, fixed, or mixed.
| Cost of food sold | AnswerVariableFixedMixed |
| Wages and fringe benefits | AnswerVariableFixedMixed |
| Fees paid delivery help | AnswerVariableFixedMixed |
| Rent on building | AnswerVariableFixedMixed |
| Depreciation on equipment | AnswerVariableFixedMixed |
| Utilities | AnswerVariableFixedMixed |
| Supplies (soap, floor wax, etc.) | AnswerVariableFixedMixed |
| Administrative costs | AnswerVariableFixedMixed |
(b) Use the high-low method to develop a schedule identifying the amount of each cost that is mixed or variable per unit. Total the amounts under each category to develop an equation for total monthly costs.
Round variable cost answers to two decimal places.
| Fixed Costs | Variable Costs | ||
|---|---|---|---|
| Cost of food sold | Answer | Answer | X |
| Wages and fringe benefits | Answer | Answer | X |
| Fees paid delivery help | Answer | Answer | X |
| Rent on building | Answer | Answer | X |
| Depreciation on equipment | Answer | Answer | X |
| Utilities | Answer | Answer | X |
| Supplies (soap, floor wax, etc.) | Answer | Answer | X |
| Administrative costs | Answer | Answer | X |
| Total costs equation | Answer | Answer | X |
* where X = Unit sales
(c) Predict total costs for a monthly sales volume of 8,500
units.
In: Accounting
|
In April 2016, SoCal Trailers Co. had the following cost data: |
| COST DATA | |
| a. |
Raw materials costing $92,000 were purchased. |
| b. |
Raw materials costing $91,000 were used: direct materials, $85,000; indirect materials $6,000. |
| c. |
Factory wages of $72,000 were incurred: direct labor $60,000; indirect labor $12,000. Social security tax deductions were $4,464, Medicare tax deductions were $1,044, federal income tax deductions were $10,800. |
| d. |
Other overhead costs of $29,000 were incurred. (Credit Accounts Payable.) |
| e. |
Estimated manufacturing overhead costs were applied to jobs in production at the rate of 75 percent of direct labor costs. |
| f. |
Finished goods costing $160,000 were transferred from production to the warehouse. |
| g. |
The cost of goods sold was $130,000. |
| h. |
Sales on account for the month were $220,000. |
1. Compute the amount of overapplied or underapplied overhead for the month.
|
|
Based on the partial income statement you have prepared, what portion of each sales dollar is realized as gross profit? (Round your answer to 2 decimal places.)
In: Accounting
Cost Behavior Analysis in a Restaurant: High-Low Cost Estimation
Assume a
Potbelly’s restaurant has the following information available regarding costs at representa-
tive levels of monthly sales:
Monthly sales in units
5,000 8,000 10,000
Cost of food sold ...................................$10,000$16,000$20,000
Wages and fringe benefits ............................4,2004,3204,400
Fees paid delivery help...............................1,100 1,760 2,200
Rent on building ....................................1,100 1,100 1,100
Depreciation on equipment ...........................900900900
Utilities ...........................................8009201,000
Supplies (soap, floor wax, etc.) ........................250340400
Administrative costs.................................1,700
1,700 1,700
Total .............................................$20,050$27,040 $31,700
Required
a. Identify each cost as being variable, fixed, or mixed.
b. Use the high-low method to develop a schedule identifying the amount of each cost that is mixed or
variable per unit. Total the amounts under each category to develop an equation for total monthly
costs.
c. Predict total costs for a monthly sales volume of 9,800 units
In: Accounting
Unit Cost and Cost Assignment, Nonuniform Inputs
Loran Inc. had the following equivalent units schedule and cost for its fabrication department during September:
| Materials | Conversion | ||
| Units completed | 180,000 | 180,000 | |
| Add: Units in ending WIP x Fraction complete | 72,000 | 41,040 | |
| (72,000 x 57%) | |||
| Equivalent units of output | 252,000 | 221,040 | |
| Costs: | |||
| Work in process, September 1: | |||
| Materials | $147,000 | ||
| Conversion costs | 7,875 | ||
| Total | $154,875 | ||
| Current costs: | |||
| Materials | $1,080,000 | ||
| Conversion costs | 451,860 | ||
| Total | $1,531,860 |
Required:
1. Calculate the unit cost for materials, for conversion, and in total for the fabrication department for September. If required, round your answers to the nearest cent.
| Unit materials cost | $ |
| Unit conversion cost | $ |
| Total unit cost | $ |
2. Calculate the cost of units transferred out and the cost of EWIP. Round unit cost value to the nearest cent in intermediate calculations. If required, round final answers to the nearest dollar.
| Cost transferred out | $ |
| Cost of ending work in process |
In: Accounting