ADM 2341 Lecture Notes - Lecture 4: Income Statement, European Cooperation In Science And Technology

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27 Sep 2016

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4. total fixed costs: mix of products sold. The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. Contribution margin (cm) is the amount remaining from sales revenue after variable expenses have been deducted. The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a. Racing developed contribution margin income statements at 300, 400, and 500 units sold. We will use this information to prepare the cvp graph. Variable expense ratio is the ratio of variable expenses to sales. Break-even analysis can be approached in two ways: equation method, formula method. The equation and formula methods can be used to determine the sales volume needed to achieve a target profit. Suppose racing bicycle company wants to know how many bikes must be sold to earn a profit of. Cost structure refers to the relative proportion of fixed and variable costs in an organization.

Related Questions

Cost-volume-profit (CVP)

posted Nov 28, 2016, 4:07 AM

Cost-volume-profit (CVP) analysis is a key step in manydecisions. CVP analysis involves specifying a model of therelations among the prices of products, the volume or level ofactivity, unit variable costs, total fixed costs, and the salesmix. This model is used to predict the impact on profits of changesin those parameters. Explain how changes in activity affectcontribution margin and net operating income.

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How to reply to the below Discussion response.

Managerial accounting provides internal managers the use ofaccounting to plan and control business operations(Pearsoncustom.com, n.d). The internal nature of managerialaccounting is opposite to financial accounting which is used inregards to external entities (investors, creditors and government).Management accounting focuses on the cost-benefit analysis tooperating procedures within an organization.

Associated with the two forms of accounting are two coststructures used in an income statement: absorption and variable.The two cost structures identify the cost of a product butabsorption costing includes the fixed manufacturing overhead.Variable costing identifies fixed manufacturing overhead as aperiod cost thus not including it in the price of a unit produced(EducationUnlocked, 2014). Absorption costing is typically utilizedin financial accounting for external entities. Variable costing istypically used in managerial accounting because they focus on onlyvariable costs which eliminate skewed results from fixed overheadin unused inventory. In the short-run managers donât need toinclude fixed costs because they are regarded as sunk costs nomatter how many units are produced or sold.

A variable costing income statement generates a contributionmargin. The contribution margin reflects the sale price of aproduct less all variable costs (EducationUnlocked, 2014). The contribution margin gains insight into costs thatcan be calculated in units. The contribution margin can helpmanagers understand profit per unit based on the variable expensesincurred. As the contribution margin doesnât include fixed expensesit can quickly identify if a company is going to be profited ableby subtracting the fixed expenses from the contribution margin.

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Overview: Classifying a companyâs costs allows for an in-depthanalysis of the impact that changes in output have on revenues,costs, and net income or net loss. A cost-volume-profit (CVP)analysis will be completed in order to determine the breakevenpoint. Relevant costs will be used to prepare a flexible budget.Additionally, an appropriate costing system should be selected andthe choice should be substantiated with reasonable rationale.Finally, a memo should be prepared for management that summarizesthe results of the quantitative analysis and makes recommendationsfor an optimal costing system to be ethically used by key decisionmakers. For Milestone One, you will use the MDE ManufacturingBudget (Table I) to analyze costs, contribution margin, andbreakeven point for the bird feeder division of the company. In Tab1 of your Student Workbook, classify costs as either product orperiod costs. Briefly explain the difference between the types ofcosts. Then, analyze the actual costs and, using Tab 2 of yourStudent Workbook, complete a cost-volume-profit analysis todetermine how many bird feeders must be sold at the current costand sales price level to earn a 10% profit and how much the salesprice would have to increase to earn a 10% profit at the same costand sales volume level. Submit the Student Workbook with Tabs 1 and2 completed with your cost calculations and a 1â2 page Worddocument that explains the implications of your findings andaddresses all of the critical elements in Section I.

I. Salesand Manufacturing Expenses: Budget and Actual (2014)

You will use this table to complete Milestones One and Two.

	Budget ($)	Actual ($)

Sales	1,050,000	991,700

Expenses
Materials â Cedar	225,000	248,160
Materials â Plastic	37,500	37,741
Factory Worker Labor	300,000	332,760
Materials â Indirect	3,000	2,585
Factory Depreciation	78,000	78,000
Factory Utilities	12,000	12,000
Factory Maintenance and Repairs	5,000	4,500
Shipping ($2.25/each)	112,500	105,750
Sales Commissions ($2.00/unitsold)	100,000	94,000
Office Rent	12,000	12,000
Advertising	20,000	20,000
Liability insurance	5,000	5,000
Office Depreciation	1,000	1,000
Office Salaries	48,000	48,000

Total Expenses	959,000	1,001,496

II. Contribution Margin: Static Budget and Actual Results (2014)

You will use this table to complete Milestone Two.

	Actual Results	Static Budget Amount

Units Sold	47,000	50,000
Revenues ($)	991,700	1,050,000
Manufacturing Costs ($)
Variable	621,246	565,500
Fixed	94,500	95,000
Gross Margin	275,954	389,500

Milestone One,Part I




	Product Costs









	Period Costs





		Totals	Totals
		Budget	Actual
Sales Price per Unit

Variable Costs
	Materials - Cedar
	Materials - Plastic
	Factory Worker Labor
	Materials - Indirect
	Shipping ($2.25/ea)
	Sales Commissions ($2/unit sold)

Variable Cost per Unit

Contribution Margin


Fixed Costs
	Factory Depreciation
	Factory Utilities
	Factory Maintenance and Repairs
	Office Rent
	Advertising
	Liability Insurance
	Office Depreciation
	Office Salaries
Total Fixed Costs


Using Budgeted Amounts
Breakeven Point -				Breakeven Point -


Using Actual Amounts				Units at Current Sales Price
+ 10,000 profit

Using actual amounts				New Contribution Margin
+ 10,000 profit				Current Variable Costs
				New Sales Price

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ADM 2341 Lecture Notes - Lecture 4: Income Statement, European Cooperation In Science And Technology

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