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Advanced Management Accounting Essay

1165 words - 5 pages

14/05/2014

Mixed Costs
Total Mixed Cost VC Per Unit (Slope)

Purpose of Mixed Cost Analysis
To predict cost at an activity level with no historical record:

Total mixed cost line can be expressed as:

2N

Y
Total Utility Cost

Fixed Cost (Intercept)

Level of Activity

If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, can you predict the utility of next month when you plan to use 2,000 kilowatt hours?

Y = a + bX
Variable Cost per KW Fixed Monthly Utility Charge

Y = $40 + ($0.03 × 2,000) Y = $100

X Activity (Kilowatt Hours)

A mixed cost has both fixed and variable components. Total cost CHANGES with activity level but ...view middle of the document...

00*units

Break-even point
BEP sales = FC/Profit-volume ratio = $80k/0.4 = $200k or = 20,000 * $10
Variable costs $6.00*units Total costs

= unit VC * (units 2 – units 1)/(units 2 – units 1)

$2,400 =$8.00/hour= b 300
Step 3, total FC is determined by Total FC = Total cost – Total VC Total FC=$9,800 – ($8/hour × 800 hours) Total Fixed Cost = $9,800 – $6,400 Total Fixed Cost = a = $3,400 Y = $3,400 + $8X

Unit selling price Unit VC

$10.00 $ 6.00

Unit CM=unit price-unit VC =$4

CM ratio = unit CM/unit price = CM/Sales = $4/$10 = 0.4

Fixed costs

BEP units = FC/unit CM = $80k/$4 = 20,000 units

$80,000
# of trips

— =

Since we are getting a $4 contribution toward covering fixed cost from each trip made, minimum of 20k trips will allow us to cover our fixed cost ($4*20k = 80k). Above this point, we move into a highly profitable range in which each trip brings a profit of $4 to the company leverage.

CVP analysis assumptions, limitations and requirements
1. Revenues and costs only change with number of units produced or sold. 2. Costs can be divided into fixed or variable components with respect to the level of output. 3. The relation between total revenue or cost and output units within relevant range is linear. 4. Unit selling price, unit variable costs, and fixed costs are known. 5. The analysis assumes a single product or a constant revenue mix of products as the level of total units sold changes 6. Time value of money can be ignored.
Sources: Master budget and responsibility accounting, Horngren et al., 2003, Cost Accounting: a managerial emphasis.

CVP sensitivity analysis
• Sensitivity analysis is a what-if tool that examines how a result will change if the original assumptions of key variables are different.

Sources: Master budget and responsibility accounting, Horngren et al., 2003, Cost Accounting: a managerial emphasis.

1

14/05/2014

Standard Costs CVP analysis for multiple products
• What’s the break-even units for AB Ltd that sells a product mix of 2 As with 1 B given the following information?
• Unit selling price: $200 for A and $130 for B. • Unit variable costs: $120 for A and $ 90 for B. • Total fixed costs: $2,000.
This variance/difference from standard is unfavorable because the actual cost exceeds the standard cost. The Management should focus on quantities of usage and purchase price to identify problem areas.

• If break-even units of product mix of 2 As and 1 B are Q, • Q...

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