2. accounting costs
• Determine the impact of cost decisions
• Apply appropriate accounting processes to determine break-
even points
• Evaluate break-even points
• Utilize break-even point assessment for decision making
In terms of course-level Learning Outcomes, you will:
• Evaluate various accounting measures and their relevance to a
wide range of
stakeholders
• Analyze various types of budgets, strategic planning, and
forecasting
• Employ managerial accounting approaches and information to
make effective
decisions
• Demonstrate effective communication skills to present
accounting information to
stakeholders
• Assess managerial accounting tools and their usefulness to
organizational
leaders
• Apply accounting principles ethically and appropriately to
personal and
professional contexts
4. employee for $50,000. The
opportunity cost is that the money is no longer available for
other opportunities such as
advertising, equipment purchases, etc.
Accounting costs are the actual historical costs incurred for a
product or service and are
recorded by the accounting system in monetary units
(Zimmerman, 2020). In this
course, the dollar is the unit of measure. If an organization buys
some land for
$2,000,000 with the intent of developing it, the $2,000,000 is
the accounting cost of the
land. If the organization is considering two alternative uses for
the land, the opportunity
cost will be the benefit forgone when it chooses one alternative
over the other.
Using Accounting Data to Make Decisions
Managers use accounting costs to make decisions regarding how
much it costs to make
or buy a product or produce a service, and these costs are often
used to determine the
price to charge for the product or service. For example, if the
average cost of producing
one unit of Product M for ABC Company is $200 and the
organization wants a markup
of 30%, the selling price of Product M would be $200 + ($200 x
30%) or $260. This is
termed cost-plus pricing. Many organizations use this method as
it is relatively easy to
compute (Zimmerman, 2020).
Organizations do not operate in a vacuum and consideration
6. power. An organization has market power if no perfect
substitute exists for its products
(Zimmerman, 2020). For example, Coach, Inc. sells handbags
and other items at high
prices because it has market power. If a woman wants a Coach
handbag, there is no
perfect substitute. Coach has to make a decision concerning how
many handbags it
wants to sell each year. If it raises the price, it will sell fewer
handbags, and if it lowers
the price, it will sell more handbags. The challenge is to
determine the number of
handbags to sell and the price to charge per handbag to optimize
profitability.
Break-Even Analysis
One method that is helpful in determining profitability is break-
even analysis. At the
break-even point, sales revenue is exactly equal to total
expenses and there is no profit
or loss (Davis & Davis, 2012). The formula used to determine
the break-even point is:
PQ - VCQ - FC = 0 where P is a constant sales price, Q is the
output (quantity), VC are
the variable costs and FC are the fixed costs.
Before you can proceed, you need to know how to determine
which costs are variable
and which are fixed. Variable costs are costs that vary directly
with a change in the
activity level (Weygandt, et al. 2010). A variable cost remains
the same per unit at every
level of activity. For example, Dulce Company makes candy
7. bars and each bar requires
2 ounces of chocolate and 3 ounces of crushed peppermint. If
the company makes 10
bars, 20 ounces of chocolate and 30 ounces of peppermint will
be needed. If it makes
20 bars, 40 ounces of chocolate and 60 ounces of peppermint
will be used.
Fixed costs remain the same in total regardless of the activity
level. Examples include
rent, property taxes, supervisory salaries, and depreciation on
buildings and equipment.
If Dulce Company sells its candy bars for $2.00 each, variable
costs are $1.50 each,
and fixed costs are $50,000, how many candy bars must the
company sell to break
even? Using the break-even formula:
$2Q - $1.50Q - $50,000 = 0
$0.50Q - $50,000 = 0
$0.50Q = $50,000
Q = $50,000/$0.50
Q = 100,000 candy bars
Therefore, Dulce Company knows that it will not make a profit
until it sells at least
100,001 candy bars. Perhaps, Dulce Company wants to know
how many candy bars it
must sell to earn a profit of $70,000. In this case, simply
substitute $70,000 for the
break-even point.
$2Q - $1.50Q - $50,000 = $70,000
$0.50Q = $120,000
9. $50,000/.25 = $200,000 in sales dollars required to break even
In summary, making decisions regarding pricing, costs, and
sales volume can be
assisted by break-even analysis, but also should take into
consideration environmental
factors, competition, tax rates, etc. Accounting measures can
provide quantifiable data,
but should be only a part of the decision making process. Good
management decisions
will include quantitative as well as qualitative information.
References
Davis, C. E., & Davis, E. (2012). Managerial Accounting.
Hoboken, NJ: John Wiley &
Sons.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010)
Managerial accounting: Tools for
decision making (5th ed.). Hoboken, NJ: John Wiley & Sons.
Zimmerman, J. (2020). Accounting for decision making and
control (10th ed.). McGraw-
Hill.
Willow Smithe is planning to make a unique toy that promises
to keep small children entertained for hours! Willow believes
that parents everywhere will want to buy this toy. With a selling
price of $35, Willow now needs to determine the costs and the
10. required number of toys needed to be sold before earning a
profit, the break-even point.
After researching the costs to produce the toy, the following
two locations with associated costs have been determined:
The rent for the small facility will be $3,02,400 per month,
insurance $1,000 per month, and other fixed costs are estimated
at $2,000 per month. This facility has a capacity to produce 150
toys per month at a variable cost for each toy of $5.00.
The rent for a larger facility will be $3,500 per month,
insurance $1,600 per month, and other fixed costs are estimated
at $2,400 per month. This facility has a capacity to produce 300
toys per month at a variable cost for each toy of $5.00.
Media below helps out
http://mym.cdn.laureate-
media.com/2dett4d/Walden/WMBA/6050/06/mm/break_even/ind
ex.html
Willow Smithe is planning to make a unique toy that promises
to keep small children entertained for hours! Willow believes
that parents everywhere will want to buy this toy. With a selling
price of $35, Willow now needs to determine the costs and the
required number of toys needed to be sold before earning a
profit, the break-even point.
After researching the costs to produce the toy, the following
two locations with associated costs have been determined:
The rent for the small facility will be $3,02,400 per month,
insurance $1,000 per month, and other fixed costs are estimated
at $2,000 per month. This facility has a capacity to produce 150
toys per month at a variable cost for each toy of $5.00.
The rent for a larger facility will be $3,500 per month,
11. insurance $1,600 per month, and other fixed costs are estimated
at $2,400 per month. This facility has a capacity to produce 300
toys per month at a variable cost for each toy of $5.00.
Media below helps out
http://mym.cdn.laureate-
media.com/2dett4d/Walden/WMBA/6050/06/mm/break_even/ind
ex.html