Chapter 10
Cost Estimation and Cost-
Volume-Profit Relationships
Learning Objectives
• Understand the significance of cost behavior to decision making and control.
• Identify the interacting elements of cost-volume-profit analysis.
• Explain the break-even formula and its underlying assumptions.
• Calculate the effect on profits of changes in selling prices, variable costs, or fixed costs.
• Calculate operating leverage, determine its effects on changes in profit, and under-
stand how margin of safety relates to operating leverage.
• Find break-even points and volumes that attain desired profit levels when multiple
products are sold in combination.
• Obtain cost functions by account analysis and the high-low method.
James Forte/National Geographic/Getty Images
eps81189_10_c10.indd 207 12/20/13 9:45 AM
CHAPTER 10Introduction
Chapter Outline
Introduction
10.1 Significance of Cost Behavior to Decision Making and Control
Decision Making
Planning and Control
Trends in Fixed Costs
10.2 Cost-Volume-Profit (CVP) Analysis
Basics of CVP Analysis
A Desired Pretax Profit
A Desired Aftertax Profit
10.3 Graphical Analysis
The Break-Even Chart
Curvature of Revenue and Cost Lines
The Profit-Volume Graph
10.4 Analysis of Changes in CVP Variables
Sales Volume
Variable Costs
Price Policy
Fixed Costs
Ethical Considerations When Changing CVP Variables
10.5 Measures of Relationship Between Operating Levels and Break-Even Points
Operating Leverage
Margin of Safety
10.6 The Sales Mix
10.7 Cost Estimation
Account Analysis
High-Low Method
Ethical Considerations in Estimating Costs
Other Issues for Cost Estimation
Introduction
Managers need to understand cost behavior and cost estimation to be in a better posi-tion to plan, make decisions, and control costs. As we discussed in Chapter 9, cost
behavior describes the relationship between costs and an activity as the level of activ-
ity increases or decreases. Determining cost behavior is important to management’s
eps81189_10_c10.indd 208 12/20/13 9:45 AM
CHAPTER 10Section 10.1 Significance of Cost Behavior to Decision Making and Control
understanding of overhead costs, marketing costs, and general and administrative
expenses, as well as for proper implementation of budgets and budgetary controls. With
knowledge of cost behavior, managers can also estimate how costs are affected as future
activity levels change, which can lead to better decisions. In addition, knowledge of cost
behavior can assist managers in analyzing the interactions among revenues, costs, and
volume for profit-planning purposes. These interactions are covered later in this chapter.
10.1 Significance of Cost Behavior to Decision Making and Control
To understand more fully the significance of a manager’s analysis of cost behavior, we look at three areas: decision making, planning and control, and trends in fixed costs.
Decision Making
Cost behav ...
Week 4 OverviewThis week we cover Budgets and Standard Cost Syst.docxjessiehampson
Week 4 Overview
This week we cover Budgets and Standard Cost Systems, of the text.
There are many advantages to budgeting and some of them are listed below:
· Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.
· Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.
· The budgeting process can uncover potential bottlenecks before they occur.
· The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively.
· Budgets force managers to think about the plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies.
· Budgets communicate management’s plans throughout the organization.
When preparing a master budget you will want to prepare other budgets in the following order: sales budget, production budget, direct material budget, direct labor budget, manufacturing overhead budget, selling and administrative expense budget and cash budget.
Flexible budgets which takes into account how changes in activity affect costs. A flexible budget is an estimate of the revenues and costs that are expected given actual levels of activity. A flexible budget approach recognizes that budget can be adjusted to show what cost should be for the actual level activity. Remember, as you move forward, that all costs are not fixed. This is an error that is made in static budgeting.
Success factor training
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LearningObjectives
After studying Chapter 6, you will be able to:
Understand the signi�icance of cost behavior to decision making and control.
Identify the interacting elements of cost-volume-pro�it analysis.
Explain the break-even equation and its underlying assumptions.
Calculate the effect on pro�its of changes in selling prices, variable costs, or �ixed costs.
Calculate operating leverage, determine its effects on changes in pro�it, and understand how
margin of safety relates to operating leverage.
Find break-even points and volumes that attain desired pro�it levels when multiple products are
sold in combination.
Obtain cost functions by account analysis, the engineering approach, the scattergraph approach,
and the high-low method.
6 Cost Estimation and Cost-Volume-Pro�itRelationships
Olga_Anourina/iStock/Thinkstock
8/21/2019 Print
https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-1,navpoint-48,navpoint-49,navpoint- ...
BBA 2301, Principles of Accounting II 1 Course LeaCicelyBourqueju
BBA 2301, Principles of Accounting II 1
Course Learning Outcomes for Unit VIII
Upon completion of this unit, students should be able to:
7. Explain how financial information influences both short-term and long-term management decisions.
7.1 Describe the use of standard cost manufacturers and service businesses.
8. Discuss operational and capital budgets.
8.1 Describe capital budgeting methods.
8.2 Identify the use of intangible benefits in capital budgeting.
Course/Unit
Learning Outcomes
Learning Activity
7.1
Unit Lesson
Chapter 26, pp. 26-1 to 26-24
Webpage: Balanced Scorecard Basics
Video: What is a balanced scorecard: A simple explanation for anyone
Unit VIII Case Study
8.1
Unit Lesson
Chapter 27, pp. 27-1 to 27-19
Unit VIII Case Study
8.2
Unit Lesson
Chapter 27, pp. 27-1 to 27-19
Unit VIII Case Study
Required Unit Resources
Chapter 26: Standard Costs and Balanced Scorecard, pp. 26-1 to 26-24
Chapter 27: Planning for Capital Investments, pp. 27-1 to 27-19
In order to access the following resources, click the links below.
Balanced Scorecard Institute. (n.d.). Balanced scorecard basics. https://balancedscorecard.org/bsc-basics-
overview/
For the video resource below, a transcript and closed captioning are available upon accessing the video.
Marr, B. (2019, June 24). What is a balanced scorecard: A simple explanation for anyone [Video]. Cielo24.
https://c24.page/2s4pmxpj2kpwnprckg6p8tcjtu
Unit Lesson
Introduction
This final unit will conclude the study of managerial accounting. This lesson will share important content for
managers in manufacturing, merchandising, and service companies. Content includes estimating future costs,
implementing financial and non-financial performance measures, and incorporating capital budgeting.
Costing requires you to make estimates. As noted in a previous unit, many people are uncomfortable with this
task, as they are used to having objective numbers given to them. However, as much as the future is
UNIT VIII STUDY GUIDE
Management: Costs and Capital Investing
https://balancedscorecard.org/bsc-basics-overview/
https://c24.page/2s4pmxpj2kpwnprckg6p8tcjtu
BBA 2301, Principles of Accounting II 2
UNIT x STUDY GUIDE
Title
unpredictable, we are still required to use our experience and judgment to chart a path forward. In this unit,
you will learn about standard costs. Partially based on prior period actual costs, they provide the basis for
budgeting and subsequent evaluation. Management accountants, no matter the title, are integral to the
development of standard costs, implementation of the balanced scorecard, and the capital budgeting process.
Pay attention as you read, review, and evaluate this unit as it is almost wholly transferable to any company.
Consider the following questions and how you would respond to each as you move through this unit.
As the chief accounting officer (CAO) or chief ...
LearningObjectivesAfter studying Chapter 8, you will be a.docxcroysierkathey
LearningObjectives
After studying Chapter 8, you will be able to:
Explain the signi�icance of pro�it analysis for an organization.
Describe the major characteristics and conditions of a standard cost system.
Understand the information contained in a standard cost sheet.
Compute materials price and usage variances, and identify potential causes of such variances.
Compute labor rate and ef�iciency variances, and identify potential causes of such variances.
Explain the major considerations that are the basis of standard costs for overhead and compute
budget variances and capacity variances for overhead.
Explain why the capacity variance is related only to �ixed overhead costs.
Understand issues relating to variance investigation and disposal of variances.
8 Cost Control Through Standard Costs
nd3000/iStock/Thinkstock
Explain how standard costs can be used in various different settings.
Describe ethical considerations relating to standards and variances.
WhereDoIStartWithStandardCosts?
Jean-Claude Recca, President of Rue de Lorraine, a chain of fast-food restaurants in central France, just
returned from a reunion of his INSEAD graduating class. During the day of activities in the Riviera, he talked
with several of his classmates who have become extremely successful in various businesses. One of those
classmates suggested to Jean-Claude that adoption of a standard cost system eliminated most of her �irm’s
unacceptable scrap and spoilage, caused an examination of nonvalue-added activities, and substantially
reduced several inef�icient operations.
Jean-Claude did not know whether his restaurant chain would really bene�it from a standard cost system. He
wondered: If he makes the change, which costs should be put on standards? How does he set up standards?
When do variances mean something? Isn’t a standard cost system expensive to use? Isn’t it a pain in the
derriere? Wouldn’t a tight budget do the same thing?
These questions were more than Jean-Claude could consider. He decided to bounce the idea of standard
costs off his controller.
In measuring success in any undertaking, a comparison is usually made between actual performance and expected
performance. Any difference is a variance. A manager is then left with the responsibility to explain the what, why,
and how of the variance. In doing so, the manager must understand the in�luence of key variables on the actual
results, focus on areas that deserve more detailed investigation, and determine changes that must be made in future
planning and control. This chapter introduces the concept of pro�it analysis and then concentrates on variances
associated with a standard cost system for direct materials, direct labor, and factory overhead.
8.1Pro�itAnalysis
Pro�it is an overall measure of how well an organization is doing. A pro�it variance then is the difference between
the actual net income and the planned net income for the same period. The causes of such a variance are related to
...
Week 4 OverviewThis week we cover Budgets and Standard Cost Syst.docxjessiehampson
Week 4 Overview
This week we cover Budgets and Standard Cost Systems, of the text.
There are many advantages to budgeting and some of them are listed below:
· Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.
· Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.
· The budgeting process can uncover potential bottlenecks before they occur.
· The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively.
· Budgets force managers to think about the plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies.
· Budgets communicate management’s plans throughout the organization.
When preparing a master budget you will want to prepare other budgets in the following order: sales budget, production budget, direct material budget, direct labor budget, manufacturing overhead budget, selling and administrative expense budget and cash budget.
Flexible budgets which takes into account how changes in activity affect costs. A flexible budget is an estimate of the revenues and costs that are expected given actual levels of activity. A flexible budget approach recognizes that budget can be adjusted to show what cost should be for the actual level activity. Remember, as you move forward, that all costs are not fixed. This is an error that is made in static budgeting.
Success factor training
8/21/2019 Print
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8/21/2019 Print
https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-1,navpoint-48,navpoint-49,navpoint-50,navpoint-51,navpoint-52,navpoint-5… 2/102
LearningObjectives
After studying Chapter 6, you will be able to:
Understand the signi�icance of cost behavior to decision making and control.
Identify the interacting elements of cost-volume-pro�it analysis.
Explain the break-even equation and its underlying assumptions.
Calculate the effect on pro�its of changes in selling prices, variable costs, or �ixed costs.
Calculate operating leverage, determine its effects on changes in pro�it, and understand how
margin of safety relates to operating leverage.
Find break-even points and volumes that attain desired pro�it levels when multiple products are
sold in combination.
Obtain cost functions by account analysis, the engineering approach, the scattergraph approach,
and the high-low method.
6 Cost Estimation and Cost-Volume-Pro�itRelationships
Olga_Anourina/iStock/Thinkstock
8/21/2019 Print
https://content.ashford.edu/print/Schneider.4937.17.1?sections=navpoint-1,navpoint-48,navpoint-49,navpoint- ...
BBA 2301, Principles of Accounting II 1 Course LeaCicelyBourqueju
BBA 2301, Principles of Accounting II 1
Course Learning Outcomes for Unit VIII
Upon completion of this unit, students should be able to:
7. Explain how financial information influences both short-term and long-term management decisions.
7.1 Describe the use of standard cost manufacturers and service businesses.
8. Discuss operational and capital budgets.
8.1 Describe capital budgeting methods.
8.2 Identify the use of intangible benefits in capital budgeting.
Course/Unit
Learning Outcomes
Learning Activity
7.1
Unit Lesson
Chapter 26, pp. 26-1 to 26-24
Webpage: Balanced Scorecard Basics
Video: What is a balanced scorecard: A simple explanation for anyone
Unit VIII Case Study
8.1
Unit Lesson
Chapter 27, pp. 27-1 to 27-19
Unit VIII Case Study
8.2
Unit Lesson
Chapter 27, pp. 27-1 to 27-19
Unit VIII Case Study
Required Unit Resources
Chapter 26: Standard Costs and Balanced Scorecard, pp. 26-1 to 26-24
Chapter 27: Planning for Capital Investments, pp. 27-1 to 27-19
In order to access the following resources, click the links below.
Balanced Scorecard Institute. (n.d.). Balanced scorecard basics. https://balancedscorecard.org/bsc-basics-
overview/
For the video resource below, a transcript and closed captioning are available upon accessing the video.
Marr, B. (2019, June 24). What is a balanced scorecard: A simple explanation for anyone [Video]. Cielo24.
https://c24.page/2s4pmxpj2kpwnprckg6p8tcjtu
Unit Lesson
Introduction
This final unit will conclude the study of managerial accounting. This lesson will share important content for
managers in manufacturing, merchandising, and service companies. Content includes estimating future costs,
implementing financial and non-financial performance measures, and incorporating capital budgeting.
Costing requires you to make estimates. As noted in a previous unit, many people are uncomfortable with this
task, as they are used to having objective numbers given to them. However, as much as the future is
UNIT VIII STUDY GUIDE
Management: Costs and Capital Investing
https://balancedscorecard.org/bsc-basics-overview/
https://c24.page/2s4pmxpj2kpwnprckg6p8tcjtu
BBA 2301, Principles of Accounting II 2
UNIT x STUDY GUIDE
Title
unpredictable, we are still required to use our experience and judgment to chart a path forward. In this unit,
you will learn about standard costs. Partially based on prior period actual costs, they provide the basis for
budgeting and subsequent evaluation. Management accountants, no matter the title, are integral to the
development of standard costs, implementation of the balanced scorecard, and the capital budgeting process.
Pay attention as you read, review, and evaluate this unit as it is almost wholly transferable to any company.
Consider the following questions and how you would respond to each as you move through this unit.
As the chief accounting officer (CAO) or chief ...
LearningObjectivesAfter studying Chapter 8, you will be a.docxcroysierkathey
LearningObjectives
After studying Chapter 8, you will be able to:
Explain the signi�icance of pro�it analysis for an organization.
Describe the major characteristics and conditions of a standard cost system.
Understand the information contained in a standard cost sheet.
Compute materials price and usage variances, and identify potential causes of such variances.
Compute labor rate and ef�iciency variances, and identify potential causes of such variances.
Explain the major considerations that are the basis of standard costs for overhead and compute
budget variances and capacity variances for overhead.
Explain why the capacity variance is related only to �ixed overhead costs.
Understand issues relating to variance investigation and disposal of variances.
8 Cost Control Through Standard Costs
nd3000/iStock/Thinkstock
Explain how standard costs can be used in various different settings.
Describe ethical considerations relating to standards and variances.
WhereDoIStartWithStandardCosts?
Jean-Claude Recca, President of Rue de Lorraine, a chain of fast-food restaurants in central France, just
returned from a reunion of his INSEAD graduating class. During the day of activities in the Riviera, he talked
with several of his classmates who have become extremely successful in various businesses. One of those
classmates suggested to Jean-Claude that adoption of a standard cost system eliminated most of her �irm’s
unacceptable scrap and spoilage, caused an examination of nonvalue-added activities, and substantially
reduced several inef�icient operations.
Jean-Claude did not know whether his restaurant chain would really bene�it from a standard cost system. He
wondered: If he makes the change, which costs should be put on standards? How does he set up standards?
When do variances mean something? Isn’t a standard cost system expensive to use? Isn’t it a pain in the
derriere? Wouldn’t a tight budget do the same thing?
These questions were more than Jean-Claude could consider. He decided to bounce the idea of standard
costs off his controller.
In measuring success in any undertaking, a comparison is usually made between actual performance and expected
performance. Any difference is a variance. A manager is then left with the responsibility to explain the what, why,
and how of the variance. In doing so, the manager must understand the in�luence of key variables on the actual
results, focus on areas that deserve more detailed investigation, and determine changes that must be made in future
planning and control. This chapter introduces the concept of pro�it analysis and then concentrates on variances
associated with a standard cost system for direct materials, direct labor, and factory overhead.
8.1Pro�itAnalysis
Pro�it is an overall measure of how well an organization is doing. A pro�it variance then is the difference between
the actual net income and the planned net income for the same period. The causes of such a variance are related to
...
Presentation on topics:-
1. Measurement of Cost Behaviour
2. Cost Drivers and Cost Behaviour
3. Management Influence on Cost Behaviour
4. Cost Functions
5. Methods of Measuring Cost Functions
6. Cost Management System
ABC System (Concept and Principles)
7. Various Basis of Overhead Distribution
8. Different Cost for Different Decisions
Different techniques of costing in strategic management accounting discussed.
Marginal costing,budgetary control, standard costing,Activity based costing,responsibility costing.
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
Required ResourceTextSchneider, A. (2017). Managerial Accounti.docxaudeleypearl
Required Resource
Text
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
· Chapter 5: Joint Cost Allocation and Variable Costing
· Chapter 8: Cost Control Through Standard Costs
Recommended Resource
Multimedia
Crosson, S. (2007). PVA ABC JIT – 4 ABC example (Links to an external site.) [Video File]. Retrieved from http://www.youtube.com/watch?v=eyH4l3VvOCU
Discussion 1 Allocating Joint Costs
Describe the three methods used to allocate joint costs. What are the advantages/disadvantages of each allocation method? Which method would you recommend? Why? Support your position with evidence from the text or external sources. Your initial post should be 200-250 words.
Guided Response: Review several of your classmates’ postings. Respond to at least two of your classmates by asking a question to challenge their recommended allocation method. Support your question and/or comments with evidence from the text or external sources.
Discussion 2 Variable/Absorption Costing
As you read in Chapter 8, there are arguments (for and against) variable costing and absorption costing. Select one of these costing methods and explore the various arguments. Determine whether you are “for” or “against” this selected method. Provide evidence from the text to support your position. Your initial post should be 200-250 words.
Guided Response: Review several of your classmates’ postings. Respond to at least two of your classmates who explored a different costing method than your own by stating whether you agree or disagree with their position. Be sure to include cited support/examples to clarify your point of view.
LearningObjectives
After studying Chapter 8, you will be able to:
Explain the signi�icance of pro�it analysis for an organization.
Describe the major characteristics and conditions of a standard cost system.
Understand the information contained in a standard cost sheet.
Compute materials price and usage variances, and identify potential causes of such variances.
Compute labor rate and ef�iciency variances, and identify potential causes of such variances.
Explain the major considerations that are the basis of standard costs for overhead and compute
budget variances and capacity variances for overhead.
Explain why the capacity variance is related only to �ixed overhead costs.
Understand issues relating to variance investigation and disposal of variances.
8 Cost Control Through Standard Costs
nd3000/iStock/Thinkstock
Explain how standard costs can be used in various different settings.
Describe ethical considerations relating to standards and variances.
WhereDoIStartWithStandardCosts?
Jean-Claude Recca, President of Rue de Lorraine, a chain of fast-food restaurants in central France, just
returned from a reunion of his INSEAD graduating class. During the day of activities in the Riviera, he talked
with several o ...
This powerpoint presentation is created by Gyanbikash.com for the students of class nine to ten from their accounting NCTB textbook for multimedia class.
1. The ALIVE status of each SEX. (SEX needs to be integrated into th.docxketurahhazelhurst
1. The ALIVE status of each SEX. (SEX needs to be integrated into the only Male, Female, ND, and Other) (bar comparison chart, pie comparison chart)
2. How many Male, Female, ND, and Other are there in each ALIGN. (Bar comparison chart)
3. How many red-haired heroes do Marvel and DC have?
.
1. Some potentially pathogenic bacteria and fungi, including strains.docxketurahhazelhurst
1. Some potentially pathogenic bacteria and fungi, including strains of Enterococcus, Staphylococcus, Candida, and Aspergillus, can survive for one to three months on a variety of materials found in hospitals, including scrub suits, lab coats, plastic aprons, and computer keyboards. What can hospital personnel do to reduce the spread of these pathogens?
2. Human immunodeficiency virus (HIV) preferentially destroys CD4+ cells. Specifically, what effect does this have on antibody and cell-mediated immunity?
**Provide APA references for each
.
More Related Content
Similar to Chapter 10Cost Estimation and Cost- Volume-Profit Relati.docx
Presentation on topics:-
1. Measurement of Cost Behaviour
2. Cost Drivers and Cost Behaviour
3. Management Influence on Cost Behaviour
4. Cost Functions
5. Methods of Measuring Cost Functions
6. Cost Management System
ABC System (Concept and Principles)
7. Various Basis of Overhead Distribution
8. Different Cost for Different Decisions
Different techniques of costing in strategic management accounting discussed.
Marginal costing,budgetary control, standard costing,Activity based costing,responsibility costing.
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
Required ResourceTextSchneider, A. (2017). Managerial Accounti.docxaudeleypearl
Required Resource
Text
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
· Chapter 5: Joint Cost Allocation and Variable Costing
· Chapter 8: Cost Control Through Standard Costs
Recommended Resource
Multimedia
Crosson, S. (2007). PVA ABC JIT – 4 ABC example (Links to an external site.) [Video File]. Retrieved from http://www.youtube.com/watch?v=eyH4l3VvOCU
Discussion 1 Allocating Joint Costs
Describe the three methods used to allocate joint costs. What are the advantages/disadvantages of each allocation method? Which method would you recommend? Why? Support your position with evidence from the text or external sources. Your initial post should be 200-250 words.
Guided Response: Review several of your classmates’ postings. Respond to at least two of your classmates by asking a question to challenge their recommended allocation method. Support your question and/or comments with evidence from the text or external sources.
Discussion 2 Variable/Absorption Costing
As you read in Chapter 8, there are arguments (for and against) variable costing and absorption costing. Select one of these costing methods and explore the various arguments. Determine whether you are “for” or “against” this selected method. Provide evidence from the text to support your position. Your initial post should be 200-250 words.
Guided Response: Review several of your classmates’ postings. Respond to at least two of your classmates who explored a different costing method than your own by stating whether you agree or disagree with their position. Be sure to include cited support/examples to clarify your point of view.
LearningObjectives
After studying Chapter 8, you will be able to:
Explain the signi�icance of pro�it analysis for an organization.
Describe the major characteristics and conditions of a standard cost system.
Understand the information contained in a standard cost sheet.
Compute materials price and usage variances, and identify potential causes of such variances.
Compute labor rate and ef�iciency variances, and identify potential causes of such variances.
Explain the major considerations that are the basis of standard costs for overhead and compute
budget variances and capacity variances for overhead.
Explain why the capacity variance is related only to �ixed overhead costs.
Understand issues relating to variance investigation and disposal of variances.
8 Cost Control Through Standard Costs
nd3000/iStock/Thinkstock
Explain how standard costs can be used in various different settings.
Describe ethical considerations relating to standards and variances.
WhereDoIStartWithStandardCosts?
Jean-Claude Recca, President of Rue de Lorraine, a chain of fast-food restaurants in central France, just
returned from a reunion of his INSEAD graduating class. During the day of activities in the Riviera, he talked
with several o ...
This powerpoint presentation is created by Gyanbikash.com for the students of class nine to ten from their accounting NCTB textbook for multimedia class.
1. The ALIVE status of each SEX. (SEX needs to be integrated into th.docxketurahhazelhurst
1. The ALIVE status of each SEX. (SEX needs to be integrated into the only Male, Female, ND, and Other) (bar comparison chart, pie comparison chart)
2. How many Male, Female, ND, and Other are there in each ALIGN. (Bar comparison chart)
3. How many red-haired heroes do Marvel and DC have?
.
1. Some potentially pathogenic bacteria and fungi, including strains.docxketurahhazelhurst
1. Some potentially pathogenic bacteria and fungi, including strains of Enterococcus, Staphylococcus, Candida, and Aspergillus, can survive for one to three months on a variety of materials found in hospitals, including scrub suits, lab coats, plastic aprons, and computer keyboards. What can hospital personnel do to reduce the spread of these pathogens?
2. Human immunodeficiency virus (HIV) preferentially destroys CD4+ cells. Specifically, what effect does this have on antibody and cell-mediated immunity?
**Provide APA references for each
.
1. Taking turns to listen to other students is not always easy f.docxketurahhazelhurst
1. Taking turns to listen to other students is not always easy for young children. What does the research show about promoting good listeners in the classroom setting?
2. How would you help the shyest student to become a confident speaker? How would you help the overly confident speaker to have self-control? Why are these skills important to instill in children at this age? How can becoming a confident speaker encourage stronger advocacy skills for themselves? Likewise, how does maintaining self-control encourage better listening?
.
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1. The main characters names in "The Shape of Things" are Adam and Evelyn, suggesting the play is a retelling of the original creation myth. Compare the original “Adam and Eve” and characters in the Judea-Christian creation account to Adam and Evelyn. How is The Shape of Things similar or different from the traditional Judea-Xian account? (Keep in mind the main difference being art and artistic versus theistic creation).
2. The “garden” is the museum, and roped off sculpture with the fig leaf is, like the tree of good and evil, what you’re not supposed to touch. Why does the author present the museum as a creation space? How is the sculpture like the tree of good and evil? What happens when they cross the line and touch (or photograph) it?
3. Compare Evelyn and Pygmalion as creators. How does their gender effect their position in history and creation? How do both their creations critique the culture in which they exist? Describe the "changes" to society that Evelyn and Pygmalion aspire to in their art.
4. How much are the creators (Evelyn and Pygmalion) in control of creation and their art work? Where does their control break down? What is the difference between creator and creature; or is the creature reducible to its creator?
5. When does Adam assert his own mind, (if at all) or veer towards independence by not relying on the tools to achieve superficial beauty that Evelyn imparts?
.
1. Select one movie from the list belowShutter Island (2010; My.docxketurahhazelhurst
1. Select one movie from the list below:
Shutter Island (2010; Mystery, Thriller; Leonardo DiCaprio, Mark Ruffalo
2. Watch the film you have selected as a psychology student and not merely as an ordinary film viewer (it is suggested that you watch the selected film multiple times).
3. Provide your own summary of the film, using psychological terms and concepts that you have learned in class and from your textbook. State clearly the psychological disorder you have seen portrayed in the film you have chosen, using DSM criteria/language. You should explain the psychological disorder portrayed in the movie. Determine and evaluate if the disorder identified in the film is accurate according to your textbook and other resource materials. Provide evidence using actual behaviors seen in the film. Is the depiction of the psychological disorder in the film accurate or not? Give evidence to support your claims using observable behaviors from the movie.
4. Based on the information from the film, determine what clinical diagnosis (or diagnoses) a character from the movie most likely has/have (can be the main character or supporting characters). Use criteria provided by the DSM-5 and provide an evidence-based diagnosis/diagnoses of the person. You will need to justify their diagnoses by demonstrating how the character’s symptoms meet some or all the criteria outlined in the DSM-5 as evidence of your diagnosis/diagnoses. Everything that you assert should be supported by evidence.
7. Be sure to use APA format using the latest edition of the APA Manual (7th edition).
.
1. Select a system of your choice and describe the system life-cycle.docxketurahhazelhurst
1. Select a system of your choice and describe the system life-cycle. Construct a detailed flow diagram tailored to your situation
2. What characteristics of an airplane would you attribute to the system as a whole rather than to a collection of its parts? Explain why.
.
1. Sensation refers to an actual event; perception refers to how we .docxketurahhazelhurst
1. Sensation refers to an actual event; perception refers to how we interpret the event. What are some cultural differences that might affect responses to particular stimuli, particularly in taste and pain?
2. Most of us feel like we never get enough sleep. What are the stages of sleep and what is the importance of sleep? What are some common sleep disorders and treatments?
.
1. The Institute of Medicine (now a renamed as a part of the N.docxketurahhazelhurst
1. The Institute of Medicine (now a renamed as a part of the
National Academies of Sciences, Engineering, and Medicine
) defined patient-centered care as: "Providing care that is respectful of and responsive to individual patient preferences, needs, and values, and ensuring that patient values guide all clinical decisions.”[1] While this definition clearly emphasizes the importance of a patient’s perspective in the context of clinical care delivery, it does not allow managers to focus on the actual “person” inside the institutional role of the patient.
In the same sense that a person who is incarcerated in a prison may receive extremely humane treatment, the “person” is still defined into the role of an “inmate,” and as such cannot, by definition, be granted the same rights and privileges as a non-institutionalized member of the civil order enjoys. In other words, I may be placed in a cell with great empathy and understanding of my preferences, needs, and values, but I am still being locked-up in jail.
No one is suggesting that being admitted into a jail cell is the same as being admitted into a hospital bed. There are many obvious differences between the two, including the basic purpose of the two institutions.
But while much is different, what is the same is how a pre-existing set of structured behaviors and processes are used to firmly, and without asking or negotiating, radically transform a “regular” person into a defined role of a “patient” that then can be diagnosed, treated, and discharged back into the world once the patient has finished their “time” in the “system.”
While patient-centered care emphasizes the value of increased sensitivity to a patient’s preferences, needs, and values, what we want to focus on is how decisions made by healthcare leaders affect the actual experience of a person receiving that care.
So with the "real person" in mind, this week's question is:
What can healthcare leaders do in improve the actual personal experience that "real people" go through as our "patients?"
(Be sure to develop your answers AFTER you review the definition and roles of "Leadership" in the readings for this week).
[1] Institute on Medicine, Crossing the Quality Chasm: A New Health System for the 21st Century, March, 2001
2. Health Information Technonogy - PPP Discussion
The board has created an innovation fund designed to foster improved quality, increased access, or reduced costs in healthcare delivery. Select a health information technology related to genomics, precision medicine, or diagnostics that you would propose to be funded for implementation. Prepare a PowerPoint presentation that describes the selected health information technology, what it does, why it would be beneficial, and what risks may be involved. Please note, this activity is weighted 5% toward the final grade. The PowerPoint should be no more than 5-6 slides with the presenter's notes. Follow the APA format.
.
1. The Documentary Hypothesis holds that the Pentateuch has a number.docxketurahhazelhurst
1. The Documentary Hypothesis holds that the Pentateuch has a number of underlying documents (alt., sources) that were ultimately gathered and sewn into the Pentateuch as we now have it. The method of separating those underlying documents is called source criticism. Please perform a source-critical analysis of Gen 1-3. In so doing, please identify the significant features that distinguish each underlying document. Note: There are many such features.
2. Why are covenants important in the Bible? What do they accomplish? Are they all the same, whether in structure or outlook? Do the different writers view them differently? What does the ancient Near Eastern background to the biblical covenant contribute to our understanding?
3. Dt 6:4 used to be translated
“Hear, O Israel: The LORD [YHWH] our God, the LORD [YHWH] is one.”
Currently, we translate
“Hear, O Israel: The LORD [YHWH] is our God, the LORD [YHWH] alone.”
In all likelihood, the second translation is grammatically preferable. What is the interpretive difference between “one” and “alone”? Is it significant? How, if at all, does this verse relate to the First Commandment? How does this verse relate to Gen 1:26, 3:22, and 11:7? How does this verse relate to the variant non-MT variant in Dt 32:8-9 (as reproduced in HarperCollins)? Why is any of this important?
Be sure to provide a careful, well-written essay which gives ample biblical examples (proof texts) to support the point(s) you wish to make.
.
1. Search the internet and learn about the cases of nurses Julie.docxketurahhazelhurst
1. Search the internet and learn about the cases of nurses Julie Thao and Kimberly Hiatt.
2. List and discuss lessons that you and all healthcare professionals can learn from these two cases.
3. Describe how the principle of beneficence and the virtue of benevolence could be applied to these cases. Do you think the hospital adminstrators handled the situations legally and ethically?
4. In addition to benevolence, which other virtues exhibited by their colleagues might have helped Thao and Hiatt?
5. Discuss personal virtues that might be helpful to second victims themselves to navigate the grieving process.
Scholarly article, APA format, and no grammar error
.
1. Search the internet and learn about the cases of nurses Julie Tha.docxketurahhazelhurst
1. Search the internet and learn about the cases of nurses Julie Thao and Kimberly Hiatt.
2. List and discuss lessons that you and all healthcare professionals can learn from these two cases.
3. Describe how the principle of beneficence and the virtue of benevolence could be applied to these cases. Do you think the hospital adminstrators handled the situations legally and ethically?
4. In addition to benevolence, which other virtues exhibited by their colleagues might have helped Thao and Hiatt?
5. Discuss personal virtues that might be helpful to second victims themselves to navigate the grieving process.
use reference and scholarly nursing article.
.
1. Review the three articles about Inflation that are found below th.docxketurahhazelhurst
1. Review the three articles about Inflation that are found below this.
Globalization and Inflatio
n
Drivers of Inflation
Inflation
and Unemploymen
t
2. Locate two JOURNAL articles which discuss this topic further. You need to focus on the Abstract, Introduction, Results, and Conclusion. For our purposes, you are not expected to fully understand the Data and Methodology.
3. Summarize these journal articles. Please use your own words. No copy-and-paste. Cite your sources.
4.The replies are due by the deadline specified in the Course Schedule.
Please post (in APA format) your article citation.
.
1. Review the following request from a customerWe have a ne.docxketurahhazelhurst
1. Review the following request from a customer:
We have a need to replace the aging Signage Application. This application is housed in District 4 and serves the district as well as two other districts. We would like a new application that can be used statewide to track all information related to road signs.
The current system is old and doesn’t do most of what we need it to.
The current system has a whole bunch of reports, but no way for the user to update them by themselves without getting IT involved.
We also can’t create our own reports, on-demand, when we need to. Currently, data is entered into the application manually by Administrative Staff, but in the future, we would like to be able to take a picture of the road sign using a phone app, and have it automagically populate the database with geospatial location and other information. We thought about having a Smart Watch interface, but we don’t need that. Also, the current method does not have any way to manage the quality of the data that is entered, so there is a lot of garbage information there. There is no way to centrally manage security access, with the existing application. We want to get real time alerts when a sign gets knocked over in an accident and have a dashboard that shows where signs have been knocked over across the state. This is kind of important, but not super-critical. We need to store location information, types of signs, when a new sign is installed, who installed it, etc. We plan to provide the phone app to drivers in each district who will drive around, take pictures of the signs, and upload them to the database at the end of each day, or in realtime, if a data connection is available.
Back in Central Office, reviewers will review the sign information and validate it. A report will be printed every month with the results and a map. There are probably other things, but we can’t think of anything else right now.
2. List the main goal(s) of this request
3. Write all the user stories you see (include value statements and acceptance criteria, if possible)
4. Prioritize the user stories as
a. Critical
b. Important
c. Useful
d. Out of Scope
5. Are the user stories sufficiently detailed? If not, what steps would you take to split them/further define them?
6. What are the known Data Entities?
7. Is there an implied business process? Draw an activity diagram or a flow chart of it
8. Who are the actors/roles?
9. What questions would you ask of the stakeholders to get more information?
10. What technology should be used to implement the solution?
11. What would you do next as the assigned Business Analyst working on an Agile team?
.
1. Research risk assessment approaches.2. Create an outline .docxketurahhazelhurst
1. Research risk assessment approaches.
2. Create an outline for a basic qualitative risk assessment plan.
3. Write an introduction to the plan explaining its purpose and importance.
4. Define the scope and boundaries for the risk assessment.
5. Identify data center assets and activities to be assessed.
6. Identify relevant threats and vulnerabilities. Include those listed in the scenario and add to the list if needed.
7. Identify relevant types of controls to be assessed.
8. Identify the key roles and responsibilities of individuals and departments within the organization as they pertain to risk assessments.
9. Develop a proposed schedule for the risk assessment process.
10. Complete the draft risk assessment plan detailing the information above. Risk assessment plans often include tables, but you choose the best format to present the material. Format the bulk of the plan similar to a professional business report and cite any sources you used.
.
1. Research has narrowed the thousands of leadership behaviors into .docxketurahhazelhurst
1. Research has narrowed the thousands of leadership behaviors into two primary dimensions. Please list and discuss these two behaviors.
2. Distinguish between charismatic, transformational, and authentic leadership. Could an individual display all three types of leadership?
.
1. Research Topic Super Computer Data MiningThe aim of this.docxketurahhazelhurst
1. Research Topic: Super Computer Data Mining
The aim of this project is to produce a super-computing data mining resource for use by the UK academic community which utilizes a number of advanced machine learning and statistical algorithms for large datasets. In particular, a number of evolutionary computing-based algorithms and the ensemble machine approach will be used to exploit the large-scale parallelism possible in super-computing. This purpose is embodied in the following objectives:
1. to develop a massively parallel approach for commonly used statistical and machine learning techniques for exploratory data analysis
1. to develop a massively parallel approach to the use of evolutionary computing techniques for feature creation and selection
1. to develop a massively parallel approach to the use of evolutionary computing techniques for data modelling
1. to develop a massively parallel approach to the use of ensemble machines for data modelling consisting of many well-known machine learning algorithms;
1. to develop an appropriate super-computing infra-structure to support the use of such advanced machine learning techniques with large datasets.
Research Needs:
Problem definition – In the first phase problem definition is listed i.e. business aims and objectives are determined taking into consideration certain factors like the current background and future prospective.
Data exploration – Required data is collected and explored using various statistical methods along with identification of underlying problems.
Data preparation – The data is prepared for modeling by cleansing and formatting the raw data in the desired way. The meaning of data is not changed while preparing.
Modeling – In this phase the data model is created by applying certain mathematical functions and modeling techniques. After the model is created it goes through validation and verification.
Evaluation – After the model is created, it is evaluated by a team of experts to check whether it satisfies business objectives or not.
Deployment – After evaluation, the model is deployed and further plans are made for its maintenance. A properly organized report is prepared with the summary of the work done.
Research paper Policy
· APA format
. https://apastyle.apa.org/
. https://owl.purdue.edu/owl/research_and_citation/apa_style/apa_formatting_and_style_guide/general_format.html
· Min number of pages are 15 pages
· Must have
. Contents with page numbers
. Abstract
. Introduction
. The problem
4. Are there any sub-problems?
4. Is there any issue need to be present concerning the problem?
. The solutions
5. Steps of the solutions
. Compare the solution to other solution
. Any suggestion to improve the solution
. Conclusion
. References
· Missing one of the above will result -5/30 of the research paper
· Paper does not stick to the APA will result in 0 in the research paper
· Submission
. you have multiple submission to check you safe assignments
. The percentage accepted is 1%.
1. Research and then describe about The Coca-Cola Company primary bu.docxketurahhazelhurst
1. Research and then describe about The Coca-Cola Company primary business activities. Include: Minimum 7 Pages. Excluding reference page
2.
A. A brief historical summary,
B. A list of competitors,
C. The company's position within the industry,
D. Recent developments within the company/industry,
E. Future direction, and
F. Other items of significance to your corporation.
3. Include information from a variety of resources. For example:
A. Consult the Form 10-K filed with the SEC.
B. Review the Annual Report and especially the Letter to Shareholders
C. Explore the corporate website.
D. Select at least two significant news items from recent business periodicals
The report should be well written with cover page, introduction, the body of the paper (with appropriate subheadings), conclusion, and reference page.
.
1. Prepare a risk management plan for the project of finding a job a.docxketurahhazelhurst
1. Prepare a risk management plan for the project of finding a job after graduation.
and
2. Develop a reward system for motivating IPT members to do their jobs more conscientiously and to take on more responsibility.
[The assignment should be at least 400 words minimum and in APA format (including Times New Roman with font size 12 and double spaced), and attached as a WORD file.]
Plagiarism free
.
1. Please define the term social class. How is it usually measured .docxketurahhazelhurst
1. Please define the term social class. How is it usually measured? What are some ways that social class is affecting health outcomes for people who become ill with COVID-19?
2. What is the CARES Act? Has it been enough? What has happened to people's ability to pay their bills since it expired?
3. As things stand now, data is showing higher COVID-19 related mortality rates for African Americans. Given what you know from the textbook and from the attached articles, what are some explanations for the disparity?
4. What is environmental racism (injustice)? How does environmental racism put some populations at higher risk for severe medical complications than others? (Vice article)
https://www.theatlantic.com/ideas/archive/2020/07/600-week-buys-freedom-fear/613972/
https://www.vox.com/2020/4/10/21207520/coronavirus-deaths-economy-layoffs-inequality-covid-pandemic
https://www.vice.com/en_us/article/pke94n/cancer-alley-has-some-of-the-highest-coronavirus-death-rates-in-the-country
https://www.theguardian.com/us-news/2020/apr/12/coronavirus-us-deep-south-poverty-race-perfect-storm
.
Unit 8 - Information and Communication Technology (Paper I).pdfThiyagu K
This slides describes the basic concepts of ICT, basics of Email, Emerging Technology and Digital Initiatives in Education. This presentations aligns with the UGC Paper I syllabus.
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
Honest Reviews of Tim Han LMA Course Program.pptxtimhan337
Personal development courses are widely available today, with each one promising life-changing outcomes. Tim Han’s Life Mastery Achievers (LMA) Course has drawn a lot of interest. In addition to offering my frank assessment of Success Insider’s LMA Course, this piece examines the course’s effects via a variety of Tim Han LMA course reviews and Success Insider comments.
The Roman Empire A Historical Colossus.pdfkaushalkr1407
The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
Francesca Gottschalk - How can education support child empowerment.pptxEduSkills OECD
Francesca Gottschalk from the OECD’s Centre for Educational Research and Innovation presents at the Ask an Expert Webinar: How can education support child empowerment?
Acetabularia Information For Class 9 .docxvaibhavrinwa19
Acetabularia acetabulum is a single-celled green alga that in its vegetative state is morphologically differentiated into a basal rhizoid and an axially elongated stalk, which bears whorls of branching hairs. The single diploid nucleus resides in the rhizoid.
Chapter 10Cost Estimation and Cost- Volume-Profit Relati.docx
1. Chapter 10
Cost Estimation and Cost-
Volume-Profit Relationships
Learning Objectives
• Understand the significance of cost behavior to decision
making and control.
• Identify the interacting elements of cost-volume-profit
analysis.
• Explain the break-even formula and its underlying
assumptions.
• Calculate the effect on profits of changes in selling prices,
variable costs, or fixed costs.
• Calculate operating leverage, determine its effects on changes
in profit, and under-
stand how margin of safety relates to operating leverage.
• Find break-even points and volumes that attain desired profit
levels when multiple
products are sold in combination.
• Obtain cost functions by account analysis and the high-low
method.
James Forte/National Geographic/Getty Images
2. eps81189_10_c10.indd 207 12/20/13 9:45 AM
CHAPTER 10Introduction
Chapter Outline
Introduction
10.1 Significance of Cost Behavior to Decision Making and
Control
Decision Making
Planning and Control
Trends in Fixed Costs
10.2 Cost-Volume-Profit (CVP) Analysis
Basics of CVP Analysis
A Desired Pretax Profit
A Desired Aftertax Profit
10.3 Graphical Analysis
The Break-Even Chart
Curvature of Revenue and Cost Lines
The Profit-Volume Graph
10.4 Analysis of Changes in CVP Variables
Sales Volume
Variable Costs
Price Policy
Fixed Costs
Ethical Considerations When Changing CVP Variables
10.5 Measures of Relationship Between Operating Levels and
Break-Even Points
Operating Leverage
3. Margin of Safety
10.6 The Sales Mix
10.7 Cost Estimation
Account Analysis
High-Low Method
Ethical Considerations in Estimating Costs
Other Issues for Cost Estimation
Introduction
Managers need to understand cost behavior and cost estimation
to be in a better posi-tion to plan, make decisions, and control
costs. As we discussed in Chapter 9, cost
behavior describes the relationship between costs and an
activity as the level of activ-
ity increases or decreases. Determining cost behavior is
important to management’s
eps81189_10_c10.indd 208 12/20/13 9:45 AM
CHAPTER 10Section 10.1 Significance of Cost Behavior to
Decision Making and Control
understanding of overhead costs, marketing costs, and general
and administrative
expenses, as well as for proper implementation of budgets and
budgetary controls. With
knowledge of cost behavior, managers can also estimate how
costs are affected as future
activity levels change, which can lead to better decisions. In
addition, knowledge of cost
behavior can assist managers in analyzing the interactions
4. among revenues, costs, and
volume for profit-planning purposes. These interactions are
covered later in this chapter.
10.1 Significance of Cost Behavior to Decision Making and
Control
To understand more fully the significance of a manager’s
analysis of cost behavior, we look at three areas: decision
making, planning and control, and trends in fixed costs.
Decision Making
Cost behavior affects the decisions management makes.
Variable costs are the incremen-
tal or differential costs in most decisions. Fixed costs change
only if the specific decision
includes a change in the capacity requirement, such as more
floor space.
Cost-based pricing requires a good understanding of cost
behavior because fixed costs
pose conceptual problems when converted to per unit amounts.
Fixed costs per unit
assume a given volume. If the volume turns out to be different
from what was used in
determining the cost-based price, the fixed cost component of
the total cost yields a mis-
leading price. Managers must know which costs are fixed, as
well as anticipated volume,
to make good pricing decisions.
Planning and Control
A company plans and controls variable costs differently than it
plans and controls fixed
costs. Variable costs are planned in terms of input/output
relationships. For example,
for each unit produced, the materials cost consists of a price per
5. unit of materials times
the number of units of materials; the labor cost consists of the
labor rate times the num-
ber of labor hours. Once operations are underway, levels of
activities may change. The
input/output relationships identify changes in resources
necessary to respond to the
change in activity. If activity levels increase, this signals that
more resources (materials,
labor, or variable overhead) are needed. If activity levels
decrease, the resources are not
needed, and procedures can be triggered to stop purchases and
reassign or lay off work-
ers. In cases where more materials or labor time are used than
are necessary in the input/
output relationship, inefficiencies and waste are in excess of the
levels anticipated, and
managers must investigate causes and eliminate or reduce the
financial impact of the
unfavorable variances.
Fixed costs, on the other hand, are planned on an annual basis,
if not longer. Control of
fixed costs is exercised at two points in time. The first time is
when the decision is made
to incur a fixed cost. Management evaluates the necessity of the
cost and makes the deci-
sion to move forward or reject the proposal. Once fixed costs
are incurred, another point
of control enters, that being the daily decision of how best to
use the capacity provided by
the cost. For example, a university makes a decision to build a
new classroom and faculty
eps81189_10_c10.indd 209 12/20/13 9:45 AM
6. CHAPTER 10Section 10.2 Cost-Volume-Profit (CVP) Analysis
office building. That decision is the first point of control. After
construction, control is
implemented in using the building to its maximum capacity.
This will occur if classes are
scheduled throughout the day and evening.
Another difference in the planning and control of variable and
fixed costs is the level at
which costs are controllable. Variable costs can be controlled at
the lowest supervisory
level. Fixed costs are often controllable only at higher
managerial levels.
Trends in Fixed Costs
Organizations are finding that an increasing portion of their
total costs are fixed costs. The
following are a few of the more critical changes taking place.
Implementation of more automated equipment is replacing
variable labor costs and a
major share of the variable overhead costs. Thus, fixed costs are
becoming a more signifi-
cant part of total costs. Costs associated with the additional
automated equipment such
as depreciation, taxes, insurance, and fixed maintenance charges
are substantially higher.
Some industries, like steel and automobile, are becoming
essentially fixed cost industries,
with variable costs playing a less important role than was once
the case.
In most healthcare businesses, automation cannot replace labor,
7. so this is not necessarily a
trend throughout healthcare. This trend does impact people
working in the pharmaceuti-
cal and medical equipment industries. But fixed costs are rising
in medical facilities, as
medical equipment needed for patient care increases in price.
Staffing costs can be more
variable, as some facilities do use temporary or contracted staff
to have more flexibility in
costs.
Another factor that has helped to increase fixed costs
significantly in a manufacturing
environment is the movement in some industries toward a
guaranteed annual wage for
production workers. Employees who were once hourly wage
earners are now becoming
salaried. With the use of more automated equipment, the
workers of a company may not
represent “touch labor,” that is, work directly on the product.
Instead, the production
worker may merely observe that the equipment is operating as it
should and is properly
supplied with materials or may monitor production by means of
a television screen. The
production line employee is handling more of the functions
normally associated with
indirect labor, and the cost is a fixed cost.
10.2 Cost-Volume-Profit (CVP) Analysis
The separation of fixed costs from variable costs contributes to
an understanding of how revenues, costs, and volume interact to
generate profits. With this understand-
ing, managers can perform any number of analyses that fit into
a broad category called
8. cost-volume-profit (CVP) analysis or, more commonly, break-
even analysis. Examples
of such analyses include finding the:
1. patient volume required to break even;
2. dollars of sales (i.e., fees from procedures performed) needed
to achieve a
specified profit level;
eps81189_10_c10.indd 210 12/20/13 9:45 AM
CHAPTER 10Section 10.2 Cost-Volume-Profit (CVP) Analysis
3. effect on profits if selling prices and variable costs increase
or decrease by a
specific amount per unit; and
4. increase in selling price needed to cover a projected fixed
cost increase.
CVP analysis, as its name implies, examines the interaction of
factors that influence the
level of profits. Although the name gives the impression that
only cost and volume deter-
mine profits, several important factors exist that determine
whether we have profits or
losses and whether profits increase or decrease over time. The
key factors appear in the
basic CVP equation:
(Selling price)(Sales volume) 2 (Unit variable cost)(Sales
volume) 2
Total fixed cost 5 Pretax profit.
9. The basic CVP equation is merely a condensed income
statement, in equation form, where
total variable costs (Unit variable cost 3 Sales volume) and total
fixed costs are deducted
from total sales revenues (Selling price 3 Sales volume) to
arrive at pretax profit. This
equation, as well as other variations that will be discussed later,
appears as formula (1) in
Figure 10.1.
Figure 10.1: Formulas for CVP analysis
1. Basic CVP equation:
2. CVP equation taxes:
3. Break-even point in units:
4. Break-even point in dollars:
5. Target pretax profit, in dollars:
6. Target pretax profit, in units:
7. Target aftertax profit, in units:
8. Target aftertax profit, in dollars:
(p – v)x – FC = PP
[(p – v)x – FC](1 – t) = AP
FC
(p – v)
10. FC
CM%
FC + PP
p – v
FC + PP
CM%
FC +
(1 – t)
AP
FC + PP
p – v
=
FC +
(1 – t)
AP
FC + PP
CM%
=
= Fixed cost dollars
= Selling price per unit
= Variable cost per unit
= Contribution margin ration (p – v) / p
= Aftertax profit
11. = Pretax profit
= Income tax rate
= Sales volume in units
FC
p
v
CM%
AP
PP
t
x
Where:
p – v
CM%
eps81189_10_c10.indd 211 12/20/13 9:45 AM
CHAPTER 10Section 10.2 Cost-Volume-Profit (CVP) Analysis
The excess of total sales revenue over total variable cost is
12. called the contribution margin
or, more precisely, variable contribution margin. From the basic
CVP equation, we see
that the contribution margin contributes to covering fixed costs
as well as generating net
income. The contribution margin, as well as the contribution
margin ratio, often plays an
important role in CVP analysis. The latter measure is the ratio
of the contribution margin
to total sales revenue (or, equivalently, the ratio of the
contribution margin per unit to the
selling price).
Before proceeding, several fundamental assumptions are made
to strengthen CVP analysis:
1. Relevant range—CVP analysis is limited to the company’s
relevant range of
activity;
2. Cost behavior identification—fixed and variable costs can be
identified
separately;
3. Linearity—the selling price and variable cost per unit are
constant across all sales
levels within the company’s relevant range of activity;
4. Equality of production and sales—all units are produced and
sold and inventory
changes are ignored;
5. Activity measure—the primary cost driver is volume of units;
and
6. Constant sales mix—the sales of each product in a
multiproduct firm are a con-
13. stant percentage.
Assumptions 1, 2, and 3 are straightforward. Assumption 4 is
required because if sales
and production are not equal, then some amount of variable and
fixed costs are treated
as assets (inventories) rather than expenses. As long as
inventories remain fairly stable
between adjacent time periods, this assumption does not
seriously limit the applicability
of CVP analysis. Regarding assumption 5, factors other than
volume may drive costs, as
we have discussed earlier in this chapter, and as we will discuss
further in later chap-
ters. Costs that vary with cost drivers other than volume can be
added to the fixed-cost
component. Assumption 6 is discussed in detail later in this
chapter. In many cases, these
assumptions are and must be violated in real-world situations,
but the basic logic and
analysis adds value. While our discussion may appear to
presume that CVP analysis
is applicable only to companies that sell physical products,
these techniques are just as
applicable to service organizations.
Basics of CVP Analysis
CVP analysis is often called break-even analysis because of the
significance of the
break-even point, which is the volume where total revenue
equals total costs. It indicates
how many units of product must be sold or how much revenue is
needed to at least cover
all costs. All break-even analyses can be approached by using
formula (1) and by creating
14. its derivations, as shown in Figure 10.1.
Each unit of product sold is expected to yield revenue in excess
of its variable cost and
thus contribute to the recovery of fixed costs and provide a
profit. The point at which
profit is zero indicates that the contribution margin is equal to
the fixed costs. Sales vol-
ume must increase beyond the break-even point for a company
to realize a profit.
eps81189_10_c10.indd 212 12/20/13 9:45 AM
CHAPTER 10Section 10.2 Cost-Volume-Profit (CVP) Analysis
Let’s look at CVP relationships in the context of Felsen Medical
Supplies, a wholesale dis-
tributor of healthcare supplies. Assume that price and costs for
one of its products, back
braces, are as follows:
Dollars per
Unit
Percentage
of Selling
Price
Selling price $ 25 100%
Variable cost 15 60%
Contribution margin $ 10 40%
15. Total fixed cost $100,000
Each product sold contributes $10 to covering fixed costs and
the creation of a profit.
Hence, the company must sell 10,000 back braces to break even.
The 10,000 back braces
sold will result in a total contribution margin of $100,000,
equaling total fixed cost.
The break-even point can be calculated by using the basic CVP
equations that appear as
formulas (3) and (4) in Figure 10.1. For Felsen Medical
Supplies, the break-even point is
determined as follows:
Break-even point in units 5 Total fixed cost/Contribution
margin per unit
5 $100,000/$10 per unit
5 10,000 units.
A break-even point measured in sales dollars can be computed
by directly using formula
(4) of Figure 10.1, as follows:
Total fixed cost/Contribution margin ratio 5 Break-even point in
sales dollars
$100,000/0.40 5 $250,000.
To use this in a service environment, such as a medical clinic,
the sales price would be
the net fee expected from patient and insurer, the variable costs
would be those costs that
16. change as the clinic provides the services, such as medical
supplies directly related to
the treatment and personnel costs. The fixed costs would be the
medical equipment and
furnishings needed to provide patient care, as well as some
portion of the costs to run
the facility, such as utilities, rent, administrative, and so on.
Most medical clinics will set
a certain overhead cost for this calculation. If you don’t have a
usable fixed cost for your
department, check with your accounting liaison to find out how
to determine fixed costs
in order to do this calculation.
eps81189_10_c10.indd 213 12/20/13 9:45 AM
CHAPTER 10Section 10.2 Cost-Volume-Profit (CVP) Analysis
A Desired Pretax Profit
In business, only breaking even is not satisfactory, but the
break-even relationships do
serve as a base for profit planning. If we have a target profit
level, we can insert that num-
ber into the basic CVP equation. This yields the following
general formulas, which appear
as formulas (5) and (6) in Figure 10.1:
(Total fixed cost 1 Pretax profit)/Contribution margin ratio 5
Sales dollars required
(Total fixed cost 1 Pretax profit)/Contribution margin per unit 5
Unit sales required.
Continuing with the Felsen Medical Supplies illustration,
17. suppose that Enoch Goodfriend,
the president, had set a profit objective of $200,000 before
taxes. The units and revenues
required to attain this objective are determined as follows:
($100,000 1 $200,000)/$10 5 30,000 back braces
or
($100,000 1 $200,000)/0.40 5 $750,000.
A Desired Aftertax Profit
The profit objective may be stated as a net income after income
taxes. Rather than chang-
ing with volume of units, income taxes vary with profits after
the break-even point. When
income taxes are to be considered, the basic CVP equation is
altered using formulas
(2), (7), and (8) in Figure 10.1. Formula (7) works as follows:
Target aftertax profit in units 5
(Fixed costs 1 (Aftertax profit/(1 2 Tax rate)))/Contribution
margin per unit.
Formula (8) yields the sales dollars needed to earn the desired
aftertax profit.
Suppose Enoch Goodfriend had budgeted a $105,000 aftertax
profit and that the income
tax rate was 30%. We use the above general formulas to obtain
the following volume and
sales:
($100,000 1 ($105,000/(1 2 0.30)))/$10 5 25,000 back braces
18. or
($100,000 1 ($105,000/(1 2 0.30)))/0.40 5 $625,000.
eps81189_10_c10.indd 214 12/20/13 9:45 AM
CHAPTER 10Section 10.3 Graphical Analysis
10.3 Graphical Analysis
Total sales dollars and total costs at different sales volumes can
be estimated and plot-ted on a graph. The information shown on
the graph can also be given in conven-
tional reports, but it is often easier to grasp the fundamental
facts when they are presented
in graphic or pictorial form. Let’s look at two common forms of
graphical analysis—the
break-even chart and the profit-volume graph.
The Break-Even Chart
Dollars are shown on the vertical scale of the break-even chart,
and the units of product
to be sold are shown on the horizontal scale. The total costs are
plotted for the various
quantities to be sold and are connected by a line. This line is
merely a combination of the
fixed and variable cost diagrams from Chapter 9. Total sales at
various levels are similarly
entered on the chart.
The break-even point lies at the intersection of the total revenue
and total cost lines. Losses
are measured to the left of the break-even point; the amount of
the loss at any point is
19. equal to the dollar difference between the total cost line and the
total revenue line. Profit
is measured to the right of the break-even point and, at any
point, is equal to the dollar
difference between the total revenue line and the total cost line.
This dollar difference
equals the contribution margin per unit multiplied by the
volume in excess of the break-
even point.
In Figure 10.2, a break-even chart has been prepared for Felsen
Medical Supplies using the
following data associated with sales levels between 5,000 and
30,000 back braces.
Number of Back Braces Produced and Sold
5,000 10,000 15,000 20,000 25,000 30,000
Total
revenue
$125,000 $250,000 $375,000 $500,000 $635,000 $750,000
Cost:
Variable 75,000 150,000 225,000 300,000 375,000 450,000
Fixed 100,000 100,000 100,000 100,000 100,000 100,000
Total cost 175,000 250,000 325,000 400,000 475,000
550,000
Profit (loss) $(50,000) 0 $ 50,000 $100,000 $150,000
$200,000
20. eps81189_10_c10.indd 215 12/20/13 9:45 AM
CHAPTER 10Section 10.3 Graphical Analysis
Figure 10.2: Break-even chart
Curvature of Revenue and Cost Lines
In some cases, revenues and costs cannot be represented by
straight lines. If more units
are to be sold, management may have to reduce selling prices.
Under these conditions, the
revenue function is a curve instead of a straight line. Costs may
also be nonlinear depend-
ing on what changes take place as volume increases. The cost
curve may rise slowly at the
start, then more steeply as volume is expanded. This occurs if
the variable cost per unit
becomes higher as more units are manufactured. Also, fixed
costs might change as vol-
ume increases. For example, volume increases might cause a
jump in supervision, equip-
ment, and space costs. Therefore, it may be possible to have two
break-even points, as
shown in Figure 10.3.
Number of Back Braces (in Thousands)
Variable cost
Fixed cost
5 10 15 20 25 30
100
22. Break-even
point
Profit
area
Total revenue line
Total cost line
eps81189_10_c10.indd 216 12/20/13 9:45 AM
CHAPTER 10Section 10.3 Graphical Analysis
Figure 10.3: Break-even chart with two break-even points
The Profit-Volume Graph
A profit-volume (P/V) graph is sometimes used in place of, or
along with, a break-even
chart. Data used in the earlier illustration of a break-even chart
in Figure 10.2 have also
been used in preparing the P/V graph shown in Figure 10.4. In
general, profits and losses
appear on the vertical scale; units of product, sales revenue,
and/or percentages of capac-
ity appear on the horizontal scale. A horizontal line is drawn on
the graph to separate
profits from losses. The profit or loss at each of various sales
levels is plotted. These points
are then connected to form a profit line. The slope of the profit
line is the contribution
margin per unit if the horizontal line is stated as units of
product and is the contribution
23. margin ratio if the horizontal line is stated as sales revenue.
Units of Product Sold
D
o
lla
rs
Break-even
point
Break-even
point
To
tal
co
st
lin
e
To
tal
re
ve
nu
e l
ine
24. eps81189_10_c10.indd 217 12/20/13 9:45 AM
CHAPTER 10Section 10.4 Analysis of Changes in CVP
Variables
Figure 10.4: Profit-volume graph
The break-even point is the point where the profit line intersects
the horizontal line. Dol-
lars of profit are measured on the vertical scale above the line,
and dollars of loss are meas-
ured below the line. The P/V graph may be preferred to the
break-even chart because
profit or loss at any point is shown specifically on the vertical
scale. However, the P/V
graph does not clearly show how cost varies with activity.
Break-even charts and P/V
graphs are often used together, thus obtaining the advantages of
both.
10.4 Analysis of Changes in CVP Variables
Break-even charts and P/V graphs are convenient devices to
show how profit is affected by changes in the factors that
impact profit. For example, if unit selling price, unit
variable cost, and total fixed cost remain constant, how many
more units must be sold to
realize a greater profit? Or, if the unit variable cost can be
reduced, what additional profit
can be expected at any given volume of sales? The effects of
changes in sales volume, unit
variable cost, unit selling price, and total fixed cost are
discussed in the following para-
graphs. In all these cases, the starting point for analysis is the
25. CVP formulas in Figure 10.1.
Sales Volume
For some companies, substantial profits depend on high sales
volume. For example, if
each unit of product is sold at a relatively low contribution
margin, then high profits are a
function of selling in large quantities. This is more significant
when the fixed cost is high.
Number of Back Braces (in Thousands)
Revenue
(Thousands of Dollars)
$125 $250 $375 $500 $625 $750
L
o
ss
e
s
P
ro
fit
s
(T
h
o
27. CHAPTER 10Section 10.4 Analysis of Changes in CVP
Variables
For an illustration, consider a company that handles a product
with a selling price of $1
per unit. Assume a variable cost of $0.70 per unit and a fixed
cost of $180,000 per year. The
contribution margin, therefore, is $0.30 per unit ($1 2 $0.70).
Before any profit is realized,
the company must sell enough units for the total contribution
margin to recover the fixed
cost. Therefore, 600,000 units must be sold just to break even:
$180,000 4 $0.30 5 600,000 units.
For every unit sold in excess of 600,000, a $0.30 profit before
tax is earned. In such a situa-
tion, the company must be certain that it can sell substantially
more than 600,000 units to
earn a reasonable profit on its investment.
When products sell for relatively high contribution margins per
unit, the fixed cost is
recaptured with the sale of fewer units, and a profit can be made
on a relatively low sales
volume. Suppose that each unit of product sells for $1,000 and
that the variable cost per
unit is $900. The fixed cost for the year is $180,000. The
contribution margin ratio is only
10%, but this is equal to $100 from each unit sold. The break-
even point will be reached
when 1,800 units are sold. The physical quantity handled is
much lower than it was in the
preceding example, but the same principle applies. More than
28. 1,800 units must be sold if
the company is to produce a profit.
A key relationship between changes in volume and pretax profit
is the following:
Contribution margin per unit 2 Change in sales volume 5
Change in net income.
This relationship presumes that the contribution margin per unit
remains unchanged
when the sales volume changes. It also presumes that fixed
costs have not been changed.
Suppose that Enoch Goodfriend of Felsen Medical Supplies
wishes to know how the sale
of an additional 500 back braces would impact profits. The
above relationship reveals that
net income would increase by $5,000 ($10 contribution margin
per unit 3 500 units).
Variable Costs
The relationship between the selling price of a product and its
variable cost is important in
any line of business. Even small savings in variable cost can
add significantly to profits. A
reduction of a fraction of a dollar in the unit cost becomes a
contribution to fixed cost and
profit. If 50,000 units are sold in a year, a $0.10 decrease in the
unit cost becomes a $5,000
increase in profit. Conversely, a $0.10 increase in unit cost
decreases profit by $5,000.
Management is continually searching for opportunities to make
even small cost savings.
What appears trivial may turn out to be the difference between
profit and loss for the year.
29. In manufacturing, it may be possible to save on materials cost
by using cheaper materi-
als that are just as satisfactory. Using materials more effectively
can also result in savings.
Improving methods of production may decrease labor and
overhead costs per unit.
A small savings in unit cost can give a company a competitive
advantage. If prices must
be reduced, the low-cost producer will usually suffer less. At
any given price and fixed
cost structure, the low-cost producer will become profitable
more quickly as sales volume
increases.
eps81189_10_c10.indd 219 12/20/13 9:45 AM
CHAPTER 10Section 10.4 Analysis of Changes in CVP
Variables
The following operating results of three companies show how
profit is influenced by
changes in the variable cost pattern. Each of the three
companies sells 100,000 units of one
product line at a price of $5 per unit. Each has an annual fixed
cost of $150,000. Company
A can manufacture and sell each unit at a variable cost of $2.50.
Company B has found
ways to save costs and can produce each unit for a variable cost
of $2, while Company C
has allowed its unit variable cost to rise to $3.
Company A Company B Company C
30. Number of units sold 100,000 100,000 100,000
Unit selling price $ 5.00 $ 5.00 $ 5.00
Unit variable cost 2.50 2.00 3.00
Unit contribution margin 2.50 3.00 2.00
Contribution margin ratio 50% 60% 40%
Total sales revenue $500,000 $500,000 $500,000
Total variable cost $250,000 $200,000 $300,000
Total contribution margin 250,000 300,000 200,000
Fixed cost 150,000 150,000 150,000
Income before income tax $100,000 $150,000 $ 50,000
A difference of $0.50 in unit variable cost between Company A
and Company B or between
Company A and Company C adds up to a $50,000 difference in
profit when 100,000 units
are sold. The low-cost producer has a $1 per unit profit
advantage over the high-cost pro-
ducer. If sales volume should fall to 60,000 units per company,
Company B would have a
profit of $30,000, Company A would break even, and Company
C would suffer a loss of
$30,000. The same results are shown in the break-even chart in
Figure 10.5.
eps81189_10_c10.indd 220 12/20/13 9:45 AM
31. CHAPTER 10Section 10.4 Analysis of Changes in CVP
Variables
Figure 10.5: Effects of variable cost changes
The fixed cost line for each company is drawn at $150,000, the
amount of the fixed cost.
When 40,000 units are sold, a difference of $20,000 occurs
between each total cost line.
The lines diverge as greater quantities are sold. At the 100,000-
unit level, the difference is
$50,000 between each total cost line. Company B can make a
profit by selling any quantity
in excess of 50,000 units, but Company C must sell 75,000 units
to break even. With its
present cost structure, Company C will have to sell in greater
volume if it is to earn a profit
equal to profits earned by Company A or Company B. Company
C is the inefficient pro-
ducer in the group and, as such, operates at a disadvantage.
When there is enough busi-
ness for everyone, Company C will earn a profit, but will most
likely earn less than the
others. When business conditions are poor, Company C will be
more vulnerable to losses.
Price Policy
One of the ways to improve profit is to get more sales volume;
to stimulate sales volume,
management may decide to reduce prices. Bear in mind,
however, that if demand for the
product is inelastic or if competitors also reduce prices, volume
may not increase at all.
Moreover, even if the price reduction results in an increase in
sales volume, the increase
32. may not be enough to overcome the handicap of selling at a
lower price. This point is
often overlooked by optimistic managers who believe that a
small increase in volume can
compensate for a slight decrease in price.
Units of Product (in Thousands)
D
o
lla
rs
(
in
T
h
o
u
sa
n
d
s)
20 40 60 80 100
100
200
300
400
33. $500
Fixed cost line
Company B, total cost line
Company A, total cost line
Company C, total cost line
Total revenue line
eps81189_10_c10.indd 221 12/20/13 9:45 AM
CHAPTER 10Section 10.4 Analysis of Changes in CVP
Variables
Price cuts, like increases in unit variable costs, decrease the
contribution margin. On a unit
basis, price decreases may appear to be insignificant, but when
the unit differential is mul-
tiplied by thousands of units, the total effect may be
tremendous. Many more units may
need to be sold to make up for the difference. Company A, for
example, hopes to increase
profit by stimulating sales volume; to do so, it plans to reduce
the unit price by 10%. The
following tabulation portrays its present and contemplated
situations:
Present
Situation
34. Contemplated
Situation
Selling price $5.00 $4.50
Variable cost 2.50 2.50
Contribution margin $2.50 $ 2.00
Contribution margin ratio 50% 44.4%
At present, one half of each revenue dollar can be applied to
fixed cost and profit. When
revenues are twice the fixed cost, Company A will break even.
Therefore, 60,000 units
yielding revenues of $300,000 must be sold if fixed cost is
$150,000. But when the price is
reduced, less than half of each dollar can be applied to fixed
cost and profit. To recover
$150,000 in fixed cost, unit sales must be 75,000 ($150,000
divided by the $2 contribution
margin per unit). Thus, to overcome the effect of a 10% price
cut, unit sales must increase
by 25%:
(75,000 2 60,000) 4 60,000 5 25% increase.
Similarly, revenue must increase to $337,500 (75,000 units 3
$4.50 per unit). This repre-
sents a 12.5% increase, as follows:
($337,500 2 $300,000) 4 $300,000 5 12.5% increase.
Not only must total revenue be higher, but with a lower price,
more units must also
be sold to obtain that revenue. A break-even chart showing
35. these changes appears in
Figure 10.6.
eps81189_10_c10.indd 222 12/20/13 9:45 AM
CHAPTER 10Section 10.4 Analysis of Changes in CVP
Variables
Figure 10.6: Effects of price reduction
The present pretax income of $100,000 can still be earned if
125,000 units are sold. This is
obtained using formula (5) of Figure 10.1:
($150,000 1 $100,000) 4 $2 5 125,000 units.
Fixed Costs
A change in fixed cost has no effect on the contribution margin.
Increases in fixed cost are
recovered when the contribution margin from additional units
sold is equal to the increase
in fixed cost. Presuming that the contribution margin per unit
remains unchanged, the fol-
lowing general relationship holds:
(Contribution margin per unit 3 Change in sales volume) 2
Change in fixed cost 5
Change in net income.
Suppose Enoch Goodfriend estimates that, if he spends an
additional $30,000 on advertis-
ing, he should be able to sell an additional 2,500 back braces.
The above equation reveals
36. that profits would decrease by $5,000 or [($10 3 2,500) 2
$30,000].
Because fixed cost is not part of the contribution margin
computation, the slope of the
total cost line on a break-even chart is unaffected by changes in
fixed cost. The new total
cost line is drawn parallel to the original line, and the vertical
distance between the two
lines, at any point, is equal to the increase or the decrease in
fixed cost.
Units of Product (in Thousands)
D
o
lla
rs
(
in
T
h
o
u
sa
n
d
s)
Fixed cost line
Total revenue line,
38. st
line
eps81189_10_c10.indd 223 12/20/13 9:45 AM
CHAPTER 10Section 10.5 Measures of Relationship Between
Operating Levels and Break-Even Points
The break-even chart in Figure 10.7 shows the results of an
increase in fixed cost from
$100,000 to $130,000 at Felsen Medical Supplies. Under the
new fixed cost structure, the
total cost line shifts upward, and, at any point, the new line is
$30,000 higher than it was
originally. To break even or maintain the same profit as before,
Felsen Medical Supplies
must sell 3,000 more back braces.
Figure 10.7: Effects of an increase in fixed cost
Decreases in fixed cost would cause the total cost line to shift
downward. The total con-
tribution margin can decline by the amount of the decrease in
fixed cost without affecting
profit. The lower sales volume now needed to maintain the same
profit can be calculated
by dividing the unit contribution margin into the decrease in
fixed cost.
Ethical Considerations When Changing CVP Variables
Managers are often under pressure to reduce costs—both
variable and fixed costs. Many
companies have downsized in recent years by eliminating jobs
39. and even closing plants.
Managers must be careful not to cut costs in an unethical
manner. Changing a price can
also involve ethical issues. For instance, immediately after a
hurricane hit southern Flor-
ida several years ago, some sellers of building supplies were
accused of “price gouging.”
10.5 Measures of Relationship Between Operating Levels and
Break-Even Points
Companies want to know where they are with respect to the
break-even point. If they are operating around the break-even
point, management may be more conservative
in its approach to implementing changes and mapping out new
strategies. On the other
hand, if they are operating well away from the break-even point,
management will be
Units of Product (in Thousands)
D
o
lla
rs
(
in
T
h
o
u
sa
40. n
d
s)
Fixed cost line, $130,000
Fixed cost line, $100,000
Total cost line,
fixed cost $130,000
100
200
300
400
$500
5 10 15 20 25 30
Tot
al c
ost
lin
e, f
ixe
d c
ost
$1
00,
41. 000
Total revenue line
eps81189_10_c10.indd 224 12/20/13 9:45 AM
CHAPTER 10Section 10.5 Measures of Relationship Between
Operating Levels and Break-Even Points
more aggressive because the downside risk is not as great. Two
measures that relate to
this distance between a break-even point and the current or
planned operating volume are
operating leverage and margin of safety. These measures are the
subject of the following
sections.
Operating Leverage
Operating leverage measures the effect that a percentage change
in sales revenue has on
pretax profit. It is a principle by which management in a high
fixed cost industry with a
relatively high contribution margin ratio (low variable costs
relative to sales revenue) can
increase profits substantially with a small increase in sales
volume. We typically call this
measure the operating leverage factor or the degree of operating
leverage, and it is com-
puted as follows:
Contribution margin
Net income before taxes
5 Operating leverage factor.
42. As profit moves closer to zero, the closer the company is to the
break-even point. This will
yield a high operating leverage factor. As sales volume
increases, the contribution margin
and pretax profit both increase; consequently, the operating
leverage factor becomes pro-
gressively smaller. Hence, the operating leverage factor is
related to the distance between
the break-even point and a current or expected sales volume.
With an increase in sales
volume, profits will increase by the percentage increase in sales
volume multiplied by the
operating leverage factor.
Suppose Felsen Medical Supplies is currently selling 15,000
back braces. With its unit
contribution margin of $10 and fixed costs of $100,000, its
operating leverage factor is 3,
computed as follows:
115,0002 1102
115,0002 1102 2 100,000 5
150,000
50,000
5 3.
At a sales volume of 15,000, if sales volume can be increased
by an additional 10%, profit
can be increased by 30%:
Percentage increase in sales volume
10
43. 3
Operating leverage factor
3
5
Percentage increase inpretax profit
30%
.
A 10% increase in sales volume will increase sales from 15,000
units to 16,500 units. Oper-
ating leverage suggests that the pretax profit should be $65,000
($50,000 3 1.3). Indeed,
when we deduct the $100,000 fixed cost from the new
contribution margin of $165,000
(16,500 3 $10), we obtain a pretax profit of $65,000.
eps81189_10_c10.indd 225 12/20/13 9:45 AM
CHAPTER 10Section 10.6 The Sales Mix
A company with high fixed costs will have to sell in large
volume to recover the fixed
costs. However, if the company also has a high contribution
margin ratio, it will move into
higher profits very quickly after the break-even volume is
attained. Hence, a fairly small
percentage increase in sales volume (computed on a base that is
already fairly large) will
increase profits rapidly.
Margin of Safety
44. The margin of safety is the excess of actual (or expected) sales
over sales at the break-even
point. The excess may also be computed as a percentage of
actual (or expected) sales. The
margin of safety, expressed either in dollars or as a percentage,
shows how much sales
volume can be reduced without sustaining losses. The formulas
for calculating margin of
safety are:
Margin of safety in dollars 5 Actual (or expected) sales 2
Break-even sales
Margin of safety in percentage form 5
Margin of safety in dollars
Actual 1or expected2 sales .
For our purposes, margin of safety is the percentage form.
Therefore, unless otherwise
specified, a reference to margin of safety will mean a
percentage.
Recall that the break-even sales level for Felsen Medical
Supplies was $250,000. At an
actual sales level of 15,000 back braces, its safety margin is
one-third, calculated as follows:
115,0002 1$252 2 $250,000
115,0002 1$252 5
$125,000
$375,000
5 33% or 1/3.
Note that one-third is the reciprocal of the operating leverage
45. factor computed earlier for
Felsen Medical Supplies. The margin of safety will always be
the reciprocal of the operat-
ing leverage factor.
10.6 The Sales Mix
When selling more than one product line, the relative proportion
of each product line to the total sales is called the sales mix.
With each product line having a different
contribution margin, management will try to maximize the sales
of the product lines with
higher contribution margins. However, a sales mix results
because limits on either sales or
production of any given product line may exist.
When products have their own individual production facilities
and fixed costs are specifi-
cally identified with the product line, cost-volume-profit
analysis is performed for each
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CHAPTER 10Section 10.6 The Sales Mix
product line. However, in many cases, product lines share
facilities, and the fixed costs
relate to many products. For such a situation, cost-volume-
profit analysis requires aver-
aging of data by using the sales mix percentages as weights.
Consequently, a break-even
point can be computed for any assumed mix of sales, and a
break-even chart or P/V graph
can be constructed for any sales mix.
46. Let’s consider cost-volume-profit analysis with a sales mix.
Suppose that Bijan’s Discount
Eyeglasses offers three eyeglass options: regular, sunglasses,
and bifocals. Assume that
the following budget is prepared for these three product lines.
Fixed costs are budgeted at
$500,000 for the period:
Contribution Margin
Product
Lines
Sales
Volume
(Units)
Price per
Unit
Unit Vari-
able Cost Dollars Ratio
Regular 20,000 $50 $20 $30 60%
Sunglasses 10,000 50 30 20 40%
Bifocals 10,000 50 40 10 20%
Total 40,000
The break-even point in units is computed using a weighted
average contribution margin
as follows:
47. Product Lines
Sales Mix
Proportions
Contribution
Margin per
Unit
Weighted
Contribution
Margin
Regular 50% 3 $30 5 $15.00
Sunglasses 25% 3 20 5 5.00
Bifocals 25% 3 10 5 2.50
Weighted contri-
bution margin
$22.50
Fixed cost
Weighted contribution margin
5
$500,000
$22.50
5 22,222 total units.
The detailed composition of this overall break-even point of
48. 22,222 units (and contribu-
tion margins at this level) is as follows:
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CHAPTER 10Section 10.6 The Sales Mix
Product
Lines
Sales Mix
Proportions Total Units
No. of
Units
Margin per
Unit
Contribution
Margin
Regular 50% 3 22,222 5 11,111 3 $30 5 $333,330
Sunglasses 25% 3 22,222 5 5,556 3 20 5 111,120
Bifocals 25% 3 22,222 5 5,556 3 10 5 55,560
Break-even
contribu-
tion
margin*
$500,010
49. * Approximately equal to fixed cost of $500,000. Difference is
due to rounding.
To obtain the sales revenue at the break-even point directly, we
calculate it as we did ear-
lier in the chapter. Simply divide the weighted contribution
margin ratio into the fixed
costs. Individual product line revenues will be total revenues
multiplied by individual
sales mix proportions. Continuing with our illustration, we
have:
Product Lines
Regular
Sun-
glasses Bifocals Total
Units (number of glasses) 20,000 10,000 10,000
40,000
Revenues $1,000,000 $500,000 $500,000 $2,000,000
Variable cost 400,000 300,000 400,000 1,100,000
Contribution margin $ 600,000 $200,000 $100,000 $ 900,000
Less fixed cost 500,000
Budgeted net income before taxes $ 400,000
As shown in the following calculations, the weighted
contribution margin ratio is 45%,
and revenue at the break-even point is $1,111,111.
50. Total contribution margin
Total revenues
5
$900,000
$2,000,000
5 45%
Fixed cost
Weighted contribution margin ratio
5
$500,000
45%
5 $1,111,111
Another way to obtain the number of eyeglasses needed to break
even is by using an
equations approach. Let r represent the number of regular
glasses, s represent the number
of sunglasses, and b represent the number of bifocals. The
following equation is an exten-
sion of the basic CVP equation to this scenario with multiple
products:
$30r 1 $20s 1 $10b 5 $500,000.
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CHAPTER 10Section 10.6 The Sales Mix
51. Next, we need to write the equation in terms of one variable
rather than three by using the
information from the sales mix proportions. Since there are half
as many sunglasses and
bifocals sold, we can rewrite the equation as follows:
$30d 1 $20(0.5d) 1 $10(0.5d) 5 $500,000.
Solving this equation, we obtain d 5 11,111, and therefore, s 5 b
5 0.5(11,111) 5 5,556.
These are the same numbers of eyeglasses we derived earlier.
If the actual sales mix changes from the budgeted sales mix, the
break-even point and
other factors of cost-volume-profit analysis may change.
Suppose that Bijan’s Discount
Eyeglasses actually operated at the budgeted capacity with fixed
costs of $500,000. The
unit selling prices and variable costs were also in agreement
with the budget. Yet, with the
same volume of 40,000 units and total revenue of $2,000,000,
the pretax profit was consid-
erably lower than anticipated. The difference was due to a
changed sales mix. Assume the
following actual results:
Product Lines
Sale Volume
(Units)
Unit
Contribution
Margin
52. Total
Contribution
Margin Revenue
Regular 5,000 $30 $150,000 $ 250,000
Sunglasses 20,000 20 400,000 1,000,000
Bifocals 15,000 10 150,000 750,000
Total 40,000 $700,000 $2,000,000
Less fixed cost (500,000)
Actual net
income after taxes
$200,000
Instead of earning $400,000 before taxes, the company earned
only $200,000. Sales of sun-
glasses and bifocals, the less profitable products, were much
better than expected. At the
same time, sales of the best product line, regular, were less than
expected. As a result, the
total contribution margin was less than budgeted, so net income
before taxes was also less
than budgeted.
One way to encourage the sales force to sell more of the high
contribution margin lines is
to compute sales commissions on the contribution margin rather
than on sales revenue. If
sales commissions are based on sales revenue, a sales force may
sell a high volume of less
53. profitable product lines and still earn a satisfactory commission.
But if sales commissions
are related to contribution margin, the sales force is encouraged
to strive for greater sales
of more profitable products and, in doing so, will help to
improve total company profits.
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CHAPTER 10Section 10.7 Cost Estimation
10.7 Cost Estimation
Cost estimation is the process of determining a cost relationship
with activity for an individual cost item or grouping of costs.
We typically express this relationship as
an equation that reflects the cost behavior within the relevant
range. In Chapter 9, we
referred to this equation as a cost function: a 1 b(X). The
dependent variable (Y) of the
equation is what we want to predict (i.e., costs, in our case).
The independent variable
(X) (i.e., the activity) is used to predict the dependent variable.
The cost function can be
written as follows:
Y 5 a 1 b(X).
This equation states that Y, the total cost, is equal to a value a
plus a factor of variability
applied to the activity level X. The value a represents the fixed
cost. The factor b represents
the change in Y in relation to the change in X (i.e., the variable
cost per unit of activity).
54. Although a number of techniques exist for estimating a cost-to-
activity relationship, we
will discuss two techniques: (1) account analysis and (2) high-
low method.
Account Analysis
In account analysis, accountants estimate variable and fixed
cost behaviors of a particu-
lar cost by evaluating information from two sources. First, the
accountant reviews and
interprets managerial policies with respect to the cost. Second,
the accountant inspects the
historical activity of the cost. All cost accounts are classified as
fixed or variable. If a cost
shows semivariable or semifixed cost behavior, the analyst
either (1) makes a subjective
estimate of the variable and fixed portions of the cost or (2)
classifies the account accord-
ing to the preponderant cost behavior. Unit variable costs are
estimated by dividing total
variable costs by the quantity of the cost driver.
As an example, suppose for cost control purposes the managing
partner of Azran &
Associates, a medical equipment delivery company, wishes to
estimate the drivers’ truck
expenses as a function of miles driven. Costs for the past
quarter, during which 58,000
miles were driven, are classified as follows:
Item Cost Classification
Fuel $ 3,200 Variable
Depreciation 11,200 Fixed
55. Insurance 3,900 Fixed
Maintenance 1,800 Variable
Parking 2,100 Fixed
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CHAPTER 10Section 10.7 Cost Estimation
The fixed costs total $17,200, while the variable cost per mile is
8.62 cents [($3,200 1 $1,800)
4 58,000]. Hence, the cost function would be expressed as:
Y 5 $17,200 1 $.0862 (X).
The managing partner believes that costs should be stable for
the coming quarter for which
the brokers’ auto travel budget would be 65,000 miles.
Accordingly, the truck expenses
should total $22,803 [$17,200 1 ($.0862 3 65,000)]. The
managing partner intends to inves-
tigate any significant deviation from this total cost.
Account analysis is fairly accurate for determining cost
behavior in many cases. Vendor
invoices, for instance, show that direct materials have a variable
cost behavior; leasing
costs are fixed. A telephone bill is a semivariable cost. One
portion is fixed for the mini-
mum monthly charge, and the remainder may be variable with
usage.
56. Account analysis has limited data requirements and is simple to
implement. The judgment
necessary to make the method work comes from experienced
managers and accountants
who are familiar with the operations and management policies.
Because operating results
are required for only one period, this method is particularly
useful for new products or
situations involving rapid changes in products or technologies.
The two primary disadvantages of this method are its lack of a
range of observations and
its subjectivity. Using judgment generates two potential issues:
(1) Different analysts may
develop different cost estimates from the same data, and (2) the
results of analysis may
have significant financial consequences for the analyst;
therefore, the analyst will likely
show self-serving estimates. Another potential weakness in the
method is that data used
in the analysis may reflect unusual circumstances or inefficient
operations, as is likely to
occur with new products. These factors then become
incorporated in the subsequent cost
estimates. This method is also dependent on the quality of the
detailed chart of accounts
and transaction coding.
High-Low Method
Another method for obtaining rough approximations to fixed
and variable costs is the
high-low method. The first step is to list the observed costs for
various levels of activity
from the highest level in the range to the lowest. This method
chooses observations asso-
ciated with the highest and the lowest activity levels, not the
57. highest and lowest costs.
The second step is to divide the difference in activity between
the highest and the lowest
levels into the difference in cost for the corresponding activity
levels in order to arrive at
the variable cost rate. As an example, suppose a manager for
Edlin’s Home Nurse Services
wishes to estimate supplies costs as input for bidding on jobs.
Its costs of supplies for sev-
eral recent jobs, along with the hours of activity, are as follows:
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CHAPTER 10Section 10.7 Cost Estimation
Hours of
Activity
Supplies
Cost
High 95 $397
90 377
87 365
82 345
78 329
75 317
66 281
58. 58 239
Low 50 217
The difference in hours is 45 (95 2 50), and the difference in
cost is $180 ($397 2 $217). The
variable supplies cost per hour is computed below:
Cost at highest activity 2 Cost at lowest activity
Highest activity 2 Lowest activity
5
$180
45
5
$4 Variable cost per hour.
The fixed cost is estimated by using the total cost at either the
highest or lowest level and
subtracting the estimated total variable cost for that level:
Total fixed cost 5
Total cost at highest activity 2 (Variable cost per unit 3 Highest
activity)
or
Total fixed cost 5
Total cost at lowest activity 2 (Variable cost per unit 3 Lowest
activity).
If the variable cost is calculated correctly, the fixed cost will be
the same at both the high
59. and low points. For the above illustration, the calculation of
total fixed cost is as follows:
Total fixed cost 5 $397 2 ($4 Variable cost per hour 3 95 hours)
5 $397 2 $380
5 $17
or
Total fixed cost 5 $217 2 ($4 Variable cost per hour 3 50 hours)
5 $217 2 $200
5 $17.
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CHAPTER 10Section 10.7 Cost Estimation
The cost function that results from the high-low method is:
Y 5 $17 1 $4 (X).
If Edlin’s manager forecasts that a particular job would require
75 hours, then the bid
would include an estimate of $317 for supplies cost.
Occasionally, either the highest or lowest activity or the cost
associated with one of those
points is obviously an outlier to the remaining data. When this
happens, use the next
highest or lowest observation that appears to align better with
60. the data. Sometimes only
two data points are available, so, in effect, these are used as the
high and low points.
The high-low method is simple and can be used in a multitude
of situations. Its primary
disadvantage is that two points from all of the observations will
only produce reliable
estimates of fixed and variable cost behavior if the extreme
points are representative of the
points in between. Otherwise, distorted results may occur.
If enough quality data are available, statistical techniques can
provide more objective cost
estimates than we have discussed thus far.
Ethical Considerations in Estimating Costs
All cost estimation methods involve some degree of
subjectivity. With account analy-
sis, managers judgmentally classify costs. With the high-low
method, one must decide
whether the high and low points are representative data points.
The subjectivity inherent in cost estimation can lead to biased
cost estimates. Indeed, in
certain instances, incentives exist for managers to bias cost
estimates. In developing bud-
gets or cost-based prices, managers may want to overestimate
costs. In developing pro-
posals for projects or programs, incentives may exist to
underestimate costs. Managers
must take care not to use subjectivity as an opportunity to act
unethically.
Other Issues for Cost Estimation
An overriding concern with any cost estimation technique is
61. that of extrapolating beyond
the relevant range of activity. Cost behavior may change
drastically once the activity falls
below or rises above the relevant range. For instance, assume
the relevant range of activity
for Edlin’s Home Nurse Services is 40 to 100 hours. We wish to
predict the supplies cost
for the coming time period, during which 130 hours of activity
are expected. Since this
level is above the relevant range, the cost function we derived
earlier may not be appro-
priate to use.
We have presumed that our cost data are suitably represented by
a straight line (linear)
and not by a curve. In some situations, the linear relationship
may not be appropriate.
Costs, for example, may not increase at a constant rate but
instead may change at an
increasing or a decreasing rate as the measure of activity
increases. Hence, the cost data
would be represented by a curve rather than a straight line. The
shape of the line or curve
can be revealed by plotting a sufficient amount of data for
various volumes of activity.
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CHAPTER 10Section 10.7 Cost Estimation
Case Study: Mendel Medical Supplies Company
Mendel Medical Supplies Company produces four basic medical
disposable paper product lines at
62. one of its plants: headrest paper sheets, headrest paper rolls,
exam table rolls, and face cradle cov-
ers. Materials and operations vary according to the line of
product. The market has been relatively
good. The demand for its products has been growing steadily,
and, with the implementation of the
Affordable Healthcare Act, demand could increase dramatically.
The plant superintendent, Marlene Herbert, while pleased with
the prospects for increased sales,
is concerned about costs:
“Our big problem now is the high fixed cost of production. As
we have automated our operation,
we have experienced increases in fixed overhead and even
variable overhead. And, we will have
to add more equipment since it appears that we need even more
plant capacity. We are operating
over our normal capacity as it is.
“The headrest paper sheets market concerns me. We may have
to discontinue that market. Our
specialty printing is driving up the variable overhead to the
point where we may not find it profit-
able to continue with that line at all.”
Cost and price data for the next fiscal quarter are as follows:
Exam
Table Rolls
Headrest
Paper
Rolls
Headrest
63. Paper
Sheets
Face
Cradle
Covers
Estimated sales
volume in units
30,000 120,000 45,000 80,000
Selling prices $14.00 $7.00 $12.00 $8.50
Materials costs $ 6.00 $4.50 $ 3.60 $2.50
Variable overhead includes the cost of hourly labor and the
variable cost of equipment operation.
The fixed plant overhead is estimated at $420,000 for the
quarter. Direct labor, to a large extent,
is salaried; the cost is included as a part of fixed plant
overhead. The superintendent’s concern
about the eventual need for more capacity is based on increases
in production that may reach and
exceed the practical capacity of 60,000 machine hours.
In addition to the fixed plant overhead, the plant incurs fixed
selling and administrative expenses
per quarter of $118,000.
“I share your concern about increasing fixed costs,” the
supervisor of plant operations replies.
“We are still operating with about the same number of people
we had when we didn’t have this
sophisticated equipment. In reviewing our needs and costs, it
appears to me that we could cut
64. fixed plant overhead to $378,000 a quarter without doing any
violence to our operation. This
would be a big help.”
(continued)
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CHAPTER 10Key Terms
account analysis A method of estimat-
ing fixed and variable costs by classifying
accounts into one of these two categories.
break-even analysis An approach that
examines the interaction of factors that
influence the level of profits.
break-even chart A graph showing cost
and revenue functions together with a
break-even point.
break-even point The point where total
revenues equal total costs.
contribution margin ratio Contribution
margin divided by sales revenues.
Key Terms
Case Study: Mendel Medical Supplies Company (continued)
“You may be right,” Herbert responds. “We forget that we have
more productive power than we
65. once had, and we may as well take advantage of it. Suppose we
get some hard figures that show
where the cost reductions will be made.”
Data with respect to production per machine hour and the
variable cost per hour of producing
each of the products are given as follows:
Exam Table
Rolls
Headrest
Paper Rolls
Headrest
Paper
Sheets
Face Cradle
Covers
Units per hour 6 10 5 4
Variable overhead per hour $9.00 $6.00 $12.00 $8.00
“I hate to spoil things,” the vice president of purchasing
announces. “But the cost of our materials
for exam table rolls is now up to $7. Just got a call about that
this morning. Also, headrest paper
sheet materials will be up to $4 a unit.”
“On the bright side,” the vice president of sales reports, “we
have firm orders for 35,000 rolls of
exam table sheets, not 30,000 as we originally figured.”
Case Study Exercises
66. 1. From all original estimates given, prepare estimated
contribution margins by product
line for the next fiscal quarter. Also, show the contribution
margins per unit.
2. Prepare contribution margins as in part (1) with all revisions
included.
3. For the original estimates, compute each of the following:
a. break-even point for the given sales mix.
b. margin of safety for the estimated sales volume.
4. For the revised estimates, compute each of the following:
a. break-even point for the given sales mix.
b. margin of safety for the estimated sales volume.
5. Comment on Herbert’s concern about the variable cost of the
headrest paper sheets.
eps81189_10_c10.indd 235 12/20/13 9:45 AM
Review Questions CHAPTER 10
Review Questions
The following questions relate to several issues raised in the
chapter. Test your knowl-
edge of these issues by selecting the best answer. (The odd-
numbered answers appear in
the answer appendix.)
1. Identify the interrelated factors that are important to profit
planning.
67. 2. If the total fixed cost and the contribution margin per unit of
product are given,
explain how to compute the number of units that must be sold to
break even.
3. If the total fixed cost and the percentage of the contribution
margin to sales
revenue are given, explain how to compute the sales revenue at
the break-even
point.
4. Can two break-even points exist? If so, describe how the
revenue and cost lines
would be drawn on the break-even chart.
5. Is it possible to compute the number of units that must be
sold to earn a certain
profit after income tax? Explain.
6. What does the slope of the P/V graph represent?
7. Define “margin of safety.” How is a margin of safety related
to operating leverage?
8. Why is cost estimation so important?
9. Describe the two major steps involved in the account analysis
method of cost
estimation.
cost estimation Determining expected or
predicted costs.
cost-volume-profit analysis An approach
that examines the interaction of factors
that influence the level of profits.
68. dependent variable The item one is
attempting to estimate or predict from one
or more other variables.
high-low method An approach for esti-
mating costs that uses only two data
points.
independent variable The item that is
being used to predict or estimate another
item.
margin of safety The difference between
sales revenue and the break-even point.
operating leverage Using fixed costs to
obtain higher percentage changes in profits
as sales change.
profit-volume (P/V) graph A break-even
chart that uses profits for the vertical axis.
sales mix A combination of sales propor-
tions from the various products.
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CHAPTER 10Exercises
10. Describe the steps for preparing an estimate of fixed and
variable costs using the
scattergraph and visual fit method.
69. 11. Describe the high-low method of cost estimation.
Exercises
1. Break-even point and changes in fixed costs. Spira Medical
Supplies sells a set
of grab bars for bathrooms for $50. The variable costs are 60%
of revenue. The
fixed costs amounted to $120,000 per year. Last year, the store
sold 7,500 of these
grab bars. During the current year, Spira plans to sell 8,700 sets
of grab bars, and
fixed costs will increase by $36,000.
a. What was the break-even point last year?
b. This year, the break-even point will increase by how many
grab bars?
2. Break-even analysis and cost changes. At Houston Medical
Supplies, the follow-
ing costs are known for 10,000 units:
Selling price $13 per unit
Variable costs 5 per unit
Fixed costs 6 per unit
The operations manager, Wendy Solon, is thinking of buying
new equipment to
automate certain operations. The new equipment will add
$20,000 to fixed costs
and cut variable costs by $2 per unit.
a. What is the current break-even point in units?
b. By what number of units will the break-even point change,
70. and in what direc-
tion? Why would you or would you not advise the manager to
add this new
equipment?
3. Changes to break-even variables. Brasch Eyeglass Company
sees its profit pic-
ture changing. Variable cost will increase from $4 per unit to
$4.50. Competitive
pressures will allow prices to increase only by $0.30 per unit to
$8. Fixed costs
($200,000) and sales volume (60,000 units) likely will remain
constant.
a. What will likely happen to the break-even point?
b. To maintain the same profit level, fixed costs will have to
change to what
amount?
c. To maintain the same profit level, volume will have to
change to what
amount?
4. Break-even point and variable cost increase. Lydia Perl, the
owner of Schloss
Medical Supplies in Frankfurt, Germany, is concerned about
increased costs to
purchase a hardware item that is sold by the company through
one of its retail
outlets. This year the variable cost per unit of product was €28.
Next year, the
eps81189_10_c10.indd 237 12/20/13 9:45 AM
71. Exercises CHAPTER 10
variable cost is expected to increase to €32 per unit. The selling
price per unit,
however, cannot be increased and will remain at €39 per unit.
The fixed costs
amount to €90,000.
a. What was the break-even point in units of product this year?
b. What was the break-even point in revenues for this year?
c. How many units of product must be sold next year to break
even?
d. How much revenue will generate break-even volume for next
year?
5. Effects of changes in volume and costs. Marnie’s Discount
Eyeglasses sells
glasses that have a contribution margin ratio of 35% of
$440,000 annual sales
(40,000 units). Annual fixed expenses are $95,000.
a. Calculate the change in net income if sales were to increase
by 850 units.
b. The store manager, Laura Romain, believes that if the
advertising budget were
increased by $18,000, annual sales would increase by $75,000.
Calculate the
additional net income (or loss) if the advertising budget is
increased.
c. Laura Romain believes that the present selling price should
be cut by 15% and
the advertising budget should be raised by $12,000. She predicts
72. that these
changes would boost unit sales by 30%. Calculate the predicted
additional net
income (or loss) if these changes are implemented.
6. Break-even point and profits. Sheila Hershey has noticed that
a demand for
basic wheelchairs is increasing. Medical supply outlets are
charging from $400
to $600 for a wheelchair. Sheila believes that she can
manufacture and sell a
dependable wheelchair that will serve the purpose for $210. The
cost per wheel-
chair of materials, labor, and variable overhead is estimated at
$110. The fixed
costs consisting of rent, insurance, taxes, and depreciation are
estimated at
$25,000 for the year. She already has orders for 180
wheelchairs and has estab-
lished contacts that should result in the sale of 150 additional
wheelchairs.
a. How many wheelchairs must Sheila make and sell to break
even?
b. How much profit can be made from the expected production
and sale of 330
wheelchairs?
c. How many wheelchairs are needed for a profit objective of
$11,000?
7. Target profit and taxes. Fiszon, Inc. had the following results
for October:
Fixed Variable Total
73. Sales ($200 per unit) $600,000
Cost of sales $180,000 $360,000 (540,000)
Net income before taxes $ 60,000 Taxes (40%) $ 24,000
Net income after taxes $ 36,000
a. For net income to be $60,000 after taxes in November, what
will Fiszon’s sales
in units need to be?
eps81189_10_c10.indd 238 12/20/13 9:45 AM
CHAPTER 10Problems
8. Multiple product analysis. The Lane Division of Stefan
Medical Products, Inc.
manufactures and sells two grades of grab bars. The
contribution margin bar of
Lite-Weight aluminum is $25, and the contribution margin per
roll of Heavy-
Duty stainless steel is $75. Last year, this division
manufactured and sold the
same amount of each grade of grab bar. The fixed costs were
$675,000, and the
profit before income taxes was $540,000.
During the current year, 14,000 rolls of Lite-Weight grab bars
were sold, and 6,000
rolls of Heavy-Duty grab bars were sold. The contribution
margin per roll for
each line remained the same; in addition, the fixed cost
remained the same.
74. a. How many bars of each grade of grab bar were sold last
year?
b. Assuming the same sales mix experienced in the current
year, compute the
number of units of each grade of grab bar that should have been
sold during
the current year to earn the $540,000 profit that was earned last
year.
9. Cost segregation by high-low method. Betty Grus provides
nursing services in
her area. She uses a motor home for transportation and lodging.
She recognizes
that travel costs with the motor home are relatively high and
would like to esti-
mate costs so that she can decide how far she can travel and still
operate at a profit.
Records from one round trip of 150 miles show that the total
cost was $320. On
another round trip of 340 miles, the total cost was $472. A local
round trip of 50
miles cost $240. She is convinced that the time and cost for
trips of more than 300
miles are too high unless the sales potential is very high.
a. Calculate the variable cost per mile and the fixed cost per
trip by the high-low
method.
Problems
1. Costs estimations and break-even points. Rodbell Outpatient
Surgery Center
75. removes gallstones at the price of $30,000. In 2013, the
company performed 145
surgeries at an average price of $30,000 per surgery. Variable
costs were $18,000
per surgery, and total fixed costs were $1,200,000.
In 2014, fixed costs are expected to increase to $1,350,000,
while variable costs
should decline to $16,000 per surgery due to a new source of
materials and sup-
plies. The company forecasts a 20% increase in number of
surgeries for 2014;
however, the average price charged to customers is not planned
to change.
The 2015 forecast is for 20 more surgeries than in 2014, and
fixed costs are expect-
ed to jump by $240,000 more than in 2014. The average price
and variable cost is
not expected to change from 2014.
Instructions
a. For 2013, calculate the number of surgeries needed to break
even.
b. For 2014, calculate the operating leverage factor.
c. Determine the expected amount of profit change from 2014
to 2015.
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Problems CHAPTER 10
2. CVP with changes in prices and costs. Data with respect to a
76. basic product line
sold by Carson Medical Supply Stores are as follows:
Selling price per unit $50
Cost per unit 30
Contribution margin per unit $20
The fixed costs for the year are $360,000. The income tax rate
is 40%.
Instructions
a. Determine the number of units that must be sold in order to
break even.
b. If a profit before income taxes of $270,000 is to be earned,
how many units of
product must be sold?
c. If a profit after income taxes of $180,000 is to be earned,
how many units of
product must be sold?
d. If the selling price per unit is reduced by 10%, how many
units must be sold to
earn a profit of $8 per unit before income taxes?
e. Assume that the selling price remains at $50. How many
units must be sold
to earn a profit of $8 per unit before income taxes if the
variable cost per unit
increases by 10%?
f. Why does a 10% decrease in the selling price have more
77. effect on the contribu-
tion margin than a 10% increase in the variable unit cost?
3. Break-even comparisons. Dan and Elaine Miller, owners of
Senior Day Care
want to know potential maximum profits and the break-even
occupancy for the
operation. Senior Day Care is a low-cost operation to attract
families who need
help with elderly relatives on low budgets. A study of costs
shows a difference
between summer and winter operations. Swimming pool
maintenance adds to
summer costs while utilities (heat and light) add to winter costs.
Variable costs
have been determined on the basis of cost per patient per day
and are as follows:
Cost per
Room
Laundry $1.90
Heat and light (summer) 1.10
Heat and light (winter) 2.20
Repairs 0.75
Supplies 1.60
Taxes and insurance 3.60
Maintenance 1.50
Pool maintenance (summer only) 0.60
78. eps81189_10_c10.indd 240 12/20/13 9:45 AM
CHAPTER 10Problems
Fixed costs per month have been estimated as follows:
Staffing $14,000
Management 17,000
Desk service 2,700
Repairs and maintenance 1,600
Taxes 1,430
Insurance 1,120
Heat and light 1,000
Depreciation—
building
26,000
Depreciation—
furnishings
12,500
Pool maintenance and
personnel (summer only)
79. 1,800
Senior Day Care can handle 300 patients and charges $40 per
room per day.
Summer is relatively short and is defined as June, July, and
August. All other
months are designated as winter months. A month consists of 30
days for
making calculations. Maximum capacity for a month would be
9,000 patient
days (300 patients 3 30 days).
Instructions
a. Compare the maximum operating net incomes that can be
expected for a sum-
mer month versus a winter month.
b. How do the break-even points (in terms of room days)
compare for summer
versus winter? Also, state the break-even points as percentages
of total capacity.
c. Based on signed contracts with ongoing patients and normal
expectations,
Senior Day Care plans for 5,000 patient days in August.
Determine the esti-
mated operating income for August. Also, determine the
percentage of capac-
ity expected for August.
4. CVP with a sales mix. Sharon Medical Supplies Show rents
four types of booths
to exhibitors, providing them with space, tables, chairs, and
some prefestival
publicity. Stan Harris, the show organizer, has indicated that the
80. booth rental fee
is three times the amount of variable costs associated with the
particular type of
booth. Harris expects that the show will incur fixed costs of
$9,200. The number
of booths expected to be rented this year, as well as the related
variable costs, are:
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Problems CHAPTER 10
Booth Size
Variable Cost per
Booth
Number of
Booths
8’ 3 10’ $25 15
10’ 3 12’ 28 10
10’ 3 15’ 30 20
15’ 3 15’ 35 5
Instructions
a. Assuming that booths are rented according to the expected
mix, determine the
number of each type of booth that needs to be rented for the
festival to break
81. even.
5. Account analysis. The following is a partial list of account
titles appearing in the
chart of accounts for Lee Caplan Medical Equipment:
a. Direct Materials
b. Supervisory Salaries—Factory
c. Heat, Light, and Power—Factory
d. Depreciation on the Building
e. Depreciation on Equipment and Machinery (units-of-
production method)
f. Janitorial Labor
g. Repair and Maintenance Supplies
h. Pension Costs (as a percentage of employee wages and
salaries)
i. FICA Tax Expense (employer’s share)
j. Insurance on Property
k. Sales Commission
l. Travel Expenses—Sales
m. Telephone Expenses—General and Administrative
n. Magazine Advertising
o. Bad Debt Expense
p. Photocopying Expense
q. Audit Fees
r. Dues and Subscriptions
s. Depreciation on Furniture and Fixtures (double-declining-
balance method)
t. Group Medical and Dental Insurance Expense
Instructions
a. Discuss each account title in terms of whether the account
represents a vari-
able, fixed, or semivariable cost.
82. b. For accounts designated as variable or semivariable,
indicate the most likely
cost driver with which the cost varies.
c. Explain the problems associated with using the account
analysis approach to
establish cost behavior patterns.
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CHAPTER 10Problems
6. High-low method. Kathleen Otwell, a medical insurance
claims adjuster for
Shoenfield Casualty Company, notes that the cost to process a
claim has both
fixed and variable components. She believes that she can
estimate costs more
accurately if she can separate the costs into their variable and
fixed components.
The monthly record of the number of claims and the costs for
the past year is as
follows:
Month
Number of
Claims Cost
January 120 $20,600
February 134 20,670
March 142 20,710
83. April 156 20,780
May 160 20,800
Month
Number of
Claims Cost
June 220 21,100
July 250 21,250
August 330 21,650
September 114 20,570
October 280 21,400
November 274 21,370
December 230 21,150
Instructions
a. Estimate the variable costs per claim and the fixed costs per
month by the
high-low method.
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eps81189_10_c10.indd 244 12/20/13 9:45 AM
84. Chapter 11
Product Costing: Attaching Costs
to Patient Services
Learning Objectives
• Understand why and how costs are attached to patient
services.
• Describe how direct materials, direct labor, and clinic/hospital
overhead are costed to
patient services.
• Explain why predetermined overhead rates are usually used for
costing.
• Identify the main differences among alternative measures for
the denominator in the
overhead rate.
• Explain why services should be costed for pricing purposes by
using an overhead rate
computed at normal volume levels.
• Describe how to allocate service center costs so that they can
be included in over-
head rates of operating departments.
Westend61/Getty Images
eps81189_11_c11.indd 245 1/2/14 10:39 AM
85. CHAPTER 11Section 11.1 Costing of Patient Services
Chapter Outline
Introduction
11.1 Costing of Patient Services
11.2 Costing of Direct Costs
Costing of Direct Materials
Costing of Direct Labor
11.3 Costing of Hospital/Clinic Overhead
Predetermined Overhead Rate
Multiple Overhead Rates
Alternative Concepts of Volume
11.4 Cost of Providing Services
Direct Method
Step (Sequential) Method
Treatment of Revenues
Allocation of Costs by Behavior
11.5 Ethical Issues For Cost Allocation
Introduction
Costs are used to accomplish an assortment of needs: to
evaluate the profitability of goods and services, to aid in pricing
and bidding decisions for negotiating contracts
with insurers, to plan and budget operations, to evaluate
performance, to control costs,
and to establish inventory values for the balance sheet and cost
of goods and services sold
for the income statement.
86. This chapter discusses accounting for costs and presents ways to
identify costs with prod-
ucts or services. Accounting for direct materials and direct
labor comes first. Then, account-
ing for clinic/hospital overhead covers simple to more complex
situations. Finally, we
discuss how service center costs, such as transportation or
laboratory costs, are included
in patient service costs.
11.1 Costing of Patient Services
Serving patient needs involves the use of resources. As
mentioned in Chapter 9, the costs of these resources are
typically classified as materials, labor, and overhead. The
costs are accumulated by jobs (patient care or procedure) or by
departments. Then they
are assigned to each unit of output (product, such as medical
equipment, or service, such
as nursing care or laboratory test) based on each unit’s use of
the resources. These rela-
tionships for assigning costs to products or services are
depicted in Figure 11.1.
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CHAPTER 11Section 11.2 Costing of Direct Costs
Figure 11.1: A view of cost linkage
The principles underlying product costing are applicable to
manufacturing companies
and service organizations. For example, a hospital may be
87. interested in determining the
cost of a specific medical treatment or the cost of outpatient
care. A medical supply store
may wish to know the costs associated with carrying and selling
a particular line of wheel-
chairs. A building contractor, on the other hand, will
accumulate costs by project. If a con-
tractor is constructing a hospital for a community, for instance,
the contractor will identify
and trace the costs to the hospital project. A university may be
interested in the estimation,
measurement, and control of a program to train nurses and
physicians. A museum may
want to determine the cost of a particular exhibit for a season.
Regardless of the type of organization, costs are identified as
direct costs when they can be
readily connected to a cost objective. Indirect costs, which
cannot as easily be connected
to an objective, must be allocated using some reasonable basis
for allocation. For example,
all patient care requires heat and light, but that would not be
billed per patient; instead it
would be an indirect cost.
In a medical setting, costs are allocated by patient or by
medication. A job would include
everything involved in an individual patient’s care. Some of
these costs can be allocated
directly, such as the costs for medications used, laboratory tests
done, and staff time (phy-
sicians, nurses, and others) that is tracked directly by patient.
Other costs will be overhead
costs, such as housekeeping, transportation, administrators, and
everything else that goes
into operating a hospital or clinic that cannot be identified as
88. direct patient care.
First, we take a look at costs that can be identified by patient.
Then we a look at indirect
costs that are allocated using a process called overhead costing.
11.2 Costing of Direct Costs
We now discuss how to determine the costs that are directly
traceable to patient care. These costs consist of direct materials
and direct labor.
Costing of Direct Materials
Materials include the medical supplies that have been purchased
for patient care and can
be allocated by patient. Many medical facilities today use a
system to scan a medication or
medical supply by bar code before providing care. That way,
each type of medical supply
can be directly allocated by patient. After a hospital stay, the
bill the patient receives can
have hundreds of these supplies listed. Direct materials are
those that are identified with
the treatment of a specific patient and are easily and
economically traced to the patient;
their costs represent a significant part of the total patient cost.
All other materials and
Outputs
(Products or Services)
Resources
(Costs)
Activities
(Departments or Jobs)
89. eps81189_11_c11.indd 247 1/2/14 10:40 AM
CHAPTER 11Section 11.2 Costing of Direct Costs
supplies that become part of patient care are called indirect
materials, which are part of
hospital/clinic overhead.
The costs associated with acquiring materials and having them
ready for patient care typi-
cally fall into four categories:
1. the acquisition cost purchase price of the materials;
2. in-transit charges, such as freight, insurance, storage,
customs and duty charges;
3. credits for trade discounts, cash discounts, and other
discounts and allowances;
and
4. the costs of purchasing, receiving, inspecting, and storing
activities.
Categories 1 through 3 are typically included in the cost of
materials, whether direct or
indirect materials. Category 4 is treated as hospital/clinic
overhead. We allocate those
costs to patient services with one of the several approaches that
will be discussed later in
the chapter.
Suppose that Julz Medical Clinic purchased medical supplies on
account for $75,000.
Upon receipt of the materials, we increase Medical Supplies and
Accounts Payable by
90. $75,000 as follows:
Medical Supplies Accounts Payable
$75,000 $75,000
Nurses requisition from the supply room the medical supplies
required for a specific
patient’s care. Thus, each requisition becomes the basis for
charging the cost of medi-
cal supplies to a specific patient. Assume that a month’s
requisitions at Julz Enterprises
show that direct materials costing $60,000 have been transferred
from the medical sup-
plies inventory to patient care. The total of $60,000 is moved
from Medical Supplies to
Patient Billing (or Accounts Receivable). The latter account is a
focal account for the track-
ing of costs to be billed to the patient or the insurance company.
The costs of the three
cost elements—direct materials, direct labor, and hospital/clinic
overhead—are funneled
through this account, as will be shown later. It is, therefore, the
control account for all
patient billing. The movement of medical supplies used in
production for the month is
shown as:
Medical Supplies Patient Billing
$75,000 $60,000 $60,000
Costing of Direct Labor
Labor is the total labor cost expended for the benefit of an
individual patient. Direct labor
can be specifically identified with an individual patient in an
91. economically feasible
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CHAPTER 11Section 11.3 Costing of Hospital/Clinic Overhead
manner. Indirect labor is not readily traced to an individual
patient, such as housekeep-
ing or nursing administrative time.
Labor-related costs include the wages and salaries of the
employees plus any additional
expenditures made by an employer on behalf of an employee.
These typically include
bonuses, overtime premiums (i.e., the additional wages for
overtime), shift differentials,
idle time, employer’s payroll taxes, and fringe benefits. These
additional expenditures are
usually treated as part of the hospital/clinic overhead costs.
Some of these expenditures
cannot easily be traced to individual patients. Others, such as
overtime premiums and
shift differentials, are treated as hospital/clinic overhead, so
those patients receiving care
during overtime hours or late shifts are not unfairly penalized.
Some medical facilities track nursing time by individual
patients. This automatically
generates a labor report. These reports show how much of the
nurses’ time and cost is
charged to each patient. For the sake of simplicity, we will
assume that all of Julz Medi-
cal Clinic’s labor is direct labor. Suppose that during one
month, the labor costs for Julz
92. Medical Clinic were $10,000 and the workers’ take-home pay
totaled $7,400. The resulting
transaction is shown:
Patient Billing Wages Payable
$60,000 $7,400
10,000
Other Labor-Related
Payables
$2,600
Other medical facilities don’t try to calculate these costs with
this much precision because
they don’t have an automated system to track nursing time, and
it would be too costly
to do it manually. Instead they may allocate nursing time per
patient per day based on
historical averages. For example, in an ICU unit more nursing
time per patient will be
allocated than in a lower-level-of-care floor. Check with your
medical facility to find out
how medical staff costs are allocated per patient.
11.3 Costing of Hospital/Clinic Overhead
Hospital/clinic overhead, unlike direct materials and direct
labor, cannot be measured directly as a cost of any particular
patient care. Overhead consists of a variety of
costs, such as indirect materials, indirect labor, administration,
insurance, depreciation,
utilities, repair, and maintenance—all of which are indirectly
related to patient services.
93. eps81189_11_c11.indd 249 1/2/14 10:40 AM
CHAPTER 11Section 11.3 Costing of Hospital/Clinic Overhead
The indirect nature of overhead costs with respect to patient
services creates difficulty in
identifying service costs for each patient. For our purposes at
this point, we take an over-
all, simplified approach to costing of hospital/clinic overhead to
patient services. This
is to convey the concepts involved. Later in the chapter, we
explain overhead costs by
employing departmental rates.
For the discussion that follows, hospital/clinic overhead is
attached to services by means
of a cost driver that links costs to patient services. The cost
driver chosen as a basis for
overhead allocation should be related logically to both the
overhead and the service. For
example, the operation of an MRI machine will include
overhead costs such as power cost,
lubrication, maintenance, repairs, depreciation, and other costs
closely related to machine
operation. The benefits received by the products can probably
be best measured against
the cost of the machine hours used in providing patient care.
Therefore, these overhead
costs should be allocated to the products on the basis of
machine hours used to provide
patient care. For other types of patient services whose
operations are more labor intensive
than capital intensive, direct labor cost or direct labor hours
94. may be more appropriate for
overhead allocation. The most common cost drivers chosen for
overhead allocation are
direct labor hours and direct labor cost.
The total cost driver activity for the hospital/clinic is divided
into the total overhead cost
to obtain an overhead rate. Services then are assigned overhead
cost by multiplying the
actual quantities of the activity by the rate calculated. Suppose
that Julz Medical Clinic
uses direct labor cost to allocate overhead. During the month in
the earlier example, for
which direct labor cost was $10,000, the total overhead for the
clinic was $15,000. Con-
sequently, the overhead rate would be 150% of direct labor cost.
During that month, the
direct labor cost incurred to treat patients amounted to $2,700.
Hence, $4,050 ($2,700 3 1.5)
of overhead cost would be allocated to each patient.
Predetermined Overhead Rate
Thus far, we have discussed actual costing, where the product
costs consist of actual direct
materials used, actual direct labor cost, and overhead allocation
based on total actual over-
head costs and total actual activity. Most companies, however,
use a normal cost system
or a standard cost system. The latter will be covered in Chapter
13. Normal costing differs
from actual costing in that overhead is allocated using a
predetermined overhead rate,
defined as:
Predetermined overhead rate 5
Budgeted hospital/clinic overhead 4 Budgeted cost driver
95. activity.
With normal costing, the applied overhead would be determined
by multiplying the pre-
determined overhead rate by the actual cost driver activity for
the patient care. Typically,
companies use a 1-year time horizon to calculate predetermined
overhead rates.
Two major reasons exist for the use of normal costing rather
than actual costing. The first
is the timing of overhead cost incurrence. For example, air
conditioning costs in the sum-
mer for many facilities in the Sunbelt tend to be higher than
heating costs are in the winter.
Should we allocate the higher air conditioning costs to patients
who were served during
the summer? The facilities and workers must be maintained
regardless of the weather.
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CHAPTER 11Section 11.3 Costing of Hospital/Clinic Overhead
In addition, discretionary costs may fluctuate widely from
month to month. For instance,
managers may decide to incur substantial maintenance costs
during some months and
very little during other months. Because of seasonal and
discretionary aspects of over-
head, a more stable overhead rate requires a longer time
horizon, such as 1 year.
The second reason for the use of normal costing is the potential
96. fluctuation in the activ-
ity represented by the cost driver. Most companies do not have
a constant level of activ-
ity every month. For example, employees take vacations during
the summer months, or
operations are scaled back to accommodate major repairs and
maintenance. Normal cost-
ing, by using a 1-year time horizon for the overhead rate,
averages costs over the units of
work regardless of when work is performed. Therefore, patients
are not penalized because
they are treated during a period of low volume.
Calculating an actual overhead rate using a 1-year time horizon,
prices, and other cost-
based decisions could not be done until the end of the year.
Clearly, medical facilities can-
not operate this way. The use of a predetermined overhead rate
allows costs of patient care
to be calculated throughout the year as necessary. Moreover, a
predetermined overhead
rate helps managers to prepare bids when negotiating contracts
with insurers or other
third-party payers.
To illustrate the application of overhead in a normal cost
system, suppose that, for 20X3,
Bodker Medical Clinic has budgeted $50,000 for fixed overhead
costs and $3 per direct
labor hour for variable overhead costs. This is its overhead cost
function. These budgeted
costs correspond to a budget activity of 10,000 direct labor
hours. The predetermined
overhead rate would be computed as:
[$50,000 1 $3(10,000)] 4 10,000 5 $8 per direct labor hour.
97. Assume there were 10,000 direct labor hours worked, at a rate
of $50 per hour, during
20X3. Assume also that $95,000 of direct materials was used.
During production, various
entries were made to cost the patient care. We could quite
literally add $8 to the patient bill
every time one more hour of direct labor is worked. In normal
accounting activity, these
transfers to the patient bill are done periodically, most likely on
a daily basis. If done in
aggregate, a summary transfer of all overhead applied to patient
services would show the
following:
Facility Overhead Patient Billing
$80,000 $ 95,000
100,000
80,000
Multiple Overhead Rates
Some reasonable, causal, or beneficial relationship should exist
among the costs accu-
mulated in facility overhead accounts, the cost driver selected,
and the services to which
the costs will be allocated. Simply stated: The activity (as
represented by the cost driver)
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CHAPTER 11Section 11.3 Costing of Hospital/Clinic Overhead
98. is the link between the output of services and facility overhead
spending. The implica-
tion is that more output requires more activity and, therefore,
more overhead spending.
For example, if a company uses direct labor hours as a cost
driver, facility overhead costs
should consist primarily or exclusively of costs that support
direct workers. Such costs
may include supervision and facilities for workplaces, as well
as travel, training, and
fringe benefits of workers.
In the examples up to this point in the chapter, we have assumed
that only one cost driver
is appropriate for the total facility overhead. However, diversity
of products and services
will often result in distorted cost allocations when only one cost
driver is used. The greater
the differences in services, the greater the diversity that exists
in the operations. The more
diverse the operations, the more likely it is that one cost driver
cannot assign costs to all
services fairly. In these situations, departmental overhead rates
will assign costs more
accurately to services than will one facility-wide overhead rate.
A facility-wide overhead
rate can only be justified for a clinic that specializes in one or
two types of patient care.
For example, the patient transportation department must have
the equipment for trans-
porting patients and the staff to make those transports. An
overhead allocation would be
developed for the depreciation of equipment, storage of
equipment, and the supervisory
99. staff. This would be very different from the radiology
department whose overhead would
include much more expensive equipment that would need to be
depreciated, technical
staff as well as medical staff that would not be easy to allocate
directly, supervisory staff,
utilities, and other costs. The overhead allocated for services
from this department would
likely be higher than the overhead calculated for patient
transportation.
When patients use the services of these two departments, patient
transportation overhead
may be allocated by patient transported, while radiology
overhead may be allocated by
test performed. For example, one patient could be sent to
radiology for numerous tests.
This could involve one patient transport and three possible
tests.
Alternative Concepts of Volume
When selecting the denominator for the overhead rate, volume
can be measured in one of
four ways:
1. ideal capacity;
2. practical capacity;
3. expected volume; or
4. normal volume.
Ideal capacity is the maximum amount of service that can be
rendered with available
facilities. This is often too perfect a goal to be realized and is
generally recognized to be
beyond realistic expectations. Certain interruptions and
inefficiencies in service are to
100. be expected.
Practical capacity is full utilization of facilities with allowance
made for normal interrup-
tions and inefficiencies. For example, service will be slowed or
stopped at times because
of breakdowns, shortages of labor and materials, or retooling.
These possibilities are con-
sidered in arriving at practical facility capacity.
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CHAPTER 11Section 11.4 Cost of Providing Services
Expected volume is the level of operation budgeted or estimated
for the current period.
This may be at or below practical capacity. It is the level at
which management expects to
operate during the next month or year.
Normal volume is generally a balance between practical
capacity and patient care demand
in the long run. Over a period of years, the peaks and valleys of
patient care demand are
leveled by averaging, and the average level of plant utilization
is considered to be normal
volume.
It may seem, at first, that overhead per unit should be calculated
at the expected level
of operation for the next year. Indeed, this is the practice of
most healthcare providers.
However, for service-pricing purposes, a better approach is to
use the normal volume.
101. Why should normal volume be used when you already know that
the company may be
operating below that level? After all, a rate computed at the
expected level of operation
will come closer to costing all of the overhead to the products,
and product cost will be
more in line with actual cost.
The problem with using an overhead rate based on expected,
rather than normal, volume
is illustrated by the following example. Assume that the normal
level of operation for
Cherrywood Medical Laboratory is 200,000 labor hours and that
100,000 items can be
analyzed in that time. The fixed overhead for the year is
budgeted at $500,000. The normal
fixed overhead per item is then $5, computed as:
$500,000/100,000 5 $5 Fixed overhead per item.
But management expects to operate at only 100,000 labor hours
next year and to analyze
50,000 items. An overhead rate at expected volume would be
$10 per item:
$500,000/50,000 5 $10 Fixed overhead per item.
If the lab plans to operate below normal volume, an overhead
rate computed at the
expected level of operations will result in more fixed overhead
being assigned to each
item. If prices are set by adding a markup to total cost, the cost
of operations will be higher
when fewer items are analyzed. Billing will not change because
that is determined by
negotiated contract rates.
102. For this reason, the objective is not necessarily to assign all
overhead costs to products.
The products should bear the normal overhead costs, and any
unabsorbed fixed overhead
should be recognized as a period expense. (Overabsorbed fixed
overhead would likewise
result in a reduction of period expenses.) Rather than allocating
unabsorbed fixed over-
head to products produced, this approach treats the costs of idle
capacity as the costs of
products the company did not produce.
11.4 Cost of Providing Services
A n entity that provides services instead of tangible products
may not operate with a formal cost accounting system that
traces costs to jobs. Instead, all service job costs
are treated as period costs and are often left in their original
cost categories such as sup-
plies expense, labor expense, and depreciation expense.
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CHAPTER 11Section 11.4 Cost of Providing Services
Nevertheless, costs will be used to measure performance by type
of service and by patient
groups. A rehabilitation facility, for example, provides an
exercise room for its patients.
The cost of supplies used exclusively for the exercise room,
such as rubbing lotions and
bandages, along with the salaries and wages of the room’s
employees, such as the man-