Managerial Accounting

​Pros and Cons of Break even point

​

​One of the main purposes for calculating break-even is to help the business to set selling price and to predict profitability.

​

​

​Limitations could include: it’s only a forecast or It assumes that all products that are made are also sold which is unrealistic in most circumstances.

FI:660

Explain the nature

of managerial accounting

Multiple Choice

Which of the following are variable costs?

• Property Taxes

• Rent

• Employee Bonues

​Break - even point formula

Multiple Choice

A business that does not reach break-even will

• go bankrupt
• have profit and loss
• lose money
• need to relocate

▪ Operating costs greatly influence

product’s final selling price.

� Total cost

▪ Operating costs greatly influence

business profits.

� Gross profit

� Break-even point

Operating Expenses, Selling Price, & Profit

OP:024 Explain the nature of overhead/operating costs

FI:658

Describe types of costs used

in managerial accounting

(e.g., direct cost, indirect cost,
sunk cost, differential cost, etc.)

Multiple Choice

What assumption does this statement say "Break even is 54 units"?

• if we sell 55 we aren't making a profit

• if we sell 54 we begin to make a profit

• if we sell 55 we begin to make a profit

• if we sell 54 we are not yet at break even point

Multiple Choice

Businesses calculate break-even in dollars so they know the

• amount of the business's after tax-earnings
• total dollar value of the stock on hand
• total dollar sales needed to reach break-even
• amount the business can spend on new purchases

Multiple Choice

Businesses calculate break-even in units so they know

• how much profit they will earn after they break even
• which products they should purchase for resale
• which costs are variable and which are fixed
• how many products they must sell to break even

Classifying Managerial Accounting Costs

▪ Behavior

▪ Function

▪ Relevance

▪ Traceability

▪ Controllability

FI:658 Describe types of costs used in managerial accounting

▪ Direct materials costs

▪ Direct labor costs

▪ Manufacturing/Production

overhead costs

Basic Manufacturing Costs

FI:658 Describe types of costs used in managerial accounting

▪ Product vs. period costs

▪ Selling vs. general administrative costs

▪ Direct vs. indirect costs

▪ Controllable vs. uncontrollable costs

▪ Avoidable vs. unavoidable costs

▪ Out-of-pocket vs. sunk costs

▪ Differential, incremental, opportunity,

and imputed costs

▪ Relevant vs. irrelevant costs

Common Managerial Accounting Costs

FI:658 Describe types of costs used in managerial accounting

Multiple Choice

Which of the following is a true statement regarding operating costs:

• They are fixed expenses

• They are not directly related to production.

• Only some businesses have them.

• They occur once or twice a year.

Multiple Choice

Which of the following is a true statement regarding operating costs:

• Businesses spend more on operating costs than production costs.

   

• Purchasing a piece of equipment is an operating cost.

•   They are usually divided into selling expenses and manufacturing expenses.

• Some may be considered either fixed or variable

Multiple Choice

A business determines how much it costs to make a product—and then adds a predetermined markup to set its selling price. This is an example of

•   economies of scale.

• cost-based pricing.

•   gross profit.

•   price-based costing.

Multiple Choice

A business has determined that customers are willing to pay $25 for its product. Managers attempt to make the product for $15, so the business can make a $10 profit. This is an example of

• gross profit.

•  

   

    cost-based pricing.

• economies of scale.

• price-based costing.

Multiple Choice

The revenue a company makes after subtracting the costs of the products it has sold is called

• depreciation.

   

•   commission.

• gross profit.

•   breakeven point.

Multiple Choice

An expense that can be directly tied to the production of goods or services.

• Indirect Costs

• Direct Costs

• Total Revenue

Multiple Choice

Sunk costs are...

• Costs that were part of a cruise ship that sunk

• Costs that will end in a product

• What a producer pays to supply a product to a market

• Costs that cannot be recovered

Multiple Choice

Marginal Cost is?

• The highest amount that customers will pay for a good

• The lowest amount that customers will pay for a good

• The cost of producing one additional good

• The cost of producing 2 additional goods

▪ Planning

▪ Performing

▪ Evaluating

▪ Communicating

How Cost Information Is Used

FI:658 Describe types of costs used in managerial accounting

FI:719

Discuss cost accounting systems

(e.g., job costing, process costing, standard costing,

activity-based costing [ABC].)

Purposes of Cost Accounting Systems

▪ Internal process tailored

to management

▪ Track production

activities and measure
cash flow

▪ Assess profitability and

enhance budgeting

▪ Fine-tune operations

FI:719 Discuss cost accounting systems

▪ Job order costing

▪ Process costing

▪ Standard costing

▪ Activity-based costing (ABC)

▪ Hybrid approach

Cost Accounting Systems

FI:719 Discuss cost accounting systems

Importance of Overhead Cost Allocation

FI:719 Discuss cost accounting systems

▪ Distribute indirect costs

to finished products

▪ Set reasonable prices

and enhance profitability

▪ Cut manufacturing costs and

improve efficiency

▪ Keep accurate financial records

▪ Manufacturing overhead and nonmanufacturing

(or administrative) overhead

▪ Calculate overhead rate using

cost drivers and cost pools

� e.g., direct labor hours, machine hours,

sales, orders completed, etc.

▪ Traditional method: single cost driver

▪ ABC method: multiple cost drivers

Overhead Cost Allocation Methods

FI:719 Discuss cost accounting systems

FI:726

Apply cost accounting techniques
(e.g., job costing, process costing,

standard costing, activity-based costing [ABC])

Cost Accounting Techniques

FI:726 Apply cost accounting techniques

▪ Internal process used by management

to make better financial decisions

▪ Measure, report, analyze

production costs

▪ Reduce these expenses to boost

efficiency and profitability

▪ Costs: direct, indirect, fixed,

variable, operating

Job Costing

▪ Track costs for individual

jobs/projects

� Step 1: Calculate direct material

� Step 2: Calculate direct labor

� Step 3: Determine overhead rate

� Step 4: Allocate overhead

� Step 5: Calculate job cost

FI:726 Apply cost accounting techniques

Process Costing

FI:726 Apply cost accounting techniques

▪ Record costs for each process

▪ Three main types: Standard cost,

FIFO, WAC

� Step 1: Analyze inventory

� Step 2: Convert inventory costs

� Step 3: Calculate total costs

� Step 4: Calculate cost per unit

� Step 5: Assign costs to complete

and in-process units

Standard Costing

FI:726 Apply cost accounting techniques

▪ Apply standard, estimated costs

▪ Variances: favorable/unfavorable,

rate/volume

� Step 1: Create standard cost

� Step 2: Establish standards

� Step 3: Determine actual costs

� Step 4: Compare actual costs

and standard costs

� Step 5: Determine causes

� Step 6: Dispose of variances

Activity-Based Costing (ABC)

FI:726 Apply cost accounting techniques

▪ Assign costs to specific cost

objects using activities

� Step 1: Identify activities and

assign costs

� Step 2: Divide into cost pools

� Step 3: Assign cost drivers

� Step 4: Calculate cost driver rate

� Step 5: Assign costs to products

FI:450

Maintain job order cost sheets

Importance of Job Order Cost Sheets

▪ Record and track all job cost information

▪ Compile, organize, and assign costs to specific job

▪ Track performance, improve efficiency,

compare profitability among jobs

▪ Serve as supplementary ledger,

or record, to WIP account

▪ Job order costing: manufacturing

companies, law firms, hospitals,
accounting businesses

FI:450 Maintain job order cost sheets

Costs Recorded on Job Order Cost Sheets

▪ Direct materials costs

� Authorized by materials

requisition forms

▪ Direct labor costs

� Recorded on time tickets

▪ Manufacturing overhead costs

� All indirect costs, calculate

predetermined overhead rate

▪ Cost sheets also include:

� Job number/name
� Start/Completion date
� Quantity of units/items completed

FI:450 Maintain job order cost sheets

Determining the Cost of a Job

▪ Use source documents for accuracy

▪ Final cost of completed job = direct materials costs + direct labor costs +

overhead allocation

▪ Unfinished jobs fall under WIP Category.

▪ Completed jobs yet to be sold fall under Finished Goods Inventory.

� As items sell and ship, company pulls those records, then used to calculate

Cost of Goods Sold

FI:450 Maintain job order cost sheets

Preparing Job Order Cost Sheets

▪ New job order cost sheet for each new job

▪ Name job with customer name or

unique number

▪ Crucial to accurately track and record

� Missing hours can have massive impact

on job’s total cost.

▪ Engage in ethical cost accounting

� Integrity and professionalism

in recordkeeping

FI:450 Maintain job order cost sheets

FI:451

Calculate the cost of goods sold

Importance of Calculating COGS

▪ Cost of creating a company’s products

▪ Expense needed to produce items a business sells

▪ Can be referred to as cost of sales

▪ Provides insight into financial health of company

▪ Used to calculate net income and gross profit

FI:451 Calculate the cost of goods sold

Relationship to Inventory Costing Method

▪ Value of COGS directly dependent

on inventory costing method

▪ Three main ways to account for

inventory sold

� First In, First Out (FIFO)

� Last In, First Out (LIFO)

� Weighted Average Cost (WAC)

FI:451 Calculate the cost of goods sold

Limitations of COGS Calculations

FI:451 Calculate the cost of goods sold

▪ Accountants or management can manipulate by overvaluing inventory,

altering ending inventory amount, overstating discounts, etc.

▪ Formula is broad, so companies can calculate

direct inventory costs differently.

▪ Inventory accounting methods vary by company.

▪ One business can have multiple COGS results.

Information Needed To Calculate COGS

▪ Accounting method

▪ Inventory costing method

▪ Beginning inventory

▪ Cost of purchases for inventory

▪ Cost of labor, supplies, other costs

(shipping, rent, utilities, etc.)

▪ Ending inventory

FI:451 Calculate the cost of goods sold

▪ Step 1: Determine direct costs and indirect costs

▪ Step 2: Determine facilities costs

▪ Step 3: Determine beginning inventory

▪ Step 4: Add purchases of inventory items

▪ Step 5: Determine ending inventory

▪ Step 6: Perform COGS calculation

� Cost of Goods Sold = Beginning Inventory + Purchases – Closing Inventory

▪ Recorded as expense on income statement

Techniques for Calculating & Recording COGS

FI:451 Calculate the cost of goods sold

FI:455

Develop costs per unit of product

FI:455 Develop costs per unit of product

▪ An estimate

▪ How much to develop

a good or service

▪ Actual cost

� Final cost

� Not an estimate

What Is Standard Cost?

▪ Three pieces needed

� Direct Material

� Direct Labor

� Manufacturing Overhead

▪ Add all three to reach standard cost

▪ Example: Guitar building

� Direct material: $500

� Direct labor: $200

� Manufacturing overhead: $200

� Standard cost: $900

Finding Standard Cost

FI:455 Develop costs per unit of product

▪ Efficiency of labor

and training

▪ Labor cost

▪ Prices of direct materials

▪ Age and condition

of equipment

▪ Equipment repairs

Standard Cost Factors

FI:455 Develop costs per unit of product

▪ Yearly

� It can change frequently.

▪ Standard cost vs. actual cost

� If actual cost > standard cost,

profit is larger

� If actual cost < standard cost,

profit is smaller

▪ Variances can cause managers

to change standard cost.

Reviewing Standard Costs

FI:455 Develop costs per unit of product

FI:718

Discuss the use of cost-volume-profit analysis

Objectives of Cost-Volume-Profit Analysis

▪ Measure how changes

in costs/volume affect
operating profit

▪ Improve strategic

decision-making

▪ Prepare budgets,

evaluate performance,
control costs

▪ Solve financial and

production challenges

FI:718 Discuss the use of cost-volume-profit analysis

Components of Cost-Volume-Profit Analysis

FI:718 Discuss the use of cost-volume-profit analysis

▪ Volume or level of activity

▪ Unit selling price

▪ Variable cost per unit

▪ Total fixed costs

▪ Sales mix

Assumptions and Limitations

▪ Total revenues/costs are linear in relation to units sold.

▪ Costs change when

activity changes.

▪ Difficult for multiproduct

businesses

▪ Ignores how other factors

impact cost/profit

FI:718 Discuss the use of cost-volume-profit analysis

LIMITATIONS

• Not recommended for a multiproduct business

• Ignores how other factors can influence

costs and profit

• Does not account for inventory

• Can be issues with identifying variable

and fixed costs

• Is a short-term tool

Cost-Volume-Profit Analysis Tools

▪ Contribution margin analysis

▪ Break-even analysis

▪ Operating leverage analysis

FI:718 Discuss the use of cost-volume-profit analysis

▪ Shows how break-even point

changes as predicted
data changes

▪ Margin of safety

� Business’s “wiggle room”

Sensitivity Analysis

FI:718 Discuss the use of cost-volume-profit analysis

FI:454

Conduct cost-volume-profit analysis

Conducting Cost-Volume-Profit Analysis

FI:454 Conduct cost-volume-profit analysis

▪ Changes in fixed and variable costs, price, and

sales volume impact profitability.

▪ Establish break-even point

▪ Set optimal price and reach

target profit

▪ Break-Even Point in Units =

Total Fixed Costs /
Contribution Margin

▪ https://www.fool.com/the-blueprint/co

st-volume-profit-analysis/

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

Break-Even

Point

Total
Costs

Fixed Costs

5,000

Number of Units

Cost

10,000 15,000 20,000 25,000 30,000 35,000 40,000

0

0

Sales

▪ Difference between sales price and variable costs

▪ Money to cover fixed costs and contribute to profit

▪ Contribution Margin = Net Sales Revenue – Total Variable Costs

▪ Contribution Margin Ratio = Contribution Margin / Net Sales Revenue

Contribution Margin

FI:454 Conduct cost-volume-profit analysis

Variable cost

Sales

Total Contribution Margin

Sales and Costs ($)

Sales Volume in Units

▪ How well business uses fixed costs to create profits

▪ Measures effectiveness of pricing structure

▪ Degree of Operating Leverage = Contribution Margin / Operating Income

Operating Leverage

FI:454 Conduct cost-volume-profit analysis

Change in Operating Income

Change in Sales

▪ Calculate number of sales to generate desired profit

▪ Target Income in Dollars = (Total Fixed Costs + Target Income) / Contribution Margin Ratio

▪ Target Income in Units = (Total Fixed Costs + Target Income) / Contribution Margin per Unit

Target Income

FI:454 Conduct cost-volume-profit analysis

▪ Degree to which sales exceed break-even point

▪ Buffer between profit and loss

▪ Margin of Safety in Dollars = Current (or Actual) Sales – Break-Even Sales

▪ Margin of Safety in Units = Current (or Actual) Sales Units – Break-Even Point

▪ Perform sensitivity analysis

on scenarios to predict how
changes in variables will
impact profits

Margin of Safety and Sensitivity Analysis

Revenue

Break-Even Revenue

Margin of Safety

Margin
of Safety

Break-Even

Revenue

Actual

Revenue
=

–

FI:454 Conduct cost-volume-profit analysis

OP:192

Conduct break-even analysis

Importance of Break-Even Analysis

OP:192 Conduct break-even analysis

▪ Determine number of products

to financially break even

▪ Additional units = profit

▪ Monitor and regulate costs

▪ Determine pricing strategies,

cost control points, and margin
of safety

▪ Set budgets and targets

▪ Sales prices vary at different

output levels.

▪ Variable costs can change.

▪ Time-consuming to prepare

▪ Single product

▪ Useful as planning support

Limitations of Break-Even Analysis

OP:192 Conduct break-even analysis

Correcting High Break-Even Points

OP:192 Conduct break-even analysis

▪ Increase selling prices

▪ Reduce fixed costs

by outsourcing

▪ Reduce variable costs

by streamlining production

▪ Upselling and cross-selling

▪ Improve sales mix

Conducting Break-Even Analysis

OP:192 Conduct break-even analysis

▪ Break-Even Point = Fixed Costs /

(Selling Price per Unit – Variable Cost per Unit)

▪ Construct break-even tables

for sales volume and
unit price for each product

▪ Adjust costs, prices, and

volume to increase profitability

▪ Use spreadsheet or graph

to plot break-even points

Impact of Adjusted Sales Revenue and Expenses

OP:192 Conduct break-even analysis

▪ Understand sales and volume

to plan pricing and marketing

▪ Insights about product profitability

and sales techniques

▪ Break-even sales prices decline

as production volume increases.

▪ Affects pricing strategies and

anticipated demand at different
price points

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