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    Strategic Cost Management

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    Iris Fenelle
    This document discusses various costing and analysis methods used in strategic cost management: 1) It describes cost-volume-profit (CVP) analysis, the high-low method for determining variable and fixed costs, contribution margin, and break-even analysis using mathematical equations and graphs. 2) It also discusses the difference between absorption and variable costing methods, job costing using predetermined overhead rates, and just-in-time manufacturing. 3) Key terms defined include variable costs, fixed costs, contribution margin, break-even point, margin of safety, target net income, and under/overapplied manufacturing overhead.

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    Strategic Cost Management

    Uploaded by

    Iris Fenelle
    26 views7 pages
    This document discusses various costing and analysis methods used in strategic cost management: 1) It describes cost-volume-profit (CVP) analysis, the high-low method for determining variable and fixed costs, contribution margin, and break-even analysis using mathematical equations and graphs. 2) It also discusses the difference between absorption and variable costing methods, job costing using predetermined overhead rates, and just-in-time manufacturing. 3) Key terms defined include variable costs, fixed costs, contribution margin, break-even point, margin of safety, target net income, and under/overapplied manufacturing overhead.

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    STRATEGIC COST MANAGEMENT

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    This document discusses various costing and analysis methods used in strategic cost management: 1) It describes cost-volume-profit (CVP) analysis, the high-low method for determining variable and fixed costs, contribution margin, and break-even analysis using mathematical equations and graphs. 2) It also discusses the difference between absorption and variable costing methods, job costing using predetermined overhead rates, and just-in-time manufacturing. 3) Key terms defined include variable costs, fixed costs, contribution margin, break-even point, margin of safety, target net income, and under/overapplied manufacturing overhead.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    26 views7 pages

    Strategic Cost Management

    Uploaded by

    Iris Fenelle
    This document discusses various costing and analysis methods used in strategic cost management: 1) It describes cost-volume-profit (CVP) analysis, the high-low method for determining variable and fixed costs, contribution margin, and break-even analysis using mathematical equations and graphs. 2) It also discusses the difference between absorption and variable costing methods, job costing using predetermined overhead rates, and just-in-time manufacturing. 3) Key terms defined include variable costs, fixed costs, contribution margin, break-even point, margin of safety, target net income, and under/overapplied manufacturing overhead.

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    STRATEGIC

    COST
    MANAGEMENT
    CVP Analysis
    Sales Total VC VC/ unit Total FC FC/ unit
    Increase + none none -
    Decrease - none none +
    Relationship To
    direct none none indirect
    Change
    Variable & Fixed Cost

    High-Low Method

    Variable Cost per unit = Cost of Highest Activity – Cost of Lowest Activity

    Highest Activity Level – Lowest Activity Level

    Total Fixed Cost = Total Cost of Highest Activity – (Highest Activity Level x VC/ unit)

    Contribution Margin

    Contribution Margin per Unit = Unit Selling Price – Unit Variable Cost

    *CM per unit indicates that for every unit sold, the entity will have that much to cover
    fixed costs and contribute to income.

    Contribution Margin Ratio

    Contribution Margin Ratio = Contribution Margin per Unit / Unit Selling Price

    *The CM ratio means that (Contribution Margin Ratio) cents of each sales dollar ($1 x
    CMR%) is available to apply to fixed costs and to contribute to income.

    Break-Even Analysis
    Break-Even Sales = Variable Cost + Fixed Cost

    Mathematical Equation
    Break-Even in Dollars

    X = Variable Cost in Percentage (X) + Total Fixed Cost

    Break-Even in Units

    Unit Selling Price (X) = Variable Cost per Unit (X) + Total Fixed Cost

    Contribution Margin Technique


     Because we know that CM equals total revenues less variable costs, it follows
    that at the break-even point, contribution margin must equal total fixed costs.

    Break-Even in Dollars = Fixed Cost / Contribution Margin Ratio

    Break-Even in Units = Fixed Cost / Contribution Margin in Units

    Graphic Presentation

     The graph is referred to as a cost-volume-profit (CVP) graph since it shows


    costs, volume, and profits

    Margin of Safety

    Margin of Safety in Dollars = Actual (Expected) Sales – Break-Even Sales

    Margin of Safety Ratio = Margin of Safety in Dollars / Actual (Expected) Sales

    Target Net Income

    Mathematical Equation

    Required Sales = Variable Cost + Fixed Costs + Target Net Income

    Required Sales in Dollars


    X = Variable Cost in Percentage (X) + Total Fixed Cost + Target Net Income

    Required Sales in Units = Required Sales in Dollars / Unit Selling Price

    Contribution Margin Technique

    Required Sales in Dollars = Fixed Cost + Target Income / Contribution Margin Ratio
    Variable & Absorption Costing
    Absorption Costing

    Fixed Manufacturing Overhead per Unit = Manufacturing Overhead / Units Produced

    Types of cost Absorption Costing Variable Costing


    Direct materials $5 $5
    Direct Labor 3 3
    Variable Manufacturing Overhead 1 1
    Fixed manufacturing Overhead 4 0
    Total Unit Cost $13 $9

    Circumstances Income Under


    Absorption Costing Variable Costing
    = $$$ = $$$
    Units
    > Units Sold $$$ > $
    Produced
    < $ < $$$
    Job Costing
    Predetermined Overhead Rate

    Predetermined Overhead Rate = Estimated Annual Overhead Costs

    Expected Annual Operating Activity

    Manufacturing Overhead
    Debit Credit

    Actual (Cost Incurred) Applied (Costs Assigned)

    Balance = Underapplied Balance = Overapplied

    Balance Sheet

    Account Rel. To COGS

    Underapplied Prepaid Expense debited

    Overapplied Unearned Revenue credited


    Just-In-Time Manufacturing

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