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Unit 9

Managerial Accounting

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FI:660

Explain the nature �of managerial accounting

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What Is Managerial Accounting?

Internal process for management:

Planning
Controlling
Decision-making

FI:660 Explain the nature of managerial accounting

What Is Managerial Accounting?

Managerial accounting, also called management accounting or cost accounting, is an internal process that centers about three main functions within the business: planning, controlling, and decision-making.
Managerial accounting communicates financial information in a way that empowers management to measure, analyze, and interpret the results of their decisions.
The purpose of managerial accounting is to provide managers with the information necessary to improve an organization’s financial performance, efficiency, and productivity, and ultimately reach the business’s goals.
Managerial accountants help create budgets, analyses, metrics, and forecasts to optimize organizational decision-making.
Since managerial accounting is not a required business function, companies that take advantage of its benefits enjoy the flexibility of segmented reporting (i.e., a single product or line of service) in whichever method and preparation format is most helpful for managerial decision-making.

Discussion #1: Ask students to consider reasons why segmented reporting might be helpful for a business. Under what circumstances would this analysis be especially useful?

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Internal vs. external
No standards vs. GAAP
Future vs. historical
Modified for needs �vs. general

Managerial vs. Financial Accounting

FI:660 Explain the nature of managerial accounting

Managerial vs. Financial Accounting

Managerial accounting is different from financial accounting in several ways.

Managerial accounting reports are prepared for individuals within the organization, or internal users, while financial accounting reports are prepared for parties outside the business, or external users.
Financial accounting is a requirement for all companies, and as such, must conform to standards like generally accepted accounting principles (GAAP).

Since managerial accounting is not mandatory, it does not need to conform to specific accounting standards or formats.

Financial accounting provides more general results, while managerial accounting delivers specific data which can be modified by department, product, presentation, or information format.
Financial accounting reviews historical data, while managerial accounting takes a future approach.
Overall, managerial accounting is intended to provide managers within the company with accounting information tailored to their specific needs, and help management make the business more profitable.

Discussion #2: What is the value of specific data that can be modified by department, product, presentation, or information format?

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Sources: historical data, �financial accounting records
Planning, controlling, �decision-making reports:

Budget reports
Trend analysis and forecasts
Cash-flow analysis
Performance reports

Sources & Types of Managerial Accounting Reports

FI:660 Explain the nature of managerial accounting

Sources & Types of Managerial Accounting Reports

Employees who conduct managerial accounting rely on the business’s historical data and financial accounting records as sources for their information.

These individuals work directly with the financial accounting team to prepare accurate reports, compare data with projections, strategize successfully, and enhance business profitability.

Managerial accounting reports cover planning, controlling, and decision-making for the business, which can include some of the following reports:

Product costing and valuation
Cash-flow analysis
Inventory turnover analysis
Margin analysis
Constraint analysis
Job cost reports
Inventory and manufacturing reports
Performance reports
Financial leverage metrics
Accounts Receivable management
Budget reports
Trend analysis and forecasting

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Prepare budgets, develop standards
Compare actual activity �with plans
Gather data on costs, profits
Can help marketing, �manufacturing, HR, �top management
Increase business profitability

How Managerial Accountants Can Help

FI:660 Explain the nature of managerial accounting

How Managerial Accountants Can Help

Managerial accountants provide valuable assistance and information to management.

They help with preparing budgets and developing standards, accumulating data on costs and profits, comparing actual activity with plans or budgets, and advising management about non-routine decisions.
Managerial accounting information can help marketing, manufacturing, human resources, and top management all with planning, controlling, managing risk, measuring performance, and making decisions.
The information in these internal reports enables managers to set competitive product and/or service prices, control costs, save money, and ultimately increase the business’s profitability.

Discussion #3: Ask students to imagine they have been tasked with convinced their business’s CEO to implement managerial accounting. How would they persuade the CEO? Which information is most compelling?

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OP:024

Explain the nature of �overhead/operating costs

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What Are Operating Costs?

Ongoing, day-to-day expenses �not directly related to production

Maintaining company building �(e.g., janitorial services)
Running equipment (e.g., electricity)

Vital for success
Require realistic budget & planning

OP:024 Explain the nature of overhead/operating costs

What Are Operating Costs?

Every business has operating costs, sometimes called operating expenses or overhead.

Operating expenses are ongoing, day-to-day expenses of running a business that are not directly related to production.
These can relate to maintaining a company building (e.g., janitorial services) or running a piece of equipment (e.g., electricity).

Business owners and managers must keep operating costs in mind every time they engage in important business activities, such as setting organizational goals, determining whether or not to launch new products, setting budgets, etc.
Though most businesses try to keep operating costs as low as possible so they can focus on production, these expenses are still vital for success.
A realistic budget, for example, plans for operating costs (both fixed and variable) appropriately.

Discussion #1: Ask students to discuss what their own “operating costs” are. Then, ask them to brainstorm other examples of operating costs that businesses incur during day-to-day operations.

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Fixed costs: do not increase or decrease with production changes

Facility maintenance �& repairs
Utilities
Insurance

Variable costs: fluctuate with changes in production

Advertising & promotion
Travel expenses
Sales commissions

Fixed vs. Variable Costs

OP:024 Explain the nature of overhead/operating costs

Rent/Mortgage
Wages/Salaries
Office supplies

Employee bonuses
Certain permits & fees
Shipping, delivery, or installation costs

Fixed vs. Variable Costs

The two main types of operating costs are fixed and variable.

Operating costs that do not increase or decrease with changes in production are called fixed costs.

In other words, these are the expenses that must be paid no matter what. Examples of fixed costs include:

Facility maintenance and repairs
Utilities (electricity, water, sewage, etc.)
Insurance
Rent/Mortgage
Wages/Salaries
Office supplies

Operating costs that fluctuate with changes in production are called variable costs.

When a company produces more of a product, variable expenses go up.
When a company produces less of a product, variable expenses go down.
There are several variable operating costs, such as:

Advertising and promotion
Travel expenses
Sales commissions
Employee bonuses
Certain permits and fees
Shipping, delivery, or installation costs

Discussion #2: Ask students to categorize their own operating costs as either fixed or variable.

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Partially variable and partially fixed

Fixed until company reaches certain level of production; then become variable
Can be considered either fixed or variable depending on perspective

Decision how to categorize ultimately up to business

Decision must be consistent.

Semi-Variable Costs

OP:024 Explain the nature of overhead/operating costs

Semi-Variable Costs

Some operating costs may be considered partially variable and partially fixed.
These are known as semi-variable costs.
Semi-variable costs are fixed until the company reaches a certain level of production; after that, they become variable.

For example, a manufacturer has a fixed cost for its employees’ wages, but when it decides to produce a greater number of products this month, its employees work more hours and earn overtime.
The employees’ base wages are still fixed, but the cost of paying this overtime is variable, depending on how many extra hours are worked.

Certain costs may be considered either fixed or variable, depending on how you look at them.

For instance, one business may consider pest-control costs to be fixed, since it spends the same amount of money each year ridding its facility of spiders and ants.
Another business, however, may consider the costs to be variable, since it only spends money for pest control as needed.

The decision of whether to categorize an expense as fixed or variable is ultimately up to the individual business.
However, for accounting purposes, the business’s decision must remain consistent over time.

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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

Operating Expenses, Selling Price, & Profit

Operating costs have a great influence on a product’s final selling price.
The total cost of a product is the sum of the overhead and direct costs required to produce it.

Let’s say the total cost of producing a pair of basketball shoes is $25 ($5 in operating costs and $20 in materials).
To make a profit, then, the company must set a selling price that is higher than $25.

Operating costs also have a major impact on a business’s profits.
As costs go up or down, profits fluctuate as well.
More costs equal less profit, and fewer costs equal greater profit.
A company’s gross profit is the revenue it makes after subtracting the costs of the products it has sold.

For example, if a company made $1 million last quarter and spent $200,000 producing its goods, its gross profit is $800,000.

Gross profit is a good indicator of how well a company keeps its costs under control.
A company reaches its break-even point when total expenses equal total sales.

At this point, the business has covered its costs but has not yet made a profit.
The formula for calculating the break-even point is: Fixed costs / (Price per unit – Variable costs per unit) = Break-even point

Operating costs are just “a part of life” for every business and organization.
Operating costs can mean the difference between profit and loss, failure and success.
Prosperous businesses are mindful of operating costs and work to keep them in line.

Discussion #3: Ask students to discuss the possible consequences that business might experience if they are not mindful of operating costs.

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FI:658

Describe types of costs used �in managerial accounting �(e.g., direct cost, indirect cost, �sunk cost, differential cost, etc.)

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Classifying Managerial Accounting Costs

Behavior
Function
Relevance
Traceability
Controllability

FI:658 Describe types of costs used in managerial accounting

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Direct materials costs
Direct labor costs
Manufacturing/Production �overhead costs

Basic Manufacturing Costs

FI:658 Describe types of costs used in managerial accounting

Basic Manufacturing Costs

Manufacturing costs (a.k.a. product costs or inventoriable costs) consist of the expenses involved in transforming raw materials into finished products.
These costs include the cost of materials, the human resources, and the overhead involved in production.
Basic manufacturing cost categories include the following:

Direct materials costs:

These are the costs of components and raw materials that are combined and/or transformed to create a finished product.
They can be easily traced to the finished product and are a significant portion of the total product cost.

Direct labor costs:

These are sometimes called touch labor and consist of the monies paid to employees to produce the product.
They are a significant portion of the total product cost.

Manufacturing/Production overhead costs (a.k.a. factory overhead or factory burden):

These consist of factory-/production-related costs (excluding direct materials costs and direct labor costs) required to produce a finished product.

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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

Common Managerial Accounting Costs

Product vs. period costs:

Product costs (a.k.a. manufacturing costs or inventoriable costs):

These can be associated with the production of a good or service and are treated as expenses when the resulting products are sold.
They appear as cost of goods sold on income statements and as inventory on balance sheets.

Period costs:

These are non-manufacturing/non-product costs, and they consist of all costs except for product costs.
They are not associated with a particular good or service, but they can be associated with a particular time period.
They are treated as expenses when they are incurred, and they appear as operating expenses on the income statement.

Selling vs. general administrative costs:

Selling costs (a.k.a. order-getting or order-filling costs):

These are associated with marketing a good or service.

General and administrative costs:

These pertain to the administration of the business, and they are all the executive, organizational, and clerical costs associated with the general management of a business.

Direct vs. indirect costs:

Direct costs:

These can be easily associated and traced to a particular product, process, department, etc.

Indirect costs:

These are associated with multiple products, processes, departments, etc., and they cannot be conveniently traced to a particular product, process, department, etc.

Controllable vs. uncontrollable costs:

Controllable costs:

These can be regulated and controlled by certain individuals or departments within a business, and they can be incurred or not, based on responsible parties’ decisions.

Uncontrollable costs:

These cannot be regulated or controlled by certain individuals or departments within a business, and they are beyond the scope of employees’ power.

Avoidable vs. unavoidable costs:

Avoidable costs:

These can be avoided and eliminated by doing or not doing an activity.

Unavoidable costs:

These cannot be avoided or eliminated, no matter whether you initiate a certain activity or not.

Out-of-pocket vs. sunk costs:

Out-of-pocket costs:

These are associated with current expenses.

Sunk costs:

These are the costs of items that were purchased in the past and cannot be recovered.
These often pertain to discontinued products or processes that have been eliminated and should not influence future decisions.

Differential, incremental, opportunity, and imputed costs:

Differential costs (a.k.a. incremental or relevant costs):

These are the differences in costs among alternative actions or decisions being considered.
They are useful when evaluating multiple options.

Opportunity costs (a.k.a. imputed costs):

These are the benefits that are lost when you decide to use scarce resources for one purpose rather than for another.
These are useful when evaluating multiple options.

Relevant vs. irrelevant costs:

Relevant costs (a.k.a. differential or incremental costs):

These are the differences in costs among alternative actions or decisions being considered.
They can be eliminated and/or reduced by choosing one alternative over others and are avoidable costs.

Irrelevant costs:

These are the costs that are the same among alternative actions or decisions being considered.
These are sunk costs and future costs that do not differ among alternatives being considered, and they are unavoidable costs.

Discussion #2: Ask students to brainstorm examples of each type of cost.

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Planning
Performing
Evaluating
Communicating

How Cost Information Is Used

FI:658 Describe types of costs used in managerial accounting

How Cost Information Is Used

In general, costs consist of the expenses involved in manufacturing, promoting, and distributing a product—in other words, the costs of various resources needed to produce revenue.
In managerial accounting, managers utilize many different types of costs, and the specific costs they study and use depend on the tasks they are completing.
These tasks fall into four main categories:

Planning:

Managers estimate operating costs and sales volume, set prices, and prepare budgets.

Performing:

Managers monitor the profitability of products, make decisions concerning products, and compute the unit cost of a product.

Evaluating:

Managers compute variances between estimated and actual costs, and analyze variance, address causes of variances, and revise future plans.

Communicating:

Managers prepare internal reports for management and prepare external reports for stakeholders.

Discussion #3: Ask students to discuss the importance of cost accuracy in managerial accounting.

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FI:719

Discuss cost accounting systems �(e.g., job costing, process costing, standard costing, activity-based costing [ABC].)

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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

Purposes of Cost Accounting Systems

Businesses use cost accounting systems to track production activities, assess profitability, enhance budgeting, measure cash flow, and fine-tune operations.
Unlike financial accounting, which is subject to reporting standards, cost accounting is an internal process where reports are tailored to management’s needs.
Cost accounting systems let businesses check inventory at each production stage and maintain just-in-time inventory systems.

Tracking costs increases efficiency by identifying areas to streamline, which improves strategic planning capabilities.
Businesses assess variable and fixed production costs to select the system that will serve them best in allocating costs.

Discussion #1: Ask students to discuss additional ways businesses can benefit from using cost accounting systems.

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Job order costing
Process costing
Standard costing
Activity-based costing (ABC)
Hybrid approach

Cost Accounting Systems

FI:719 Discuss cost accounting systems

Cost Accounting Systems

There are four main types of cost accounting systems, and businesses can use a hybrid approach that mixes pieces of each system to create a unique method.

Job order costing, often called job costing, in which the company assigns costs from labor, materials, and overhead to each job.

This method is best suited to unique or customized products, as it is more precise and accurate than process costing; however, it is labor-intensive due to large amounts of data entry.
The flow of costs follows the physical flow of materials: manufacturing costs are assigned to one general Work In Process Inventory account, then after a job is completed, the costs transfer to Finished Goods Inventory.
As the goods are sold, costs are transferred to Cost of Goods Sold.

Process costing, in which product costs are tracked by department or process instead of job.

Costs are compiled for a total production process, then distributed to individual units.
This method is generally used for large volumes of identical products, and it is efficient and simple to operate.
This method uses a Work In Process account for each process, which results in each unit receiving an average production cost.
The flow of costs is similar to job-order costing, except product costs are assigned to each process or production department.

Standard costing, where companies assign expected costs to a product instead of the actual costs of materials, labor, and overhead.

The differences between standard and actual costs are called variances, which management analyzes to control costs.
Costs are recorded as standard costs, then the actual amounts are logged and applied as they occur.
Companies often use standard costing to create budgets and set prices, but it can be time-consuming.

Activity-based costing (ABC), where all costs are organized by activity, then allocated to cost pools and divided by cost drivers (e.g., machine hours, units, etc.).

This method identifies every cost, then allocates costs based on how much the product uses the activity.
This lets businesses identify which tasks add the most value or cost the most.
Businesses can accurately allocate costs in complex production processes, but it can be difficult to operate.
The flow of costs considers direct and indirect costs involved in creating every product.

Discussion #2: Ask students to think of examples of products for each category of costing. How might assigning one product to a different costing category impact that company?

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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

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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

Overhead Cost Allocation Methods

There are two types of overhead: manufacturing and nonmanufacturing (or administrative) overhead.

Manufacturing overhead includes all costs a business sustains; nonmanufacturing overhead includes all costs that aren’t involved in production, like sales and general administration.

To allocate overhead costs, businesses calculate an overhead rate by collecting all relevant costs, then selecting a cost driver.

Cost drivers include direct labor, machine hours, sales, miles, orders completed, etc.
To calculate overhead, gather manufacturing costs into cost pools, or individual cost groupings that are often split by department or service center.
Divide the cost pool by the cost drivers to calculate overhead allocation per unit, or the overhead rate.

Businesses generally use either the traditional method, using a single cost driver, or the ABC method, using multiple cost drivers.

ABC involves determining the costs of all activities required to produce an item, then assigning costs of those activities to those items.
While businesses can allocate based on any cost driver in the traditional method, they typically allocate manufacturing overhead by direct labor hours or machine hours.

Labor-intensive activities are suited to direct labor hours, while automated factories are best for machine hours.

ABC’s numerous cost pools improve accuracy with diverse products and complicated processes; however, it can be expensive and time-consuming.
The traditional method is simple and less expensive, but does not distribute overhead as accurately as utilizing multiple cost drivers.

Discussion #3: Ask students to discuss the importance of allocating overhead costs. What could happen if a company fails to allocate its overhead costs?

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FI:726

Apply cost accounting techniques �(e.g., job costing, process costing, �standard costing, activity-based costing [ABC])

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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

Cost Accounting Techniques

Cost accounting enables businesses to make better financial decisions.
Since it is an internal process that is used by management, cost accounting is not required to meet specific reporting standards, which means it can be more flexible.
Businesses use cost accounting to measure, report, and analyze costs in production or separate projects or processes, then reduce these expenses to boost efficiency and profitability.
Costs involved in cost accounting include direct, indirect, fixed, variable, and operating costs.
While there are many cost accounting techniques, four of the most widely used are job costing, process costing, standard costing, and activity-based costing (ABC).

Discussion #1: Ask students to discuss why these four techniques are the most widely used.

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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

Job Costing

Job costing helps businesses track costs for individual jobs or projects.
To track direct labor, employees record their time, then management calculates the labor cost to assign to each job.
Indirect labor is recorded in an overhead cost pool, then allocated to jobs.
To track overhead, costs are accumulated in cost pools, then allocated to jobs based on usage.
Here’s how job costing works:

Step 1: Calculate direct material.

This involves totaling all materials used in creating the product.
However, this isn’t always a practical process, so you can estimate these costs by using an inventory costing method (e.g., First In, First Out [FIFO]; Last In, First Out [LIFO]; Weighted Average Cost [WAC], Specific Identification).

Step 2: Calculate direct labor.

Multiply the payroll day rate for those working on the product by the amount of time needed to complete the job.

Step 3: Determine overhead rate.

Overhead costs include the indirect costs that make the project possible, like rent and utilities.
This calculation splits indirect costs among jobs by using an activity cost driver (e.g., labor or machine hours).
The overhead rate formula is

Predetermined Overhead Rate = Estimated Overhead Cost / Estimated Level of Activity

Step 4: Allocate overhead.

After calculating the overhead rate, apply it to your job by using

Applied Overhead = Predetermined Overhead Rate X Actual Level of Activity

Step 5: Calculate job cost.

The final job cost formula is

Total Job Cost = Direct Material + Direct Labor + Applied Overhead

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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

Process Costing

Process costing accumulates the production costs for a large quantity of identical products, then allocates those costs proportionally to the entire batch.
Since the units are identical, businesses don’t need to track individual unit information.
With process costing, costs are recorded for each process, which makes it the opposite of job costing, where costs are accumulated individually for each product.
There are three main types of process costing:

Standard cost, where businesses use standardized costs based on historical cost data, then charge the difference between actual costs to a variance account at the end of the period.
FIFO, where companies create separate layers of costs by assigning costs based on the order items were produced.
WAC, where businesses disregard time period and simply assign all costs to produced units.

Here’s how process costing works:

Step 1: Analyze inventory.

Evaluate the inventory cost flow to determine the costs of each process in the production cycle.
Calculate the inventory opening balance, the amount produced during the period, and how much was left as Work in Process (WIP).

Step 2: Convert inventory costs.

Convert the WIP inventory to a number of equivalent units.
For example, 100 items in-process at 75% completion would equal 75 produced units.

Step 3: Calculate total costs.

Calculate the total indirect and direct costs accumulated in the manufacturing process.
Apply these costs to completed inventory and equivalent units.

Step 4: Calculate cost per unit.

Divide the total costs of production over the complete and equivalent units.

Step 5: Assign costs to complete and in-process units.

Split the costs by allocating amounts based on cost per unit and number of completed units to Finished Goods and WIP.

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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

Standard Costing

Standard costing assigns “standard” costs to inventory based on expected production operating conditions.
Standard costing involves estimating the cost of a production process.
The difference between the standard efficient cost and the actual cost to produce the items is called a variance, and businesses compare them with variance analysis.
A favorable variance exists when actual costs are lower than expected, and an unfavorable variance exists when actual costs are higher than the standard costs.
Rate variance includes the cost of the input (e.g., labor, materials) while volume variance includes the quantity or efficiency of the input.
Here’s how standard costing works:

Step 1: Create standard cost.

Determine the cost of direct materials, direct labor, and overhead.
Multiply the rate by the quantity.
The standard cost formula is

Standard Cost = Direct Labor + Direct Materials + Manufacturing Overhead

Step 2: Establish standards.

Review past data, future trends, and business production plan.
Compare to the estimated standard cost and set the production standards.

Step 3: Determine actual costs.

Establish the actual costs for materials, labor, and overhead.

Step 4: Compare actual costs and standard costs.

Compare the costs to determine variance.

Step 5: Determine causes.

Decide the reasons for the variances to take corrective action.

Step 6: Dispose of variances.

Transfer the variances to the profit and loss account.

Discussion #2: Ask students to think about all the ways businesses can use standard costs.

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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

Activity-Based Costing (ABC)

Activity-based costing (ABC) assigns overhead and indirect costs to specific cost objects.
This system is based on activities, which is any unit of work, event, or task with a goal.
These activities are known as cost drivers and help calculate the cost driver rate, which is then used to allocate overhead costs.
Here’s how ABC costing works:

Step 1: Identify activities and assign costs.

Identify all the activities that contribute to producing an item.
These include unit-level, batch-level, product-level, and customer-level activities.
Then assign costs to all the activities.

Step 2: Divide into cost pools.

Separate the activities into cost pools, then calculate the total overhead of each cost pool.

Step 3: Assign cost drivers.

Assign activity cost drivers (e.g., hours, units) to each cost pool.

Step 4: Calculate cost driver rate.

To calculate the rate for each cost pool, use this formula (which is the same formula for calculating predetermined overhead rate)

Cost Driver Rate = Overhead / Activity Cost Drivers

Step 5: Assign costs to products.

Multiply the cost driver rate (or the predetermined overhead rate) by the level of cost driver activity used to create the product.
This is also known as applied overhead.

Discussion #3: Ask students to consider which businesses typically use each costing technique and under what circumstances.

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FI:450

Maintain job order cost sheets

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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

Importance of Job Order Cost Sheets

Think back to job order costing, in which companies or organizations assign costs from labor, materials, and overhead to each individual job.

These businesses use job order cost sheets, sometimes called job cost sheets, to accurately record and track all job cost information.
Job order cost sheets compile and assign all costs to a particular job.
Businesses use them to organize costs for each job, which helps them streamline production processes and optimize expenditures.
By maintaining accurate job order cost sheets, management can track performance to improve efficiency and productivity, and compare profitability among jobs.

Job order cost sheets are also important for a business’s accounting records.

These documents act as a supplementary ledger, or record, to the work in process (WIP) account since it includes everything about jobs in process.
Although job order costing is popular with manufacturing, service businesses like law firms, hospitals, and accounting firms also use it to invoice individual customers.

Discussion #1: Ask students to discuss additional benefits that could result from having all job cost information in one place.

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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

Costs Recorded on Job Order Cost Sheets

Three types of costs are recorded on job order cost sheets:

Direct materials costs, which are authorized by the materials requisition form.

It’s important that only direct materials for the specific job are charged to this category.

Direct labor costs, which are recorded on a time ticket or time sheet.

It’s vital that only time recorded working on the specific job is included in this category.

Manufacturing overhead costs, which include all indirect costs.

Management calculates the predetermined overhead rate by dividing estimated overhead costs by estimated allocation base (e.g., labor hours, machine hours, etc.).
Then, they calculate the applied overhead for a particular job by multiplying the predetermined overhead rate by the actual activity.

In addition to these costs, job order cost sheets also contain the job number, job name, start date, completion date, and the quantity of items or units completed.

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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

Determining the Cost of a Job

To record resources for each job, businesses utilize source documents for accuracy.

They employ materials requisition forms, which record the job number and the type, quantity, and unit price of the direct materials for the job.
Management then uses time tickets, which employees use to clock in and out of specific jobs, to apply direct labor to the job.
To determine the final cost of a completed job, total the direct labor costs, direct materials costs, and the overhead allocation.

Under the job order cost system, all unfinished jobs fall under the WIP category.

Direct material costs are assigned to specific jobs when inventory releases the supplies.
Direct labor costs are documented by employees then linked to the job.
Overhead is allocated using the predetermined overhead rate.
At the end of the month, the WIP balance is the total of all job order cost sheets for the unfinished jobs.
This means all completed job order cost sheets that have yet to be sold can act as the supplementary ledger for finished goods inventory.

As the company sells and ships its finished goods, it pulls the cost records from the finished goods inventory file.

These records are then used to calculate a specific time period’s cost of goods sold.

Discussion #2: Ask students to discuss the ways in which materials requisition forms and time tickets support accurate job cost recording.

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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

Preparing Job Order Cost Sheets

Each time a business starts a new job, it needs to create a new job order cost sheet where all costs for the specific job will accumulate.

Depending on the product, the job order cost sheet may be brief, with a few lines of costs, or complex, with pages of data.
Companies often find it useful to specifically name the job, either with a customer’s name or a uniquely identifiable number.
It’s crucial for employees to accurately track and record all costs for the specific job, as forgetting even a few hours can have a massive impact of the job’s total cost.

For companies that use job order costing, a product’s price is typically based on its cost to create, which makes it vital for businesses to engage in ethical cost accounting.

If a company decides to simply transfer the costs from one job order cost sheet to a different job, ethical problems can develop.
Companies must exercise integrity and professionalism in their recordkeeping.

Discussion #3: Ask students to consider the importance of ethical recordkeeping.

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FI:451

Calculate the cost of goods sold

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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

Importance of Calculating COGS

Cost of goods sold (COGS) is the cost of creating a company’s products during a period, often a year.

It includes all costs that are directly related to the production of a business’s goods.
Fixed costs, like marketing, salaries, and utilities, are not included in COGS calculations.
Simply put, it is the expense needed to produce the items a company sells.
Cost of goods sold can be referred to as cost of sales.

Cost of goods sold is an important metric that provides insight into the financial health of a company.

Businesses calculate COGS to determine taxable income, review profitability, and enhance strategic decision-making.
It is also used to calculate other metrics like net income, which is revenue minus COGS and expenses, and gross profit, which is a profitability measure that reflects a company’s efficiency in managing materials and labor in its production process.

Discussion #1: Ask students to consider the importance of calculating COGS.

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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

Relationship to Inventory Costing Method

The value of COGS is directly dependent on a company’s inventory costing method.

Each inventory costing method produces a different effect on the expense charged to COGS and therefore impacts the amount of earned income.
There are three main ways to account for inventory sold:

First In, First Out (FIFO), where oldest goods are sold first.

Since prices generally go up over time, the company sells its least expensive items first.
This means COGS is lower because it’s built on cheaper costs, which results in higher gross profit and higher taxable income.

Last In, First Out (LIFO), where the newest goods are sold first.

Since higher priced items are sold first, ending inventory is valued lower at the older costs.
This means COGS is higher and both gross profit and taxable income are lower.

Weighted Average Cost (WAC), where goods are valued at the average cost.

This levels out COGS by preventing extreme fluctuations from skewing costs.

Discussion #2: Ask students to conduct further research on the relationship between COGS and inventory costing methods—is one method more popular than others? Why?

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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.

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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

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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

Techniques for Calculating & Recording COGS

To calculate COGS, businesses follow these steps:

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

The formula for calculating COGS is:

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

When calculating COGS, inventory amounts are found on the balance sheet.
Cost of goods sold is recorded as an expense on the income statement, typically beneath sales revenue and before gross profit.
It’s important to keep regular, accurate records of a company’s COGS calculations.

Detailed records help ensure taxes are filed correctly, and they are especially useful in case of an audit.

Discussion #3: Ask students to discuss the potential impact of inaccurate COGS calculations.

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FI:455

Develop costs per unit of product

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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?

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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

Three categories are needed to solve for standard cost: direct material, direct labor, and manufacturing overhead. Read more about them below:

Direct material: This is the material used to make a product. To solve for direct material, multiply quantity of materials used to make the product by the price of the materials.
Direct labor: This is the work involved in product development. Direct labor is made up as labor hours multiplied by labor rate (wages).
Manufacturing overhead: This is the combination of all other expenses involved in the building of the good or service. To solve for manufacturing overhead, add up all of the costs that are incurred during the production of a product that do not include direct labor.
The sum of direct material, direct labor, and manufacturing overhead is the standard cost.
The total of the three is the standard cost per unit.

For example, if the direct material to make a guitar is $500, the direct labor is $200, and the manufacturing overhead is $200, the standard cost to produce the guitar is $900.

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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

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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

Business administrators or managers will typically review the standard cost estimates on a yearly basis.

There are a few reasons for that.
As discussed above, direct labor, direct material, and overhead costs can change frequently year over year.
Remember that standard cost is used for planning and anticipating the costs for a product.

If the actual cost is above the standard cost, it means that the profit will be less than anticipated.
If the actual cost is below the standard cost, the profit from the sale of a product will be above what was anticipated, which is generally good for business.

Businesses will adjust the standard cost to get closer to the actual cost of the product after the review is conducted.
Some business administrators will even review the standard cost per unit on a quarterly basis to make sure their estimates for product development are correct, and then adjust their estimates as needed.
These differences between the actual cost and standard cost are called variances.
The following list includes examples of what could be a variance between actual costs and standard costs:

Production cost
Production output
Change in labor production
Cost of materials
The price of paid labor
Equipment updates or repairs
Amount of materials used for a product

Discussion #2: Ask your students if they think businesses should review standard cost more frequently than one year. How often would they review standard cost, and why?

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FI:718

Discuss the use of cost-volume-profit analysis

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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

Objectives of Cost-Volume-Profit Analysis

Businesses use cost-volume-profit analysis to measure how changes in levels of costs and volume affect the business’s operating income (or operating profit).

Cost-volume-profit analysis assesses how changes in fixed and variable costs, sales volume, and price impact the company’s profit.
This tool helps managers gain insight into profitability in various outcomes and ultimately make better strategic decisions.

Cost-volume-profit analysis helps in forecasting profits, preparing budgets, formulating pricing policies, evaluating performance, controlling costs, increasing efficiency, determining expansion plans, and more.

The information derived from cost-volume-profit analysis enables businesses to set costs at various volume levels, analyze the impact of changes in prices and product mix, and help solve financial and production challenges.

Discussion #1: Ask students to discuss additional ways businesses could use the data gleaned from cost-volume-profit analyses.

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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

Components of Cost-Volume-Profit Analysis

There are five main components of cost-volume-profit analysis:

Volume or level of activity
Unit selling price
Variable cost per unit
Total fixed costs
Sales mix

These components are then combined and analyzed to generate the contribution-format income statement, break-even analysis, margin of safety, and targeted income.

Businesses use contribution-format income statements, which are reformatted income statements that show the business’s fixed and variable expenses as well as net profit or net loss for the time period.
Targeted income, which is also known as target profit, involves calculating the number of sales necessary to generate a desired profit.

Businesses can analyze this amount by incorporating their goal amount into the break-even formula.

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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

Assumptions and Limitations

Cost-volume-profit analysis features several assumptions, including that sales price per unit, variable costs per unit, and total fixed costs are all known and constant.

When drawn on a graph, total revenues and total costs are linear, or straight lines, in relation to the number of units sold.
Another assumption is that everything that is produced is sold.
In addition, the only reason costs are affected or change is because activity changes; in other words, changes in revenues and costs only occur due to changes in the number of products or units sold.

Cost-volume-profit analysis has the following limitations: it is not recommended for a multiproduct business, it ignores how other factors can influence cost and profit, it does not account for inventory, there can be issues with identifying variable and fixed costs, and it is a short-term tool.

Discussion #2: Ask students to discuss the limitations of cost-volume-profit analysis. How might businesses address these shortcomings?

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Cost-Volume-Profit Analysis Tools

Contribution margin analysis
Break-even analysis
Operating leverage analysis

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

Cost-Volume-Profit Analysis Tools

Cost-volume-profit analysis offers three main tools:

Contribution margin analysis, which involves computing the profitability of various products.

The contribution margin is the amount of profit the business makes after deducting variable expenses.
The contribution margin ratio is the percentage of sales dollars that are available to cover fixed costs.

The contribution margin ratio, which can be calculated with dollars or per unit, is calculated by dividing the contribution margin by sales amount.

Break-even analysis, which shows the quantity of products or sales needed to cover all costs and break even financially.

After determining the break-even point, businesses can use it to view the effects of increasing or decreasing fixed costs to improve overall profitability.

Operating leverage analysis, which analyzes how changes in both products sold and contribution margin affect operating income as fixed costs change.

How a business uses fixed costs compared to variable costs in operations is known as operating leverage.

The degree to which a business uses fixed costs enhances profits as sales go up but increases losses as sales decrease.
Operating leverage is the risk-return tradeoff among different cost structures (i.e., sales commissions as variable costs instead of salaries as fixed costs).

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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

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FI:454

Conduct cost-volume-profit analysis

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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/cost-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

Sales

Conducting Cost-Volume-Profit Analysis

Businesses use CVP analysis any time they want to see how changes in fixed and variable costs, price, and sales volume will impact profitability.

CVP analysis helps determine selling price and reveals the number of products needed to cover costs, break even, and reach target profit.

CVP analysis aims to establish the business’s break-even point and subsequent target income.

The first step involves viewing a contribution margin format income statement to review all revenue and expenses.
Total the business’s fixed costs, including rent, utilities, insurance, etc.
Then, determine the product’s selling price, which you may need to calculate multiple times to set the optimal price.
Next, calculate the variable cost per unit.
The next step is to calculate the contribution margin and contribution margin ratio, outlined below.
Finally, plug all values into the following formulas to determine break-even sales:

Break-Even Point in Dollars = Total Fixed Costs / Contribution Margin Ratio
Break-Even Point in Units = Total Fixed Costs / Contribution Margin

Businesses often plot the break-even point on a graph to view its impact on profit.

After calculating break-even sales, companies use these calculations to determine target income, also outlined below.
For a step-by-step guide to conducting CVP analysis, visit https://www.fool.com/the-blueprint/cost-volume-profit-analysis/.

Discussion #1: Ask students to list benefits of performing cost-volume-profit analysis.

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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

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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

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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

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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

Margin of Safety and Sensitivity Analysis

The margin of safety is the degree to which a business’s sales exceed its break-even point.

It is the number of sales a business can lose before it stops being profitable.
The margin of safety acts as a buffer between profit and loss.
The formula for calculating margin of safety is as follows:

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

Along the same lines, businesses use sensitivity analysis to predict what will happen with changes in fixed costs, variable costs, sales price, units sold, and sales mix.

Managers perform sensitivity analysis on different scenarios to determine how changes in variables will impact profitability.

Discussion #3: Ask students to consider how sensitivity analysis can help businesses in their planning efforts.

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OP:192

Conduct break-even analysis

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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

Importance of Break-Even Analysis

Businesses conduct break-even analyses to determine the number of units or products they must sell to cover all costs and financially break even.

This calculation represents the minimum number of products or sales volume necessary to cover all expenses before the business can make a profit.
Any units sold above the break-even point increase the business’s profitability.
Break-even analyses help companies set targets for units/revenue and are helpful in the pricing and promotion process.

Conducting break-even analyses enables businesses to monitor and regulate costs by setting cost control points, determine pricing strategies for sales volume/profitability, and determine margin of safety.

They help businesses set budgets and targets by clarifying the effects of changes in variable/fixed costs and motivate sales staff by highlighting the potential for greater commissions.

Discussion #1: Ask students to discuss why break-even point is an essential business calculation.

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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

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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

Correcting High Break-Even Points

Businesses can lower their break-even points a few different ways.

They can increase selling prices to lower the number of products necessary to break even.
Businesses can reduce fixed costs through outsourcing.
They can also reduce variable costs per unit by streamlining production.
Businesses can introduce upselling and cross-selling to increase profitability.
Additionally, businesses can improve their sales mix by selling products with larger contribution margins.

Some of the benefits of lowering break-even points include targeting smaller niches, then tailoring products and providing greater customer value, which builds brand equity and positively affects price and margin.

When businesses reach higher margins, they can reduce their break-even points.

Discussion #2: Ask students to explain why businesses prefer low break-even points over high break-even points.

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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

Conducting Break-Even Analysis

The formula for calculating the break-even point is as follows:

Break-Even Point = Fixed Costs / (Selling Price per Unit – Variable Cost per Unit)

Fixed costs:

These costs don’t fluctuate with production or sales of units.
They include startup costs, rent, insurance, utilities, and administration costs.
Fixed costs occur on a regular basis.

Selling price per unit:

This is the price at which a business sells its product.

Variable costs per unit:

These costs are directly associated with number of units produced and are calculated on a per unit basis.
Variable costs include material, labor, direct sales, commission, promotion, storage, and shipping.
Variable costs increase/decrease with production volume.

Businesses should construct break-even tables for both sales volumes and unit prices for each product.
To conduct a break-even analysis, follow these steps:

Determine variable unit costs, fixed costs, selling price per unit, sales volume, and unit price
Calculate contribution margin:

Selling price per unit – Variable costs

Calculate contribution margin ratio:

Contribution margin per unit / Selling price per unit

Determine break-even points:

Calculate units to break even:

Fixed costs / Contribution margin per unit

Calculate sales revenue to break even:

Fixed costs / Contribution margin ratio

Adjust costs, prices, and volume to change results and increase profitability
Create a spreadsheet to plot the break-even point for each level of sales and item price

Discussion #3: Visit https://corporatefinanceinstitute.com/resources/knowledge/modeling/break-even-analysis/ and ask students to describe the benefits of graphically representing break-even point.

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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

Impact of Adjusted Sales Revenue and Expenses

When businesses understand the relationships between sales and volume, they can better plan pricing strategies and marketing campaigns.

As fixed costs rise, break-even analysis calculates the increase in sales or amount to raise prices needed to account for increased costs.
By calculating break-even prices at various sales volumes, businesses can glean insights about product profitability and sales techniques.
Pricing at break-even points is one way businesses can try to drive competitors out of the market.
Often, break-even sales prices decline as production volume increases; this occurs when fixed costs are spread over a greater number of products while variable costs remain the same.
These variations affect pricing strategies and anticipated demand at different price points.

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Acknowledgments

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