Fixed-Variable Expenses

FIXED AND VARIABLE COSTS Fixed Costs those expenses that are independent of changes in volume of activity Variable Costs those expenses that increase or decrease proportionately with increases or decreases in volume of activity Semivariable (Mixed) Costs those expenses that vary with volume of activity, but not necessarily proportionately, and that may have a fixed (or sequence of fixed) components FLEXIBLE BUDGET A budget that is volume-adjusted for variable expenses Best use is for planning and performance analysis The first table titled "Fixed Budget Variances" compares budgeted and actual revenue and expenses without adjusting for changes in activity level. The second table, "Flexible Budget Variances," adjusts the budget for changes in activity level (number of members) and then compares it to actual results. Both tables calculate the difference between budgeted and actual amounts, referred to as variance. Additionally, the image provides information about the number of members for each month. VOLUME, PRICE, COST, PROFIT INTERRELATIONSHIPS (Figure 13-5, Page 300) 200 160 120 Break-even Variable cost point of services 80 Variable administrative nd selling expense 40 Fixed operating expense 0 fixed administrative and selling expense 0 50 100 150 200 N MONTHLY SALES VOLUME (physical measure) Contribution = Revenue - Variable Cost Contribution Margin = Contribution / Revenue Break-Even Point: Total Revenue = Total Cost Revenue = Fixed Cost / Contribution Margin Revenue Total expense REVENUE AND EXPENSE DOLLARS ($000) OPERATING LEVERAGE (Figure 13-8, Page 307) Company A - High Operating Leverage Break-even Revenue PROFIT Variable expenses LOSS Fixed expenses VOLUME Company B - Low Operating Leverage Break-even LOSS Revenue PROFIT Variable expenses Fixed expenses VOLUME DOLLARS DOLLARS page 311, #13.8: Give two examples of industries that are characterized by high operating leverage and two that are characterized by low operating leverage. • Industries with high operating leverage are those with a large fixed cost base. These could include electrical utilities, semiconductor manufacturers, and others with low total asset turnover such as commercial banks. • Industries with low operating leverage are those with a small fixed cost base. These could include personal services firms, grocery retailers, and some manufacturing firms that have high variable direct labor costs. page 311, #13.1: What is the break-even point for a comp that anticipates monthly fixed costs of $525,000 and varia costs equal to 55 percent of sales? Break-Even Point (BEP) is that point at which Total Revenues = Total Costs = Fixed Costs + Variable Costs Thus we have → R R = $525,000 + 0.55R =$1,166,667 page 313, #13.7: The Wilkinson Maintenance Company, a contract janitorial service, reported actual and variance results for April 1996 as follows (debit, or unfavorable, variances shown in parentheses). Assume the same data for Wilkinson Maintenance Company as in Exercise 13.7, but assume that all expenses (except depreciation) vary directly with volume. Compute the variable expense variance for April. Answer: $1,600 unfavorable. Explanation: April Actual Variance from S 106,000 Flexible Budget Wages 62,000 (2,200) Salaries 12,400 (400) Supplies 10,200 (1,000) Transport 3,600 (400) Miscellaneous 2,800 (200) Depreciation 6,000 0 Total $ 97,000 $ (2,600) page 313. #13.7a: What was Wilkinson's flexible-budgeted profit for April? Wages variable with volume → 59,800 / 102,000 = 58.6% of revenues Thus Flexible Budget Wages = (0.586)(106,000) = $62,116 Salaries: Fixed Budget breakdown 12,600 - (0.01)(102,000) = 12,600 - 1,020 = 11,580 base + 1,020 bonus Thus Flexible Budget Salaries = 11,580 + (0.01)(106,000) = $12,640 Supplies: Fixed Budget breakdown 9,600 - (0.07)(102,000) = 9,600 - 7,140 = 2,460 base + 7,140 janitorial Thus Flexible Budget Supplies = 2,460 + (0.07)(106,000) = $9,880