Profit Center Analysis.pptVIP

Profit Center Analysis Jack Davis, CPA, MBA SDSU-CES, Area Management Specialist Profits squeezed? Everyone knows their costs, don’t they? Do you know how these costs behave? Word List Cost Behavior Variable Costs. Variable Costs per unit are constant. Fixed Costs. Fixed costs per unit vary with production level. Mixed Costs. Semi-variable costs change in total with changes in production level, but not proportionately. Terms to Recognize Cost volume profit analysis Profit = Sales (S) – Variable Costs (VC) – Fixed Costs (FC) Contribution Margin Sales -- Variable Costs Contribution Margin Ratio (Sales – Variable Costs)÷ Sales Breakeven Point Sales (in dollars) = Fixed Costs / Contribution margin ratio Sales (units) = Fixed Costs / Contribution margin per unit Management Hubs Profit Centers. Subunit that has responsibility for generating revenue as well as for controlling costs. Cost Centers. Subunit that has responsibility for controlling costs but does not sell product. i.e. service departments. Cost Allocation Cost Objective Cost Pools Allocation base Relates the cost pool to the cost objective Profit Center Analysis Organize business into subunits, profit center cost centers. Track variable costs to profit centers. Control escalators Allocate asset use to subunits. Evaluate on contribution margin and amount of capital invested. Cost-Volume-Profit Diagnostics Differential Analysis Decision method to chose among alternative courses of action. Additional Processing Make or buy Drop enterprise Outsourcing Core competencies Vocabulary Differential costs and revenue The additional cost or revenue incurred when one alternative is chosen over another. Sunk cost. Costs that are already incurred not reversible. Opportunity Costs. The benefit given up by selecting one alternative over another. i.e. Interest on stored grain. Process or Sell Produce or Purchase Differential AnalysisDiscontinued Operations Cost allocation death spiral. What will happen to co