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Cost-Volume-Profit Analysis: OST Ccounting Anagerial Mphasis Dition Rikant Eorge Adhav Hristopher

The document summarizes key concepts in cost-volume-profit (CVP) analysis including: 1) CVP examines how total revenues, costs, and operating income change with units sold, price, variable cost, or fixed costs. It assumes changes in production solely impact costs and revenues. 2) Formulas for contribution margin, breakeven point, profit planning, sensitivity analysis, margin of safety, and operating leverage are derived based on CVP assumptions. 3) The effects of multiple products, cost drivers, and sales mix on CVP are also discussed.

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Fahim Ashab Chowdhury
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64 views17 pages

Cost-Volume-Profit Analysis: OST Ccounting Anagerial Mphasis Dition Rikant Eorge Adhav Hristopher

The document summarizes key concepts in cost-volume-profit (CVP) analysis including: 1) CVP examines how total revenues, costs, and operating income change with units sold, price, variable cost, or fixed costs. It assumes changes in production solely impact costs and revenues. 2) Formulas for contribution margin, breakeven point, profit planning, sensitivity analysis, margin of safety, and operating leverage are derived based on CVP assumptions. 3) The effects of multiple products, cost drivers, and sales mix on CVP are also discussed.

Uploaded by

Fahim Ashab Chowdhury
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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COST ACCOUNTING- A MANAGERIAL

EMPHASIS, 16TH EDITION,


SRIKANT/ GEORGE/ MADHAV/
CHRISTOPHER

Chapter 3

Cost-Volume-Profit
Analysis
ESSENTIALS OF CVP ANALYSIS
 Cost-Volume-Profit (CVP) analysis examines the
behaviour of total revenues, total costs, and operating
income as changes occur in the units sold, the selling
price, the variable cost per unit, or the fixed costs of a
product.
COST-VOLUME-PROFIT
ASSUMPTIONS
 Changes in production/sales volume are the sole cause
for cost and revenue changes
 Total costs consist of fixed costs and variable costs
 Revenue and costs behave and can be graphed as a
linear function (a straight line)
 Selling price, variable cost per unit, and total fixed
costs are known and constant
 In many cases only a single product will be analyzed. If
multiple products are studied, their relative sales
proportions are known and constant
 The time value of money (interest) is ignored
BASIC FORMULAE
CONTRIBUTION MARGIN
 Contribution Margin equals sales less variable
costs
 CM = S – VC
 Contribution Margin per unit equals unit selling
price less variable cost per unit
 CMu = SP – VCu
CONTRIBUTION MARGIN
 Contribution Margin also equals contribution
margin per unit multiplied by the number of
units sold
 CM = CMu x Q
 Contribution Margin Ratio (percentage) equals
contribution margin per unit divided by selling
price
 CMR = CMu ÷ SP
DERIVATIONS OF FORMULAS
 A horizontal presentation of the Contribution
Margin Income Statement:
 Sales – VC – FC = Operating Income (OI)
 (SP x Q) – (VCu x Q) – FC = OI
 Q (SP – VCu) – FC = OI
 Q (CMu) – FC = OI
 Remember this last equation, it will be used again in
a moment
BREAKEVEN POINT
 Recall the last equation in an earlier slide:
 Q (CMu) – FC = OI
 A simple manipulation of this formula, and
setting OI to zero will result in the Breakeven
Point (quantity):
 BEQ = FC ÷ CMu
 At this point, a firm has no profit or loss at a
given sales level
 If per-unit values are not available, the
Breakeven Point may be restated in its alternate
format:
 BE Sales = FC ÷ CMR
BREAKEVEN POINT, EXTENDED:
PROFIT PLANNING
 With a simple adjustment, the Breakeven Point
formula can be modified to become a Profit
Planning tool
 Profit is now reinstated to the BE formula, changing
it to a simple sales volume equation
 Q = (FC + OI)
CMu
 Sales = (FC + OI)
CMR
CVP, GRAPHICALLY
y
$10,000

Total Operating
revenues income
line
$8,000 Breakeven point = 25 units

Operating
income area
$6,000
Dollars

$5,000
Variable
Breakeven
$4,000
point
costs
Total = 25 units
Total
costs costs
line line

$2,000
Operating
Operating loss area Fixed
loss area
x
costs
10 20 25 30 40 50

Units Sold
CVP AND INCOME TAXES
 From time to time it is necessary to move back and
forth between pre-tax profit (OI) and after-tax profit
(NI), depending on the facts presented
 After-tax profit can be calculated by:
 OI x (1-Tax Rate) = NI
 NI can substitute into the profit planning equation
through this form:
 OI = I I NI I
(1-Tax Rate)
SENSITIVITY ANALYSIS
 CVP provides structure to answer a variety of
“what-if” scenarios
 “What” happens to profit “if”:
 Selling price changes
 Volume changes
 Cost structure changes
 Variable cost per unit changes
 Fixed cost changes
MARGIN OF SAFETY
 One indicator of risk, the Margin of Safety (MOS)
measures the distance between budgeted sales
and breakeven sales:
 MOS = Budgeted Sales – BE Sales
 The MOS Ratio removes the firm’s size from the
output, and expresses itself in the form of a
percentage:
 MOS Ratio = MOS ÷ Budgeted Sales
OPERATING LEVERAGE
 Operating Leverage (OL) is the effect that fixed costs
have on changes in operating income as changes occur
in units sold, expressed as changes in contribution
margin
 OL = Contribution Margin
Operating Income
 Notice these two items are identical, except for fixed costs
EFFECTS OF SALES-MIX ON CVP
 Sales mix is the quantities of various products (or
services) that constitute total unit sales of a company.
 The formulae presented to this point have assumed a
single product is produced and sold
 A more realistic scenario involves multiple products
sold, in different volumes, with different costs
MULTIPLE COST DRIVERS
 Variable costs may arise from multiple cost
drivers or activities. A separate variable cost
needs to be calculated for each driver. Examples
include:
 Customer or patient count
 Passenger miles
 Patient days
 Student credit-hours
CONTRIBUTION MARGIN VS. GROSS
PROFIT COMPARATIVE STATEMENTS

Contribution Margin Income Statement Financial Accounting Income Statement


(Internal-Use Only) GAAP - Based

Revenues: $200 Revenues: $200


Less: Less:
Variable Cost of Goods Sold $120 Cost of Goods Sold $120
Variable Operating Costs 45 165
Contribution Margin 35 Gross Margin (Profit) 80
Fixed Operating Costs 20 Fixed & Variable Operating Costs 65
Operating Income $15 Operating Income $15

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