Cost - Chapter 5.pptx

1. Cost accounting chapter 5
Chapter Five: Cost – Volume – Profit (CVP) Analysis
• LEARNING OBJECTIVES
• After studying this chapter, you should be able to do the following:
• 1 Explain the features of cost–volume– profit (CVP) analysis
• 2 Determine the breakeven point and output level needed to achieve a target
operating income
• 3 Understand how income taxes affect CVP analysis
• 4 Explain how managers use CVP analysis to make decisions
• 5 Explain how sensitivity analysis helps managers cope with uncertainty
• 6 Use CVP analysis to plan variable and fixed costs
• 7 Apply CVP analysis to a company producing multiple products
• 8 Apply CVP analysis in service and not-for-profit organizations
• 9 Distinguish contribution margin from gross margin.

2. Cost accounting chapter 5
Essentials
of CVP
Analysis
Managers use cost–
volume– profit
(CVP) analysis to
study the behavior
of and relationship
among these
elements as
changes occur in
the number of
units sold, the
selling price, the
variable cost per
unit, or the fixed
costs of a product.
1. Identify the
problem and
uncertainties.
2. Obtain
information.
3. Make
predictions about
the future.
4. Make decisions
by choosing among
alternatives.
5. Implement the
decision, evaluate
performance, and
learn

3. Cost accounting chapter 5
• Contribution Margin = Total revenues - Total variable costs
• Contribution margin per unit = Selling price - Variable cost per unit
• Contribution margin = Contribution margin per unit X Number of units sold
• Operating income = Contribution margin - Fixed costs
• margin percentage (or contribution margin ratio):
Contribution margin percentage (or contribution margin ratio) =
Contribution margin / Revenues
• Contribution margin percentage = { Contribution margin / Quantity of units
sold } / { Revenues / Quantity of units sold }
= Contribution margin per unit / Selling price

4. Cost accounting chapter 5
• Expressing CVP Relationships
• 1. The equation method 2. The contribution margin method
• Revenues - Variable costs - Fixed costs = Operating income
• How are revenues in each column calculated?
• Revenues = Selling price (SP) X Quantity of units sold (Q)
• How are variable costs in each column calculated?
• Variable costs = Variable cost per unit (VCU) X Quantity of units sold ( Q ) So,
• { ( Selling price ) X (Quantity of units sold) – (Variable cost per unit) X (Quantity of units sold) - (Fixed costs) = Operating
income (Equation 1)
Equation 1 becomes the basis for calculating operating income for different quantities of units sold. For example, if you go to
o cell F7 in Exhibit 3-1, the calculation of operating income when Emma sells 5 packages is
o ($200 * 5) - ( $120 * 5) - $2,000 = $1,000 - $600 - $2,000 = $200
• Contribution Margin Method
• Rearranging equation 1, { (Selling price -Variable cost per unit ) X Quantity of units sold } – Fixed costs =
• Operating income ( Contribution margin per unit ) X ( Quantity of units sold ) – Fixed costs = Operating income
(Equation 2)
• The contribution margin per unit is $80 1$200 - $1202, so when Emma sells 5 packages, Operating income = ( $80 * 5 ) -
$2,000 = $200
• Equation 2 expresses the basic idea we described earlier—each unit sold helps Emma recover $80 (in contribution margin) of
the $2,000 in fixed costs.

5. Cost accounting chapter 5
• 3 . Graph Method

6. Cost accounting chapter 5
• Cost–Volume–Profit Assumptions
• Now that you know how CVP analysis works, think about the following
assumptions we made during the analysis:
• 1. Changes in revenues and costs result solely from changes in the number of
product (or service) units sold.
2. Total costs can be separated into two components: a fixed component that
does not vary with units sold and a variable component that changes based on
units sold .
• 3. When represented graphically, the behaviors of total revenues and total costs
are linear (meaning they can be represented as a straight line) in relation to units
sold within a relevant range (and time period).
• 4. Selling price, variable cost per unit, and total fixed costs (within a relevant
range and time period) are known and constant.

7. Cost accounting chapter 5
Breakeven Point and Target Operating Income
• PAGE 105, 106, 107, 108
• (equation 1):
• { ( Selling price X Quantity of units sold ) - ( Variable cost per unit X Quantity of units sold ) } - Fixed costs = Operating
income
• (equation 2):
• Recall the contribution margin method :
• ( Contribution margin per unit X Quantity of units sold ) - Fixed costs = Operating income At the breakeven point
• (Equation 3)
• ( Contribution margin per unit X Breakeven quantity of units ) = Fixed costs
• (equation 4).
• Quantity of units required to be sold =( Fixed costs + Target
• operating income) / Contribution margin per unit
• (equation 5).
Margin of safety =Budgeted revenues – Breakeven revenues
• Margin of safety (in units) = Budgeted sales (units) – Breakeven sales (units)
• (equation 6 ).
• Margin of safety percentage = Margin of safety in dollars / Budgeted (or actual)