Fundamentals of accounting - cost value profit (cvp)

1. Topic:
Cost, Volume and
Profit Analysis
By: John Paul Espino
De La Salle University – Dasmarinas
Facebook.com/Johnpaul.dss

3. • solve problems in relation to
contribution margin, contribution
margin ratio, and unit contribution
margin.
Student can:
• determine the break-even point and
the volume necessary to achieve a
target profit.
• explain the uses of cost – volume –
profit relationships.

4. Cost-Volume-Profit
Relationships
Cost-volume-profit analysis (CVP) is the
systematic examination of the relationships
among sales, costs, profit and volume of
production.
CVP Analysis uses the format of
Contribution Margin in presenting Net
Income.

5. The contribution margin is
the excess of sales revenues
over variable costs.
What is Contribution Margin?
Sales
Less: Variable Costs
Contribution Margin

6. In Contribution Margin,
it is important to classify
costs by their behavior as:
• variable costs
• fixed costs
• mixed costs
Objective 1

7. Variable Costs
• Costs that vary in proportion
to changes in the level of
activity, or in direct proportion
to volume changes.

8. 8
Illustration: Cool Music
Company produces stereo sound
systems. The parts for the Cool
Music stereos is P400 per unit.
Variable Costs, continued

9. Variable Costs, continued
Number
of
Units
Cost per
Unit
Total
Cost
50 units P400 P20,000
200 units P400 P80,000
1,000 units P400 P400,000

10. 10
Fixed Costs
• Costs that remain the same,
in total amount, when
production level increase or
decrease.

11. 11
Illustration: The production
supervisor for Infinity
Perfume is paid P360,000 per
year. The plant produces
from 50,000 to 300,000 bottles
of perfume.
Fixed Costs, continued

12. Fixed Costs, continued
Number of
Bottles
Total
Salary
Salary
per Bottle
50,000 P360,000 P7.20
150,000 360,000 2.40
300,000 360,000 1.20

13. Mixed Costs
A mixed cost has characteristics of both a
variable and a fixed cost. Over one
range of activity, the total mixed cost
may remain the same. Over another
range of activity, the mixed cost may
change in proportion to changes in level
of activity.
Mixed costs are sometimes called
semivariable or semifixed costs.

14. Simpson Inc. manufactures sail boats
using rented equipment. The rental
charges are P120,000 per year, plus 100
for each machine hour used over 10,000
hours.
Illustrations: Mixed Costs
Fixed costs - Rental charges of P120,000
per year of machine hours used is 10,000
and less.
Variable costs - plus 100 for each
machine hour used over 10,000 hours.

15. Direct
Materials
Elements of Manufacturing Costs
Direct Labor
Factory
Overhead
Variable
Cost
Variable
Cost
Variable Cost -
indirect materials,
indirect labor, small
tools, overtime pay of
indirect labor
Fixed Costs (insurance on building, depreciation,
property taxes, rent, plant manager’s salary)
Mixed, Semi variable or Semi fixed (electricity,
inspector’s wages, machine repairs

16. Gross Profit Format
Sales
Less: Cost of Goods
Sold
Gross Profit
Less: Selling/Admin
Expenses
Net Income
Sales
Less: Variable
costs
Contribution
margin Fixed
Costs
Net Income
Contribution Margin
Format

17. Sales 10,000
Cost of Goods Sold
Direct materials 3,000
Direct labor 2,000
Factory overhead 2,500
Cost of Goods Sold 7,500
Gross Profit 2,500
Less: Operating Expenses
Selling expenses 500
Administrative expenses 600
General expenses 700
Total Expenses 1,800
Net Income 700
Income Statement for Manufacturing
Sales 10,000
Cost of Goods Sold:
Direct materials 2,000
Direct labor 3,500
Factory overhead 2,500
Manufacturing costs 8,000
Work in process inv., beg. 2,000
Goods placed in process 10,000
Work in process inv., end (2,500)
Cost of goods manufactured 7,500
Finished goods inventory, beg. 1,500
Merchandise Available for Sale 9,000
Finished Goods, end (3,000)
Cost of Goods Sold 6,000
Gross Profit 4,000
Less: Operating Expenses
Selling 1,200
Administration 900
2,100
Net Income 1,900
Sales 10,000
Cost of Goods Sold:
Direct materials 2,000
Direct labor 3,500
Factory overhead 2,500
Manufacturing costs 8,000
Work in process inv., beg. 2,000
Goods placed in process 10,000
Work in process inv., end (2,500)
Cost of goods manufactured 7,500
Finished goods inventory, beg. 1,500
Merchandise Available for Sale 9,000
Finished Goods, end (3,000)
Cost of Goods Sold 6,000
Gross Profit 4,000
Less: Operating Expenses
Selling 1,200
Administration 900
2,100
Net Income 1,900
VC
VC
VC FC
VC FC
VC FC
Sales 10,000
Less: Variable Costs
Direct materials 2,000
Direct labor 3,500
Factory overhead 2,500
Manufacturing costs 8,000
Work in process inv., beg. 2,000
Goods placed in process 10,000
Work in process inv., end (2,500)
Cost of goods manufactured 7,500
Finished goods inventory, beg. 1,500
Merchandise Available for Sale 9,000
Finished Goods, end (3,000)
Cost of Goods Sold 6,000
Contribution Margin 4,000
Less: Operating Expenses
Selling 1,200
Sales 10,000
Less: Variable Costs
Direct materials 2,000
Direct labor 3,500
Factory overhead 2,500
Manufacturing costs 8,000
Work in process inv., beg. 2,000
Goods placed in process 10,000
Work in process inv., end (2,500)
Cost of goods manufactured 7,500
Finished goods inventory, beg. 1,500
Merchandise Available for Sale 9,000
Finished Goods, end (3,000)
Cost of Goods Sold 6,000
Contribution Margin 4,000
Less: Operating Expenses
Selling 1,200
Administration 900
Merchandise Available for Sale 9,000
Finished Goods, end (3,000)
Cost of Goods Sold 6,000
Contribution Margin 4,000
Less: Operating Expenses
Selling 1,200
Administration 900
2,100
Net Income 1,900
Manufacturing costs 8,000
Work in process inv., beg. 2,000
Goods placed in process 10,000
Work in process inv., end (2,500)
Cost of goods manufactured 7,500
Finished goods inventory, beg. 1,500
Merchandise Available for Sale 9,000
Finished Goods, end (3,000)
Cost of Goods Sold 6,000
Contribution Margin 4,000
Less: Operating Expenses
Selling 1,200
Administration 900
2,100
Net Income 1,900
Manufacturing costs
Work in process inv., beg.
Goods placed in process
Work in process inv., end
Cost of goods manufactured
Finished goods inventory, beg.
Merchandise Available for Sale
Finished Goods, end
Cost of Goods Sold
Contribution Margin
Less: Fixed Costs
Selling
Administration
Net Income
Work in process inv., beg. 2,000
Goods placed in process 10,000
Work in process inv., end (2,500)
Cost of goods manufactured 7,500
Finished goods inventory, beg. 1,500
Merchandise Available for Sale 9,000
Finished Goods, end (3,000)
Cost of Goods Sold 6,000
Contribution Margin 4,000
Less: Operating Expenses
Selling 1,200
Administration 900
2,100
Net Income 1,900
Sales
Less: Variable Costs
Direct materials
Direct labor
Factory overhead
Manufacturing costs
Work in process inv., beg.
Goods placed in process
Work in process inv., end
Cost of goods manufactured
Finished goods inventory, beg.
Sales
Less: Variable Costs
Direct materials
Direct labor
Factory overhead
Manufacturing costs
Work in process inv., beg.
Goods placed in process
Work in process inv., end
Cost of goods manufactured
Finished goods inventory, beg.
Merchandise Available for Sale
Finished Goods, end
Cost of Goods Sold
Contribution Margin
Less: Fixed Costs
Selling
Administration
Net Income
Contribution Margin Format
VC
VC
VC
VC
VC
FC
FC
FC

18. Compute the contribution
margin (in amount), the
contribution margin ratio (%),
and the unit contribution
margin (per unit).
Objective 2

19. Presentation of Contribution Margin
Volume of Production:
PerUnit Amount Ratio
Sales
Less: Variable Expenses
ContributionMargin
Less: Fixedexpenses
Income fromoperations
Volume of Production:
PerUnit Amount Ratio
Sales
Less: Variable Expenses
ContributionMargin
Less: Fixedexpenses
Income fromoperations
VolumeofProduction:
PerUnit Amount Ratio
Sales
Less: VariableExpenses
ContributionMargin
Less: Fixedexpenses
Incomefromoperations
Volume of Production:
PerUnit Amount Ratio
Sales
Less: Variable Expenses
ContributionMargin
Less: Fixedexpenses
Income fromoperations
No. of Units Produced____________

20. Illustration: Contribution Margin
Molly Company sells 20,000 units at P12
per unit. Variable cost is P9 per unit, and
fixed costs is P25,000. Determine the
(a) contribution margin ratio,
(b) unit contribution margin, and
(c) income from operations.

21. Illustrations: Contribution Margin, continued
Volume of Production: 20,000
Per Unit Total
Sales 12₱
Less: Variable Expenses 9
Contribution Margin
Less: Fixed expenses 25,000
Income from operations
1 Contribution Margin Ratio
2 Unit Contribution Margin
3 Income from Operations
3
3
60,000 25%
25%
35,000
35,000

22. Using the unit contribution
margin, determine the break-
even point and the volume
necessary to achieve a target
profit.
Objective 3

23. Break-Even Point (BEP)
The break-even point is the level of
operations at which a business’s
revenues and costs (cost of goods
and expenses) are exactly equal.
The Break-Even Point Formula:
Sales BEP = Fixed Costs/ CM Per Unit

24. Illustrations: Break-Even Point
Barker Corporation’s fixed costs are
estimated to be P90,000. The unit
contribution margin is as follows:
Unit selling price P25
Unit variable cost 15
Unit contribution margin P10

25. Volume of Production: ???
Per Unit Total
Sales 25₱
Less: Variable Expenses 15
Contribution Margin 10₱ ???
Less: Fixed expenses 90,000
Income from operations -₱
No. of Units to Break Even
90,000₱
10₱
9,000=
Fixed Cost (Total Amount)
CM Per Unit
Illustrations: Break-Even Point
Volume of Production: ???
Per Unit Total
Sales 25₱
Less: Variable Expenses 15
Contribution Margin 10₱ ???
Less: Fixed expenses 90,000
Income from operations -₱
No. of Units to Break Even
90,000₱
10₱
9,000=
Fixed Cost (Total Amount)
CM Per Unit
Volume of Production: ???
Per Unit Total
Sales 25₱
Less: Variable Expenses 15
Contribution Margin 10₱ ???
Less: Fixed expenses 90,000
Income from operations -₱
No. of Units to Break Even
90,000₱
10₱
9,000=
Fixed Cost (Total Amount)
CM Per Unit

26. Income from operations is zero when 9,000 units
are sold — hence, break-even is 9,000 units.
Volume of Production: 9,000
Per Unit Total
Sales 25₱ 225,000₱
Less: Variable Expenses 15 135,000
Contribution Margin 10₱ 90,000₱
Less: Fixed expenses 10 90,000
Income from operations -₱ -₱
Illustrations: Break-Even Point

27. The sales volume required to earn a
target profit is determined by
modifying the break-even equation.
Sales (units) =
Fixed Costs + Target Profit
Unit Contribution Margin
Illustrations: with Target Profit

28. Illustrations: with Target Profit
Fixed costs are estimated at P200,000, and
the desired profit is P100,000. Unit
contribution margin is P30.
Unit selling price P75
Unit variable cost 45
Unit contribution margin P30
Required: How many units should be sold to
achieve the target profit.

29. Illustrations: with Target Profit
Sales (units) =
Fixed Costs + Target Profit
Unit Contribution Margin
Sales (units) = 10,000 units
Sales (units) = P200,000 + P100,000
P30

30. 30
Calculate the correct amount for each blank on the
following information:
Sales P180,000
Variable cost 80,000
Contribution margin P100,000
Fixed cost _______ 1
Operating income (loss) P 30,000
Units sold _______ 2
Price per unit P 9.00
Variable cost per unit P______ 3
Contribution margin per unit P______ 4
Contribution margin ratio ______ 5
Break – even units ______ 6
Seatwork

31. 31
Calculate the correct amount for each blank on the
following information:
Sales P 53,000
Variable cost _______ 1
Contribution margin P______ 2
Fixed cost 22,260
Operating income (loss) P 4,240
Units sold 1,000
Price per unit P______ 3
Variable cost per unit P______ 4
Contribution margin per unit P______ 5
Contribution margin ratio ______ 6
Break – even units ______ 7
Short Quiz