CVP Analysis in Management Accounting
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Transcript of CVP Analysis in Management Accounting
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C V P Analysis
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Understand how cost behaviorand cost-volume-profit analysis
are used by managers.
CVP Analysis
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Cost-Profit-Volume Analysis
What is cost-volume-profit analysis?
It is the study of the effects of outputvolume on revenue (sales), expenses(costs), and net income (net profit).
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Questions Addressed by CVP Analysis
How much must I sell to earn my desired income?
How will income be affected if I reduce selling prices to increase sales volume?
What will happen to profitability if I expand capacity?
Variable Costs
Fixed Costs
Mixed Costs
Cost Estimation Methods
Cost Estimation Methods are frequently required to separate the fixed and variable components of a total cost pool. Methods include:
1. Account Analysis2. Scattergraph3. High-Low Method4. Regression5. Relevant Range
Scattergraph
High-Low Method
Example: Let total costs at 500 units of output be $150,000 and at 3,000 units of output be $400,000. Calculate variable and fixed costs, respectively.
High-Low Method
Solution: High Low Change
Costs: $400,000 $150,000 $250,000
Units: 3,000 500 2,500
Calculate Variable Cost Per Unit:
$250,000/2,500 = $100
Calculate Total Fixed Costs:
$400,000 – (3,000 x 100) = $100,000
High-Low Method
Regression Analysis
Relevant Range
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How Is Cost Behavior Used By Managers ?
Understanding cost behavior is vital tothe manager’s decision-making role,because one of the main goals ofmanagement accounting iscontrolling costs.
Cost-Volume-Profit Analysis
1. The Profit Equation
2. Breakeven Point
3. Margin of Safety
4. Contribution Margin
5. Contribution Margin Ratio
6. What-if Analysis
The Profit Equation
Profit = SP(x) –VC(x) – TFC
X = Quantity of units produced and sold
SP = Selling price per unit
VC = Variable cost per unit
TFC = Total fixed cost
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Break-Even Point
The break-even point is the level of sales at which revenue equals expenses and net income is zero.
Break-Even Point
Break-Even Point
TFC/CM(per unit) = Break-Even (units)
X = Quantity of units produced and sold
SP = Selling price per unit
VC = Variable cost per unit
CM = Contribution margin
TFC = Total fixed cost
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Contribution Margin and Gross Margin
Gross margin (which is also called gross profit)is the excess of sales over the cost of goods sold.
Contribution margin is the excess of sales overall variable costs.
Contribution Margin
SP(u) – VC(u) = CM (u)
SP = Selling price per unit
VC = Variable cost per unit
CM = Contribution margin
u = per unit
Contribution Margin Ratio
(SP – VC) / SP = CM%
SP = Selling Price per unit
VC = Variable Cost per unit
CM = Contribution Margin
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Per Unit PercentageSelling price $5 100Variable cost 4 80Difference $1 20
CVP Scenario
Total monthly fixed expenses = $8,000Rent $2,000Labor $5,500Other $ 500
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Equation Technique
$5N – $4N – $8,000 = 0$1N = $8,000N = $8,000 ÷ $1N = 8,000 Units
Let N = number of units to be sold to break even
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Equation Technique
S – 0.80S – $8,000 = 0.20S = $8,000S = $8,000 ÷ .20S = $40,000
Let S = sales in dollars needed to break even
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Margin of Safety
The margin of safety shows how far sales can fall below the planned level before losses occur.
Actual sales –
Break-even sales=
Margin of safety
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Target Net Profit
Managers can also use CVPanalysis to determine thetotal sales, in units anddollars, needed toreach a targetnet profit.
Managers can also use CVPanalysis to determine thetotal sales, in units anddollars, needed toreach a targetnet profit.
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Target Net Income and Income Taxes
Revenues (2,535 × $90) $228,150Variable costs (2,535 × $32) 81,120Contribution margin: $147,030Fixed costs: 96,000Operating income: $ 51,030Income taxes: ($51,030 × .30) 15,309Net income $ 35,721
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Target Net Profit
Contribution Margin Technique
Target sales volume in units =Fixed expenses + Target net incomeContribution margin per unit