Cost-Volume-Profit (CVP) Analysis
Chapter 4 Cost-Volume-Profit (CVP) Analysis
Some things we know: The objective of every business is to make money (profit) for the owners
Profit = Revenues – Expenses
Revenues = Sales = Quantity sold x price per unit
Expenses = the costs related to: the specific revenue (COGS) or the specific accounting period Matching Principle
Role of Management is: Planning, control and performance measurement, and decision-making
Decision-making relates to future events and involves risk
Full costing (full-absorption costing) is a good historical tool but may not Be the best indicator of future activity because it is based on past events.
Cost Behavior Variable Costs – total dollars change with volume, Cost per unit is constant Fixed Costs – total dollars are constant, cost per unit changes with volume Mixed Costs – include some variable costs and some fixed costs
Total Cost = Fixed Costs + Volume(variable cost per unit)
Fixed Component Variable Component Purely Fixed $25,000 $ 0 Purely Variable 0 5.00 per unit Mixed Costs 10,000 2.00 per unit Total Costs $35,000 $7.00 per unit
Graphing Total Costs X axis (horizontal/across) = volume Y axis (vertical/up & down) = dollars
Estimating the Composition of Mixed Costs Account Analysis
Scattergraph – Visual inspection of plotted points
High-Low Estimation Theory: The change in total costs between the high volume point and The low volume point, must be purely variable costs
Linear Regression (computer assisted scattergraph)
Contribution Margin Income Statement
Ignores the function of the expenses
Focus is on cost behavior (fixed and variable)
Used extensively in forecasting future potential outcomes (planning & decision making)
Because
Profit = Revenue – Expenses(Costs) Where: Revenue = Volume x price per unit And
Some things we know: The objective of every business is to make money (profit) for the owners
Profit = Revenues – Expenses
Revenues = Sales = Quantity sold x price per unit
Expenses = the costs related to: the specific revenue (COGS) or the specific accounting period Matching Principle
Role of Management is: Planning, control and performance measurement, and decision-making
Decision-making relates to future events and involves risk
Full costing (full-absorption costing) is a good historical tool but may not Be the best indicator of future activity because it is based on past events.
Cost Behavior Variable Costs – total dollars change with volume, Cost per unit is constant Fixed Costs – total dollars are constant, cost per unit changes with volume Mixed Costs – include some variable costs and some fixed costs
Total Cost = Fixed Costs + Volume(variable cost per unit)
Fixed Component Variable Component Purely Fixed $25,000 $ 0 Purely Variable 0 5.00 per unit Mixed Costs 10,000 2.00 per unit Total Costs $35,000 $7.00 per unit
Graphing Total Costs X axis (horizontal/across) = volume Y axis (vertical/up & down) = dollars
Estimating the Composition of Mixed Costs Account Analysis
Scattergraph – Visual inspection of plotted points
High-Low Estimation Theory: The change in total costs between the high volume point and The low volume point, must be purely variable costs
Linear Regression (computer assisted scattergraph)
Contribution Margin Income Statement
Ignores the function of the expenses
Focus is on cost behavior (fixed and variable)
Used extensively in forecasting future potential outcomes (planning & decision making)
Because
Profit = Revenue – Expenses(Costs) Where: Revenue = Volume x price per unit And