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Module 3 - CVP Analysis

This document discusses key concepts in cost-volume-profit (CVP) analysis and break-even analysis. It defines cost behavior as fixed, variable, or mixed costs and how costs change with activity levels. It explains the contribution margin approach to CVP relationships and how to calculate break-even point, target operating income, margin of safety, and effects of sales mix and operating leverage. Underlying assumptions of CVP analysis include constant unit costs and behaviors, as well as unchanged capacity, sales, production, and conditions within the relevant range.

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Joshua Cabinas
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259 views

Module 3 - CVP Analysis

This document discusses key concepts in cost-volume-profit (CVP) analysis and break-even analysis. It defines cost behavior as fixed, variable, or mixed costs and how costs change with activity levels. It explains the contribution margin approach to CVP relationships and how to calculate break-even point, target operating income, margin of safety, and effects of sales mix and operating leverage. Underlying assumptions of CVP analysis include constant unit costs and behaviors, as well as unchanged capacity, sales, production, and conditions within the relevant range.

Uploaded by

Joshua Cabinas
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MODULE 3 – CVP ANALYSIS AND BREAK-EVEN ANALYSIS

Ms. Carmel Mae M. Tumulak, CPA |02-17-21

COST BEHAVIOR COST VOLUME PROFIT ANALYSIS


Refers to the way costs change with respects to a change in I. CONTRIBUTION MARGIN (CM)
the activity level, such as production or sales volume, labor Indicates why operating income changes as the number of units sold
or machine hours, etc. changes.
Classification: CM= Total Revenues – Total variable costs
1.Fixed Cost CMu (CM per unit) = Selling price – Variable cost per unit
2. Variable Cost CM = CMu x # units sold
3. Mixed Cost CMr (CM ratio) = CM/Total revenue
CMr= CMu/Selling price
1. Fixed Cost- the total cost does not change with changing
levels of activity. They remain constant regardless of the
change in activity level. II. EXPRESSING CVP RELATIONSHIPS

Change in Fixed Cost 1. Equation Method


Activity level Total Per Activity level
Revenues – Variable costs – Fixed costs= OI
INCREASE Constant Decrease
DECREASE Constant Increase

2. Contribution margin method


2. Variable Cost- unit cost change directly and proportionately
with the level of activity. CMu x # units sold) – Fixed Costs= OI

Change in Variable Cost


Activity level Total Per Activity level
INCREASE Increase Constant 3. Graph Method
DECREASE Decrease Constant

3. Mixed Cost- cannot be described by a single cost behavior


pattern. They possess both fixed and variable components.

SEGREGATING FIXED AND VARIABLE ELEMENTS OF


MIXED COST

A. High and Low Method


(Steps)
1. Choose the representative highest and lowest
activity levels
2. Get the differences between highest and lowest
activity level and the cost of the highest and
lowest activity level
3. Difference in Cost / Difference in Activity level
= Variable rate per activity level
4. Total Cost – ( H or L Activity level x #3)=
Fixed Cost

B. Scatter graph method


is a type of data display that shows the relationship between two
numerical variables. Each member of the dataset gets plotted as a
point whose x-y coordinates relates to its values for the two variables.
MODULE 3 – CVP ANALYSIS AND BREAK-EVEN ANALYSIS
Ms. Carmel Mae M. Tumulak, CPA |02-17-21

III. BREAKEVEN POINT VIII. OPERATING LEVERAGE


Is that quantity of output sold at which total revenues equal Operating leverage describes the effect of change in sales to
total costs- that is, the quantity of output sold that results in the net income or the effects that fixed costs have on
0 operating income (OI). changes in operating income as changes occur in unit sold
and contribution margin.
BEPu = Fixed Cost / CMu
BEPpesos= Fixed Cost/ CMr
DOL (Degree of operating leverage) = CM / OI
Increase in Profit= Increase in sales x DOL

IV. TARGET OPERATING INCOME

IX. UNDERLYING ASSUMPTIONS ON CVP


TOI= Fixed cost + TOI / CMu
ANALYSIS

1. All revenue and variable cost behavior patterns are


constant per unit and linear within relevant range.
V. TARGET NET INCOME 2. Total contribution margin is linear within relevant
Net Income (NI) is operating income plus nonoperating range and increase proportionally with output.
income less nonoperating costs less income taxes 3. Total fixed cost is a constant amount within the
relevant range
4. Mixed costs can be accurately separated into their
NI= OI – IT (Income taxes) fixed and variable elements.
5. Sales and production are equal.
Target net income= (Target OI) – (Target OI x Tax rate) 6. There will be no capacity additions during the
Target net income= (Target OI) x (1-tax rate) period under consideration.
7. Sales mix will remain constant.
8. There is no inflation.
9. Labor productivity, production technology, and
market conditions will not change.
VI. MARGIN OF SAFETY
Tells us how far sales can drop before the company will be
operating at a loss.

Actual (Expected Sales) - Break Even Sales = MOS in Pesos

MOS in Pesos / Actual (Expected) Sales = MOS ratio

VII. SALES MIX


The relative percentage in which a company sells its multiple
products.

SOURCES:
Weighted-Average Unit CM= (Product 1 Unit CM x Sales Mix %) MAS by Roque
+ (Product 2 Unit CM x Sales Mix %) Introduction to Cost and Management Accounting in a
Global Business Environment
BEP units= Fixed costs / Weighted Average Unit CM
Cost Accounting by Horngren
Cost Management by Hansen & Mowen

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