Managerial Accounting

Cost Volume Profit (CVP) Analysis

Lecturer : Suyanto, WA +62811952956
 Basic Assumptions
◼ Changes in production/sales volume are the
sole cause for cost and revenue changes
◼ Total costs consist of fixed costs and variable
costs
◼ Revenue and costs behave and can be
graphed as a linear function (a straight line)

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-2
 Basic Assumptions, continued
◼ Selling price, variable cost per unit, and fixed
costs are all known and constant
◼ In many cases only a single product will be
analyzed. If multiple products are studied,
their relative sales proportions are known and
constant
◼ The time value of money (interest) is ignored

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-3
 Basic Formulae

Total Cost Pretax

Operating Revenues of Operating
Income = from Goods Expenses
Operations Sold

Net Operating Income

Income = Income Taxes

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-4
 Contribution Margin
◼ Contribution Margin equals sales less
variable costs
◼ CM = S – VC
◼ Contribution Margin per unit equals unit
selling price less variable cost per unit
◼ CMu = SP – VCu

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-5
 Contribution Margin
◼ Contribution Margin also equals contribution
margin per unit multiplied by the number of
units sold
◼ CM = CMu x Q
◼ Contribution Margin Ratio (percentage)
equals contribution margin per unit divided by
selling price
◼ CMR = CMu ÷ SP

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-6
 Contribution Margin
Income Statement Derivations
◼ A horizontal presentation of the Contribution
Margin Income Statement:
◼ Sales – VC – FC = Operating Income (OI)
◼ (SP x Q) – (VCu x Q) – FC = OI
◼ Q (SP – VCu) – FC = OI
◼ Q (CMu) – FC = OI
◼ Remember this last equation, it will be used
again in a moment

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-7
 CVP, Graphically
y
$10,000

Total Operating
revenues income
line
$8,000 Breakeven point = 25 units

Operating
income area
$6,000
Dollars

$5,000
Variable
Breakeven
$4,000
point
costs
Total = 25 units
Total
costs costs
line line

$2,000
Operating
Operating loss area Fixed
loss area
x
costs
10 20 25 30 40 50

Units Sold

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-8
 Breakeven Point
◼ Recall the last equation in an earlier slide:
◼ Q (CMu) – FC = OI
◼ A simple manipulation of this formula, and
setting OI to zero will result in the Breakeven
Point (quantity):
◼ BEQ = FC ÷ CMu
◼ At this point, a firm has no profit or loss at
a given sales level

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-9
 Breakeven Point, continued
◼ If per-unit values are not available, the
Breakeven Point may be restated in its
alternate format:
◼ BE Sales = FC ÷ CMR

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-10
 Breakeven Point, extended:
Profit Planning
◼ With a simple adjustment, the Breakeven
Point formula can be modified to become a
Profit Planning tool
◼ Profit is now reinstated to the BE formula,
changing it to a simple sales volume equation
◼ Q = (FC + OI)
CM

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-11
 CVP and Income Taxes

◼ From time to time it is necessary to move back and forth

between pre-tax profit (OI) and after-tax profit (NI),
depending on the facts presented
◼ After-tax profit can be calculated by:
◼ OI x (1-Tax Rate) = NI
◼ NI can substitute into the profit planning equation
through this form:
◼ OI = I I NI I
(1-Tax Rate)

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-12
 Sensitivity Analysis
◼ CVP provides structure to answer a variety of
“what-if” scenarios
◼ “What” happens to profit “if”:
◼ Selling price changes
◼ Volume changes
◼ Cost structure changes
◼ Variable cost per unit changes
◼ Fixed cost changes

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-13
 Margin of Safety
◼ One indicator of risk, the Margin of Safety
(MOS) measures the distance between
budgeted sales and breakeven sales:
◼ MOS = Budgeted Sales – BE Sales
◼ The MOS Ratio removes the firm’s size from
the output, and expresses itself in the form of
a percentage:
◼ MOS Ratio = MOS ÷ Budgeted Sales

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-14
 Operating Leverage

◼ Operating Leverage (OL) is the effect that fixed

costs have on changes in operating income as
changes occur in units sold, expressed as
changes in contribution margin
◼ OL = Contribution Margin
Operating Income
◼ Notice these two items are identical, except for
fixed costs

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-15
 Effects of Sales-Mix on CVP
◼ The formulae presented to this point have assumed a
single product is produced and sold
◼ A more realistic scenario involves multiple products
sold, in different volumes, with different costs
◼ For simplicity’s sake, only two products will be
presented, but this could easily be extended to even
more products

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-16
 Effects of Sales-Mix on CVP
◼ A weighted-average CM must be calculated (in this
case, for two products)
Weighted ( Product #1 CMu x Product #1 Q ) + ( Product #2 CMu x Product #2 Q )
Average =
CMu Total Units Sold (Q) for Both Products

◼ This new CM would be used in CVP equations

Multi- Fixed Costs

Product = Weighted Average CM per unit

BE

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-17
 Multiple Cost Drivers
◼ Variable costs may arise from multiple cost
drivers or activities. A separate variable cost
needs to be calculated for each driver.
Examples include:
◼ Customer or patient count
◼ Passenger miles
◼ Patient days
◼ Student credit-hours

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
3-18
 Contribution Margin vs.
Gross Profit Comparative Statements

Contribution Margin Income Statement Financial Accounting Income Statement

(Internal-Use Only) GAAP - Based

Revenues: $200 Revenues: $200

Less: Less:
Variable Cost of Goods Sold $120 Cost of Goods Sold $120
Variable Operating Costs 45 165
Contribution Margin 35 Gross Margin (Profit) 80
Fixed Operating Costs 20 Fixed & Variable Operating Costs 65
Operating Income $15 Operating Income $15

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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