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Chapter 2

The document discusses cost-volume-profit analysis and its key concepts. It defines terms like contribution margin, breakeven point, and target operating income. Formulas for revenue, variable costs, contribution margin, breakeven units and sales are provided. Examples are used to illustrate calculating breakeven point and target operating income using the cost-volume-profit model.

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8 views15 pages

Chapter 2

The document discusses cost-volume-profit analysis and its key concepts. It defines terms like contribution margin, breakeven point, and target operating income. Formulas for revenue, variable costs, contribution margin, breakeven units and sales are provided. Examples are used to illustrate calculating breakeven point and target operating income using the cost-volume-profit model.

Uploaded by

Ly Võ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Cost Accounting

Chapter 2

Copyright © 2019 Pearson Canada Inc. 3-1


Horngren’s Cost Accounting: A Managerial
Emphasis
Eighth Canadian Edition

Cost-Volume-Profit Analysis

Copyright © 2019 Pearson Canada Inc. 3-2


Learning Objectives (1 of 2)
1. Identify the essential elements of cost-volume-
profit analysis and calculate the breakeven point
(BEP).
2. Apply the CVP model to calculate a target
operating profit before interest and tax.
3. Distinguish among contribution, gross, operating,
and net income margins, and apply the CVP
model to calculate target net income.

Copyright © 2019 Pearson Canada Inc. 3-3


Learning Objectives (2 of 2)
4. Apply the CVP model in decision making.

Copyright © 2019 Pearson Canada Inc. 3-4


Essentials of CVP Analysis
• Changes in sales volume and production are
identical and the ending balances in all inventory
accounts are zero
• All costs are classified as fixed or variable
• All cost behaviour is linear within the relevant
volume range

Copyright © 2019 Pearson Canada Inc. 3-5


Essentials of CVP Analysis continued
• Sales price per unit, variable cost per unit, and
total fixed costs are all known
• Either the product sold or the product mix remains
constant, although the volume changes
• The time value of money is ignored

Copyright © 2019 Pearson Canada Inc. 3-6


Cost-Volume-Profit Formulae
Revenue – Variable Costs – Fixed Costs = Operating Income

Where the following equations hold:

Revenue = Selling Price ´ Quantity Sold

and

Variable Costs = Variable Cost per Unit ´ Quantity Sold

Copyright © 2019 Pearson Canada Inc. 3-7


CVP: Contribution Margin
• Contribution Margin (CM)
– Amount remaining from revenue obtained after all
variable costs have been paid

CM = total revenue - total variable costs

• Contribution Margin per unit (CMu)


CMu = unit sales price − unit variable cost
• Contribution Margin Ratio
– Equals unit contribution margin per unit divided by unit
selling price (= CMu ÷ SPu)
– Interpretation: how many cents out of every sales dollar
are represented by Contribution Margin
Copyright © 2019 Pearson Canada Inc. 3-8
Breakeven Point
• Where total revenue = total cost
– Total revenue referred to as breakeven revenue
– Number of units sold referred to as breakeven volume
• Where contribution margin = fixed costs
• At this point, a firm has no profit or loss at the
given sales level
• Breakeven point (BEP) formulae
– in units: BEP unit quanity = FC ÷ CMu
– in sales revenue: BEP sales $ = FC ÷ CM ratio
Copyright © 2019 Pearson Canada Inc. 3-9
Example, Wei’s Do-All Software
bl

Blank Wei Sells 5 Packages Wei Sells 40 Packages an


k

Revenue $1,000 ($200 per package $8,000 ($200 per package ×


× 5 packages) 40 packages
Total variable costs 600 ($120 per package 4,800 ($120 per package ×
× 5 packages) 40 packages
Contribution margin $ 400 blank $3,200 blank
Fixed cost 2,000 blank 2,000 blank
Operating income (loss) ($1,600) blank $1,200 blank

Copyright © 2019 Pearson Canada Inc. 3 - 10


Breakeven – Example
Wei Sells 25 Packages
Revenue $4,000 ($200 per package ×
25 packages)
Total variable costs 3,000 ($120 per package ×
25 packages)
Contribution margin $2,000 Blank
Fixed cost 2,000 Blank
Operating income (loss) $ 0 Blank

(Units sold ´ $200) - (Units sold ´ $120) - $2, 000 = $0

Copyright © 2019 Pearson Canada Inc. 3 - 11


Target Operating Income Example
Wei Sells 43.75 Packages
Revenue $8,750 ($200 per package × 43.75
packages)
Total variable costs 5,250 ($120 per package × 43.75
packages)
Contribution margin $3,500 Blank
Fixed cost 2,000 Blank
Operating income $1,500 Blank

Copyright © 2019 Pearson Canada Inc. 3 - 12


Profit Planning, Illustrated

Copyright © 2019 Pearson Canada Inc. 3 - 13


Target Net Income and Income Taxes
• After-tax net income can be calculated by:

Operating income ´ (1 - Tax Rate) = Net income

• Net income can substitute into the profit planning


equation through this form:

Net income
Operating income =
(1 - Tax Rate)

Copyright © 2019 Pearson Canada Inc. 3 - 14


Alternative Income Statement Formats
Contribution Income Statement Financial Accounting Income Statement
Emphasizing Contribution Margin (in $ thousands) Emphasizing Gross Margin (in $ thousands)

Revenue blank $1,000 Revenue $1,000

Variable manufacturing costs $250 blank Cost of goods sold 410

Variable non-manufacturing costs 270 520 ($250 + $160) blank

Contribution margin blank $480 Gross margin $590

Fixed manufacturing costs $160 blank Non-manufacturing costs 408

Fixed non-manufacturing costs 138 298 ($270 + $138) blank

Operating income blank $182 Operating income $182

CM = Revenue − Total Variable Costs GM = Revenue − COGS

Copyright © 2019 Pearson Canada Inc. 3 - 15

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