CVP & BEP Analysis Flashcards
one of the tools managers can use in profit planning.
- a systematic examination of the relationships among costs, activity levels or volume, and profit.
Cost-Volume-Profit Analysis
Why is the relationship of cost, volume, and profit important to management?
The CVP analysis is very much useful to management as it provides an insight into the effects and inter-relationship of factors, which influence the profits of the firm. The relationship between cost, volume and profit makes up the profit structure of an enterprise. Hence, the CVP relationship becomes essential for budgeting and profit planning.
functional classification of costs?
manufacturing, selling and administrative expenses
the way cost change with respect to a change in the activity level, such as production or sales volume, labor or machine hours, etc.
Cost behavior
costs that DO NOT CHANGE with changing levels of activity, remain constant.
Fixed Cost
Examples of Fixed Cost
rental cost of factory building, property taxes, insurance, depreciation computed on straight line basis, salaries of some personnel
costs that CHANGE DIRECTLY or PROPORTIONATELY with the level of activity. Total Variable cost increases (decreases), activity level increases (decreases)
Variable Cost
direct materials, direct labor, some overhead items like indirect materials, indirect labor, factory supplies, employee fringe benefits on direct labor, sales commissions, office supplies, etc.
Variable Costs
cannot be described by a single cost behavior pattern, possess both fixed and variable components.
Mixed Cost
vary directly with the change in activity level, the rate of change in these cost items with the change in activity level is not constant. Instead of increasing at a constant rate, semi-variable costs tend to either increase at an increasing rate or increase at decreasing rate.
Semi-variable Cost
Examples of Semi-variable Cost
cost of electricity (increase at an increasing rate), learning curve costs (increase at decreasing rate)
often called step function cost or step costs.
Semi-fixed Cost
the band of activity within which the identified cost behavior patterns are valid.
Relevant Range
states that the cost behavior patterns identified are true only over a specific period of TIME.
Time Assumption
that point in activity level (sales volume) where total revenues equal total costs (or expenses), there is neither profit nor loss.
Break-even point/sales
Break-even Methods
Equation method or Algebraic approach
Contribution margin method or formula approach
Graphic approach
the excess of revenue over all the variable costs, and this is the amount available for the recovery of fixed costs and generation of profits.
Contribution Margin
Differentiate between the break-even chart and profit volume graph
Unlike the break-even chart, the profit volume graph does not show the total cost and sales lines. What it shows is a profit line drawn on a graph with volume (in units and in pesos) in the horizontal axis and profit/loss in the vertical axis.
is the difference between actual or planned sales volume and break-even sales. It indicates the amount by which actual or planned sales may be reduced without incurring loss. It can be expressed in units, in pesos of sales or as a ratio.
Margin of Safety
Five Factors Affecting Profit
Selling price per unit
Variable cost per unit
Volume or number of units
Fixed cost
Sales mix
Assumptions or Limitations underlying CVP Analysis
All costs are classified as either fixed or variable.
Fixed costs remain constant within the relevant range.
The behavior of total revenues and total cost will be linear over the relevant range.
In case of multiple-product companies, the selling prices cost and proportion of units (sales mix) sold will not change.
There is no significant change in the inventory levels during the period under review.
Other assumptions
