S1 - cost volume profit Flashcards
what is CVP
Cost volume profit analysis (break even)
relationship between profit and level of activity in the short run
Business planning and marketing decisions
Impacts on profits depending on sales levels and expenditure
no profit or loss
what is the economist view
volume can only be increased by reducing selling price. Revenue doesn’t increase proportionately with output
Costs are assumed to be high at low levels of output - not operating efficiently but unit costs decrease as production increases
As output increases, they operate more efficiently and costs do not rise quickly
As production increases beyond a certain point, labour becomes inefficient and costs increase rapidly again
Two break even points
Fixed costs vary depending on output
what is the accountant view
assumes constant selling price, constant variable cost, linear relationship for revenue and costs
One break even point - straight lines
Assume unchanged fixed costs within certain range
Relevant range for short term planning
how to determine break even
total costs = total revenue
a + bx = Px
(Fixed costs + target profit) / contribution
what is the CVP ratio
contribution margin ratio
Contribution / sales
Assume stay constant per unit
Determines contribution for varying level of sales
Break even sales = fixed costs / CVP ratio
what is margin of safety
indicates how much sales may decrease before a loss occurs
How many units above break even point
Percentage margin of safety = (expected sales - breakeven sales) / expected sales
what are the possible graphs
break even chart
Profit volume graph
Contribution chart
what is multi product CVP analysis
same approach can be used if fixed costs are directly attributable to products
Generally, most fixed costs are common and cannot be directly traced
Convert sales volume measure of the individual products into standard batches of products based on the sales mix - ratio
Contribution based on the standard batch can be determined
Breakeven then determined by using this contribution as if it were a single product
what are the limitations of CVP
assumes other variables remain constant
Assumes costs and selling price are linear
Assumes Complexity related fixed costs do not change
Profits are calculated on a variable costing basis
Unit variable cost and selling price are constant per unit of output
Cannot use the analysis outside the relevant range
Costs can be accurately divided into their fixed and variable elements
Single product or constant sales mix
Assumed that cost are matched to income = no increase or decrease in stock levels over sales mixes
Difficult to measure activity for jobbing businesses where every item produced is different
