Topic 22: CVP Analysis Flashcards
What is the Cost-Volume-Profit (CVP) analysis?
It is an analytical technique used by managerial accountants to address how sales, cost, and profit are affected by changes in the dynamic business world.
What are Fixed Costs?
Costs that remain constant over a specific range of activity level (* the relevant range)
What are Variable Costs?
Costs that vary with changes in activity level.
eg. All direct costs ( DM and DL)
What are Semi-variable/mixed costs?
It contains both fixed and variable components. Costs that vary with changes in activity but are also incurred at zero activity level.
What is Break-Even (BE) analysis?
-The BE point refers to the activity level/sales level at which total revenue = total cost.
-It is important to management for decision making because it represents the minimum acceptable level of operations.
-Profitable operations can only result when the level of activity exceeds the break-even point
What is Relevant Range?
It is the number of units or hours of production where a firm would normally operate and where fixed costs remain fixed and variable costs varying at a constant rate.
Within this range, items of costs follow a predictable pattern of cost behaviour which can be divided into fixed, variable, and semi-variable components.
What is the Profit Equation?
Sales = Total cost (Variable Costs + Fixed Costs)
What is the equation for Contribution Margin?
Contribution margin = Sales - Variable Costs
What is Contribution Margin?
It refers to the excess of sales over variable cost
What is the formula for Unit Contribution Margin?
Unit Contribution Margin = Unit Selling price - Unit Variable cost
What is Unit Contribution Margin?
The unit CM refers to the amount that each unit sold contributes to cover the fixed costs and to provide for a profit
What is the formula for number of units sold?
No. of units sold = Fixed costs/Unit Contribution margin
What is the Contribution Margin(CM) ratio?
CM Ratio = CM/Sales revenue
What is the Break-Even (sales dollar) formula?
BE sales dollar = Fixed costs/CM Ratio
What does the CVP graph illustrate?
The CVP Graph illustrates the inter-relationships between:
-Total Sales and Sales Volume
-Total Costs and Sales Volume
