Chapter 3 – Cost-Volume-Profit (CVP) Analysis
Acct 2302
Chapter 11 – Cost-Volume-Profit (CVP) Analysis
&
Chapter 4 – Standard Costing Methods
CVP:
– One of the most basic planning tools of managers
Basic CVP Assumptions
1. Only one (1) driver – number of output units (which is the revenue and cost driver)
2. Total costs can be divided into variable and fixed costs
3. Total revenues and total costs are linear within the relevant range
4. Unit selling price, unit variable costs, and fixed costs are known and constant
5. Single product or constant sales mix
6. Can ignore the time value of money effects
7. Units made = units sold
How it REALLY is…..
Essential Features/Terminology of CVP Analysis
Operating Income = Revenues – Costs (excl. income taxes)
CONTRIBUTION MARGIN (CM) = Sales revenue – total variable cost
Contribution Margin (CM) per unit = selling price - variable cost per unit
Contribution Margin percentage (or ratio) = CM per unit / selling price
Contribution Margin = CM per unit x # of packages sold
• At break-even point, what is the contribution margin??
• At the break-even point, what is the operating income or profit?
• At the break-even point what are income taxes?
Example:
Givens: Sales Price per unit = $50
Variable Costs per unit = $20
Fixed Costs = $270,000
What is CM per unit?
What is CM percentage?
What is Contribution Margin?
Break-Even Point (BEP) =
What is our break-even assuming the information above?
BEP = Fixed Cost / CM per unit
What is our sales revenue at the BEP?
What-If Analysis
Givens: Sales Price per unit = $50
Variable Costs per unit = $20
Fixed Costs = $270,000
a. What if you could lower Variable Costs by $2 a unit what happens to the Break-Even Point?
b. What if you could raise sales price to $52, holding variable costs at $20, what happens to the Break-Even point?
c. What if you could lower VC by $5 / unit if you rent a machine at increased fixed costs of $115,000? What happens to the BE point and should you do it?
Sensitivity analysis = What-if analysis is only as good as the model, how sensitive is your model to changes in the estimates?
CVP Analysis in a Multi-Product Company – Sales Mix
Most companies sell more than one product. In this case, the weighted average contribution margin must be calculated. This example assumes no taxes.
BEP in units = FC / Weighted Average CM per the sales mix
Example – you have 3 products A, B, C and fixed costs are $255,000
| |Sales Price per |VC per |CM (a) |Budgeted Volume |% in Mix (b) |Weighted Average CM (a X b) |
| |unit |unit | | | | |
|A |$8 |$5 | |20,000 units | | |
|B |5 |3 | |100,000 units | | |
|C |3 |2 | |80,000 units | | |
| |200,000 units | |
BE = $255,000 / = 150,000 units X .1 = 15,000 units of A
X .5 = 75,000 units of B
X .4 = 60,000 units of C
HOMEWORK –
Chapter 11
Questions- 18, 19
Exercises – 38, 39
Problems- 51, 53
CHAPTER 4 – JOB COSTING
Costing concepts =
• Develop expense categories
• Expenses are mapped to service departments, production centers or activities
• Then attached to cost object
Job Costing vs. Process Costing
Job Costing - treats each individual job as the unit of output and assigns, or allocates costs to each job as resources are used. Think distinct or different. What are some examples?
• KEY CHARACTERISTIC – The unit being costed is identifiable (distinct). You can collect all direct & indirect costs by the job over time to complete and treat them as product costs.
Process Costing – treats all units processed during a time period as the output to be costed and does not separate and record costs for each unit produced. Used for continuous processes. Think identical or similar. What are some examples?
Raw Materials Inventory
Work in Process
Finished Goods
Flow of inventory costs in a job-costing system
BASIC FLOWS – BB + TI = EB + TO
|What I started with |What I added |What is still here |What is gone |
|Beginning Balance (BB) |Transferred In (TI) |Ending Balance (EB) |Transferred Out (TO) |
To determine the EB:
EB = BB + TI – TO
|Raw Materials (RM) |Work-In-Process (WIP) |Finished Goods (FG) |
|BB RM |BB WIP |BB FG |
|+ Purchases |+ New Resources Used (Includes RM Used) |+ COGM |
|- EB RM |- EB WIP |- EB FG |
|RM Used |Cost of Goods Manufactured (COGM) |Cost of Goods Sold (COGS) |
Job bid sheet -
Cost driver -
Cost driver rate -
Job costs -
Margin –
Bid Price -
Mark-up Rate -
Rate of Return -
Determining Cost Driver Rates
• Cost pool -
• Activity cost driver rate –
There can be problems when cost driver rates are fluctuating
Peanut butter costing –
Number of cost pools –
Recording Actual jobs –
• Materials requisition note
• Job cost sheet
The Technological Edge – p 128
Multi-stage Process Costing Systems –
Conversion costs –
P 131 – 4-12
SERVICE DEPARTMENT COST ALLOCATIONS (Appendix 4-1)
2-stage cost allocation procedure -
Service departments -
Direct allocation (direct-method) –
Sequential allocation (step-method) –
Reciprocal allocation (reciprocal-method) –
Stage 1 cost allocations –
Stage 2 cost allocations -
HOMEWORK -
Chapter 4
Questions – 1-15, 17, 18, 20
Exercises – 24, 27, 28, 29
Problems – 31, 33, 34, 37
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