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Cost, Volume, and Profit Formulas
All businesses require becoming profitable or at some point they will fail. Accounting plays an essential role in determining if the company will become successful and continue to do so over time. Using well-defined formulas in order to assess the exact numbers will facilitate the actions a company needs to carry out in order to maintain its goals. The accounting department would look at the cost-volume-profit analysis to concentrate on the different components that change the profitability of any business. The cost-volume-profit analysis consist of five components, these are: unit selling price, fixed cost per unit, sales mix, and volume activity. Each component plays a vital role and is just as important as the next although, each is dissimilar to the other. Volume activity can otherwise be known as sales activity, meaning the total of units sold. Whereas, the unit selling price is the number in which the unit is sold for. An example would consist of this; if four gallons of paint sold for a total of $100, that would mean that each can of paint cost $25 per gallon. Therefore, the unit selling price for each gallon of paint would be $25. The variable costs per unit are the expenses that are required in order to make the unit. This could include but is not limited to the changing costs of items such as raw materials and/or labor. The fixed cost per unit is similar to the variable costs per unit however; it does not change in costs. These are costs that can be presumed to stay the same throughout the year including fixed costs such as taxes and utilities. Because most companies and retail stores carry different items at different prices there would be a blend of numbers in sales referred to as the sales mix. The formula for contribution margin per unit is expressed as: the unit selling price subtracted by the unit variable costs. Thus, an increase of the unit selling price would equal a higher contribution margin per...
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...Cost, Volume, and ProfitFormulas
Heather Jauregui
University of Phoenix of Axia College
“The Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company’s profits.” (Kimmel, P., Weygandt, J., & Kieso, D. 2003) The analysis is used to maximize efficiency in a business. In order to be effective the CVP analysis has to make several assumptions. These assumptions are that the costs can be fitted into either fixed or variable categories. The next assumption is that changes that a business makes in its activities are the only thing that will affect costs. The business must assume that all units of a good or service are sold. The last two assumptions are that “behavior of both costs and revenues is linear throughout the relevant range of the activity index.” (Kimmel, P., Weygandt, J., & Kieso, D. 2003) Finally, if the company produces more than one type of product the mix or percentage of each product type will remain the same.
Volume or the level of activity; unit selling price or how much each unit of the product or service is sold for; variable cost per unit such as labor; total fixed cost like rent and utilities, and sales mix are the components that make up the CVP analysis....
...COST – volume –profit analysis
LEARNING OBJECTIVES
Students should be able to:
1. Explain the nature of CVP Analysis and name and illustrate planning and
Decision-making situations in which it may be used,
2. Separate semi-variable (mixed) costs into their fixed and variable components.
3. Construct profit/volume charts given selling price, costs andvolume data.
4. Construct a cost/volume/profit (CVP) model representing the data in a marginal costing profit and loss account
5. Define and calculate the breakeven point using various techniques
6. Apply the CVP model in multi-product situations.
7. Calculate budgeted sales volume required for a given target net income.
8. Calculate and explain the margin of safety.
9. Identify and explain the limitations of C-V-P analysis
KEY TOPICS
The following major topics are covered in this chapter (related learning objectives are listed for each topic).
1. Break-even point in units
2. Break-even point in sales dollars
3. Multiple-product analysis
4. Graphical representation of CVP relationships
5. Changes in the CVP variables
1. BREAK-EVEN POINT...
...Cost, Volume, and ProfitCost-Volume-Profit (CVP) analysis is a managerial accounting tool that expresses the simplified relationship between cost, volume, and profit (or loss). CVP analysis is based on several factors and assumptions and uses a formula to express the relationship by equation or graphically and can be used with great effect by managers who understand the limitations of the analysis.
Cost-Volume-Profit (CVP) analysis is a managerial accounting tool that expresses the simplified relationship between cost, volume, and profit (or loss). CVP analysis focuses on how profits are affected by the following five factors: selling prices, sales volume, unit variable costs, total fixed costs, and mix of products sold. (Brewer, 2010, p. 258) Additionally, CVP analysis is based on several assumptions including, (a) selling price is constant and a change in sales volume is the only factor that affects costs, (b) costs and revenues are linear throughout relevant range, (c) costs can be divided into fixed and variable components throughout relevant range, (d) sales mix doesn’t change, and (e) inventory levels don’t change (units sold equals...
...Question 2
CostVolumeProfit Analysis
1.0 Introduction
According to Jon Scheumann “a successful organizations need a culture that is attuned to cost management and pay attention to cost structure”
From that statement manager must pay attention and carefully thinking when do decision making to the cost. For example when manager want to target the profit. They must take everycost that related in production such as variable cost and fix costs.
CostVolumeprofit analysis is used in decisions making in a company. The reasons why used costvolumeprofit analysis as a method to make decisions making because it helps manager to estimate future cost, revenue, expenses and profit that helps them to monitor the level of activity in production and monitor the plan. Besides that when used CVP analysis we can identify monitor the activity level and make analysis to avoid loss, find a target profit and maximize the production of unit. Moreover CVP analysis can help manager to identify the risk and effect for their decision making and a technique to analyse the profit change bases on sales volumes, costs, and process.
When do CVP analysis the manager can get the information...
...COST-VOLUME-PROFIT ANALYSIS(CVP)
Definition of Cost Accounting
A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment.
Definition of Cost-VolumeProfit Analysis
A method of cost accounting used in managerial economics. Cost-volumeprofit analysis is based upon determining the breakeven point of cost and volume of goods. It can be useful for managers making short-term economic decisions, and also for general educational purposes.
AND Cost-volumeprofit analysis makes several assumptions in order to be relevant. It often assumes that the sales price, fixed costs and variable cost per unit are constant. Running this analysis involves using several equations using price, cost and other variables and plotting them out on an economic graph.
The assumptions underlying CVP analysis are:
The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
...
...demand, current operating capacity, fixed costs, variable costs and other ancillary information. It was also brought to our attention that presently the Company is catering the demand of its product W within a local community. However the Company wishes to analyse the implications if a decision is made in respect of launching product W at the state level. As a consulting firm, we will perform a cost-volume-profit [CVP] analysis whereby we will examine where the Company stands now and where the Company intends to be. CVP analysis is extension of break-even analysis – a situation where a business earns no income and incurs no loss. From the analysis we shall then deduce results and make recommendations.
Theoretical Background
In order to carry out a CVP analysis, we need to have an understanding of its mechanism. As noted before, CVP analysis is based on break-even analysis. Break-even analysis deals with the identification of break-even point (Cafferky & Wentworth, 2010) where revenues and costs are equal and thus the business is neither generating income nor incurring loss. Therefore, at break-even point we can say that:
Total Revenue = Total Cost
But total cost is in turn made of fixed and variable costs:
Total Revenue = Fixed Cost + Variable Cost
However revenue and variable costs are based on...
...the concept
The Cost-Volume-Profit(C-V-P) analysis is the analysis of the cost evolution models, which point out the relation between cost, production volume and profit. The C-V-P analysis is a useful forecasting as well as managerial control tool. This analysis technique expresses the relation between income, sales structure, costs, production volume andprofits and includes break-even point analysis and profit forecasting procedure. These relations may be used by managers to make short term forecasts, to assess company performance and to analyze decision making alternatives.
Costvolumeprofit analysis of three variables i.e. costvolume and profit. This analysis measures variation of costvolumes and their impact on profit is affected by several internal and external factors which influences sales revenue and costs.
Costvolumeprofit analysis helps the management in profit planning. Profit of a concern can be increase by increasing the output and sales or reducing cost. If a concern produces to maximum capacity and sell, contribution is also increased to maximum level.
The cost...
...Chapter 4 Cost-Volume-Profit (CVP) Analysis
Some things we know:
The objective of every business is to make money (profit) for the owners
Profit = Revenues – Expenses
Revenues = Sales = Quantity sold x price per unit
Expenses = the costs related to:
the specific revenue (COGS)
or the specific accounting period
Matching Principle
Role of Management is:
Planning, control and performance measurement, and decision-making
Decision-making relates to future events and involves risk
Full costing (full-absorption costing) is a good historical tool but may not
Be the best indicator of future activity because it is based on past events.
Cost Behavior
Variable Costs – total dollars change with volume, Cost per unit is constant
Fixed Costs – total dollars are constant, cost per unit changes with volume
Mixed Costs – include some variable costs and some fixed costs
Total Cost = Fixed Costs + Volume(variable cost per unit)
Fixed Component Variable Component
Purely Fixed $25,000 $ 0
Purely Variable 0 5.00 per unit
Mixed Costs 10,000 2.00 per unit
Total...