Chapter 15
Download
1 / 24

Chapter 15 - PowerPoint PPT Presentation


  • 112 Views
  • Uploaded on

Chapter 15. Cost volume profit analysis. Cost volume profit (CVP) analysis. Can be used to determine the effects of changes in an organisation’s sales volume on its costs, revenue and profit. The break-even point.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Chapter 15' - jelani-rios


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Chapter 15

Chapter 15

Cost volume profit analysis


Cost volume profit cvp analysis
Cost volume profit (CVP) analysis

  • Can be used to determine the effects of changes in an organisation’s sales volume on its costs, revenue and profit


The break even point
The break-even point

  • the volume of sales where the total revenues and expenses are equal, and the operation breaks even


Terminology
Terminology

  • Contribution margin (or variable costing) statement

    • highlights the variable and fixed costs of a business

  • Total contribution margin

    • the total sales revenue minus total variable costs

    • the amount available to cover fixed costs and then contribute to profits

Cont.


Terminology1
Terminology

  • Unit contribution margin

    • the difference between the sales price per unit and variable cost per unit

  • Contribution margin ratio

    • equal to the unit contribution margin divided by the unit sales price

    • the proportion of each sales dollar available to cover fixed costs and earn a profit

Cont.


Terminology2
Terminology

  • Contribution margin percentage

    • the contribution margin ratio multiplied by 100

    • the percentage of each sales dollar available to cover fixed costs and earn a profit


Cost volume profit cvp graph
Cost volume profit (CVP) graph

  • Shows how costs, revenue and profits change as sales volume changes

  • five steps

    • draw the fixed expense line

    • draw the total expense line

    • draw the total revenue line

    • break-even point - where the total revenue and total expense lines intersect


Profit volume pv graph
Profit volume (PV) graph

  • shows the total amount of profit or loss at different sales volumes


Target net profit
Target net profit

  • A desired profit level determined by management

  • Can be used within the break-even formula


Using cvp analysis for management decision making
Using CVP analysis for management decision making

  • Common applications include

    • safety margin

    • changes in fixed expenses

    • changes in the unit contribution margin

    • multiple changes in key variables


Safety margin
Safety margin

  • Difference between the budgeted sales revenue and the break-even sales revenue

  • Gives a feel for how close projected operations are to the break-even point


Changes in fixed expenses
Changes in fixed expenses

  • When estimates of fixed costs are revised, the break-even point will change

    • percentage change in fixed expenses will lead to similar increase in the break-even point (in units or dollars)

  • Different fixed costs may apply to different levels of sales volume

    • more than one break-even point


Changes in the unit contribution margin
Changes in the unit contribution margin

  • Change in unit variable expenses

    • changes the unit contribution margin

    • a new break-even point

    • an increase in unit variable expenses will increase the break-even point

Cont.


Changes in the unit contribution margin1
Changes in the unit contribution margin

  • Change in sales price

    • changes the unit contribution margin

    • a new break-even point

    • an increase in unit price will lower the break-even point


Multiple changes in key variables
Multiple changes in key variables

  • May involve

    • increasing unit prices

    • undertaking an advertising campaign

    • hiring a new storage facility

  • An incremental approach

    • focuses on the difference in the total contribution margin, fixed expenses and profits under the two alternatives


Cvp analysis with multiple products
CVP analysis with multiple products

  • Sales mix

    • reflects the relative proportions of each type of product sold by the organisation

  • Weighted average unit contribution margin

    • the average of the products’ unit contribution margins, weighted by the sales mix



Assumptions underlying cvp analysis
Assumptions underlying CVP analysis

  • The behaviour of total revenue is linear

  • The behaviour of total costs is linear over a relevant range

    • costs can be categorised as fixed, variable or semivariable

    • labour productivity, production technology and market conditions do not change

    • there are no capacity changes during the period under consideration

Cont.


Assumptions underlying cvp analysis1
Assumptions underlying CVP analysis

  • For both variable and fixed costs, sales volume is the only cost driver

  • The sales mix remains constant over the relevant range

  • In manufacturing firms, levels of inventory at the beginning and end of the period are the same


Treating cvp analysis with caution
Treating CVP analysis with caution

  • CVP analysis is merely a simplified model

  • The usefulness of CVP analysis may be greater in less complex smaller firms

  • For larger firms, CVP analysis can be valuable as a decision tool for the planning stages of new projects and ventures


Spreadsheets and computerised planning models
Spreadsheets and computerised planning models

  • Sensitivity analysis

    • examines how an outcome may change due to variations in the predicted data

  • Goal seeking approaches

    • the analyst specifies the outcome, so that software can specify the necessary inputs

  • What-if analysis

    • the analyst specifies changes in assumptions to examine the effect of these changes on outcomes


An activity based approach to cvp analysis
An activity-based approach to CVP analysis

  • ABC categorises activities as facility, product, batch or unit costs

    • Facility, product and batch activities are non-volume activity costs


Limiting assumption of using activity based costs
Limiting assumption of using activity-based costs

  • Batch costs are based on likely production levels

  • New planned production levels lead to changes in the number of production batches, and changes in total non-volume activity costs --> new break-even or target profit volume



ad