Download Chapter 20 Cost-Volume

Chapter 20
Cost-Volume-Profit
Analysis
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Introduction
• Cost-volume-profit analysis
– Analysis of how profits change as costs
change in response to changes in production
or sales volumes
• Absorption costing
• Direct Costing
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Direct Costing
• Determining cost of goods manufactured
– Product costs – manufacturing costs that vary
proportionately with volume of production
• Also called variable costing
– Period costs – costs that are identified with
time intervals
• All period costs are charged directly to expense in
the period in which they are incurred
20-3
Direct Costing (cont’d)
– Not accepted under Generally Accepted
Accounting Principles (GAAP)
– Often used by management in making
operating decisions
– Prime benefit is the use of data in profitability,
break-even and decision cost analysis
20-4
Comparison of Absorption and
Direct Costing
– Direct costing more clearly reflects the impact
of sales volume on costs and profits
– If production is greater than sales, the net
income under absorption costing will be
greater
• Increase in inventory results in a lower net income
under direct costing
– When production equals sales, both methods
report the same net income
20-5
Cost-Volume-Profit Analysis
• Analysis data helps in determining
– Sales volume required in order for business to
break even
– Sales volume required to produce a given
amount of profit
– Impact of a specific change in gross profit per
unit or gross profit percentage
– Profit at a specified sales volume
20-6
Computing Break-Even Point
• Break-even point – sales volume at which
there is neither loss nor profit
Fixed cost per period
Break-even sales in units =
Contribution margin per unit
Contribution margin ratio = Contribution margin per unit
Sales price per unit
Break-even sales in dollars = Fixed costs per period
Contribution margin ratio
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Estimating Profits and Sales
Volumes
• Estimating profits at different sales volume
Profits = (unit sales x contribution margin per unit) – fixed
costs per period
• Estimating the sales volume necessary to
earn a desired profit
Sales in dollars for specific profit = (fixed cost per period
+ profit per period) / contribution margin ratio
Sales in units for specific profit = (fixed cost per period +
profit per period) / contribution margin per unit
20-8
Break-Even Chart
• A graph that shows the total sales and
total costs at any sales volume
– Provides a means of estimating profit or loss
at any sales volume
20-9
Break-Even Chart (cont’d)
Dollars
4000
3000
2000
1000
100
200
300
400
500
600
700
Unit sales in month
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Analyzing the Effects of
Changes in C-V-P Factors
• Often used by management in estimating
the effects on profit that would result from
changes in
– Economic conditions
– Operating conditions
– Marketing strategies
• Use of C-V-P greatly simplifies the task of
arriving at a decision
20-11