Chapter 18
Cost volume profit analysis
Copyright ª 2006 McGrawHill Australia Pty Ltd 181
Cost volume profit (CVP) analysis
• A technique used to determine the effects of changes in an organisation’s sales volume on its costs, revenue and profit
• Can be used in profit-seeking organisations and not-for-profit organisations
• Not confined to profit-seeking enterprises
• Commonly used in many not-for-profit situations
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-2
The break-even point
• The volume of sales where the total revenues and expenses are equal, and the operation breaks even
• At this level of sales, there is no profit or loss
• Can be calculated for an entire organisation or individual projects
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-3
Formulas
Break-evenpoint(inunits)=Unitcontributionmargin
Break-evenpoint(insalesdollar)=Unitcontributionmarginratio
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-4
Terminology
• Contribution margin (or variable costing) statement
– A profit report where costs are reported by cost behaviour and a contribution margin is calculated
– Fixed and variable costs are separated • Total contribution margin
– The difference between the total sales revenue and the total variable costs
– The amount available to cover fixed costs and then contribute to profits
continued
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-5
Terminology
• Unit contribution margin
– The difference between the sales price per unit and the variable cost per unit
• Contribution margin ratio
– 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
• 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
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-6
Graphing cost volume profit relationships
• Shows how costs, revenue and profits change as sales volume changes
• Five steps
1. Draw the axes of the graph 2. Draw the fixed expense line 3. Draw the total expense line 4. Draw the total revenue line
5. Break-even point—where the total revenue and total expense lines intersect
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-7
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-8
Profit volume (PV) graph
• Shows the total amount of profit or loss at different sales volumes
• The graph intercepts the vertical axis at the amount equal to the fixed costs
• The break-even point is the point at which the line crosses the horizontal axis
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-9
Copyright 2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith
18-10
Target net profit