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Chapter 5
Cost Behavior and
Cost-Volume-Profit
Analysis
Conceptual Learning
Objectives
C1: Describe different types of cost
behavior in relation to production and
sales volume.
C2: Identify assumptions in cost-volume
profit analysis and explain their
impact.
C3: Describe several applications of
cost-volume-profit analysis.
5-3
Procedural Learning
Objectives
P1: Determine cost estimates using three
different methods.
P2: Compute the break-even point for a
single product company.
P3: Graph costs and sales for a single
product company.
P4: Compute break-even point for a
multiproduct company.
5-5
C2
Questions Addressed by
Cost-Volume-Profit Analysis
CVP
CVPanalysis
analysisis
is used
used to
to answer
answerquestions
questions
such
suchas:
as:
What
Whatsales
salesvolume
volumeis
isneeded
neededto
toearn
earnaa
target
targetincome?
income?
What
Whatis
isthe
thechange
changein
in income
incomeifif selling
selling
prices
pricesdecline
declineand
and sales
salesvolume
volume
increases?
increases?
How
How much
muchdoes
doesincome
incomeincrease
increaseififwe
we
install
install aanew
new machine
machineto
to reduce
reducelabor
labor
costs?
costs?
What
Whatis
isthe
theincome
incomeeffect
effectififwe
wechange
changethe
the
sales
salesmix
mixof
ofour
our products
productsor
or services?
services?
5-6
C1
Monthly Basic
Telephone Bill
C1
C1
Minutes Talked
C1
Per Minute
Telephone Charge
Minutes Talked
5-10
C1
In Total
Per Unit
Variable
Fixed
5-11
C1
Mixed Costs
Mixed costs contain a fixed portion
that is incurred even when the
facility is unused, and a variable
portion that increases with usage.
Example: monthly electric utility
charge
C1
Step-Wise Costs
Cost
Activity
5-13
P1
The objective
is to classify
all costs as
either fixed or
variable.
5-14
P1
Scatter Diagram
Total Cost in
1,000s of Dollars
10
* *
* *
in cost
in units
* ** *
**
Horizontal distance is
the change in activity.
Vertical
distance
is the
change
in cost.
0
1
2
3
4
Activity, 1,000s of Units Produced
5-15
P1
P1
P1
Least-Squares Regression
Least-squares regression is usually covered
in advanced cost accounting courses. It is
commonly used with spreadsheet
programs or calculators.
The objective of the cost
analysis remains the
same: determination of
total fixed cost and the
variable unit cost.
5-18
P2
5-19
P2
Contribution
Contribution margin
margin is
is amount
amount by
by which
which revenue
revenue
exceeds
exceeds the
the variable
variable costs
costs of
of producing
producing the
the revenue.
revenue.
5-20
P2
P2
P2
Fixed costs
Break-even point in units =
Contribution margin per unit
5-23
P2
5-24
P3
Volume in Units
5-25
P3
Sales
C2
5-27
C3
Computing Income
from Expected Sales
Income
Income (pretax)
(pretax) == Sales
Sales Variable
Variable costs
costs Fixed
Fixed
costs
costs
5-28
C3
C3
5-30
C3
5-31
C3
5-32
C3
Sensitivity Analysis
The
The basic
basic CVP
CVP relationships
relationships may
may be
be
used
used to
to analyze
analyze aa number
number of
of
situations
situations such
such as
as changing
changing sales
sales
price,
price, changing
changing variable
variable cost,
cost, or
or
changing
changing fixed
fixed cost.
cost.
Continue
5-33
P4
Computing Multiproduct
Break-Even Point
P4
Computing Multiproduct
Break-Even Point
The resulting break-even formula
for composite unit sales is:
Break-even point
in composite units
Fixed costs
Contribution margin
per composite unit
5-35
A3
Operating Leverage
AA measure
measure of
of the
the extent
extent to
to which
which fixed
fixed
costs
costs are
are being
being used
used in
in an
an organization.
organization.
AA measure
measure of
of how
how aa percentage
percentage change
change in
in
sales
sales will
will affect
affect profits.
profits.
Contribution margin
Pretax income
5-36
End of Chapter 5
5-37