 Significance of Cost Behavior to Decision Making and Control

 Break-even and target income analysis

 Cost-volume-profit (CVP) analysis for single-product, multi-product and service scenarios
 Measures of relationship between operating levels and break-even points
 The sales mix

Sources:

https://corporatefinanceinstitute.com/resources/knowledge/modeling/break-even-analysis/

https://xplaind.com/210003/target-income-sales

https://saylordotorg.github.io/text_managerial-accounting/s10-01-cost-volume-profit-analysis-fo.html

https://saylordotorg.github.io/text_managerial-accounting/s10-02-cost-volume-profit-analysis-fo.html

http://anucde.info/sm20210803/Financial%20Management/Lession0006.pdf

Cost Behavior

 Cost Behaviour is the change in the behavior of a cost (or costs) due to a change in business
activity.

Significance of Cost Behavior to Decision Making and Control

 A manager needs to understand the behavior of the costs when creating an annual budget.
Knowing this allows the manager to determine beforehand if any cost will decline or rise with the
change in the business activity. For example, if a company is operating at the full production
capacity, then to fulfill more demand, the company will have to invest more in the production
line.
 Understanding cost behavior is essential for cost-volume-profit analysis as well. The cost-
volume-profit (CVP) analysis studies the impact of change in costs and volume on the profit.
 It helps the management in planning and controlling costs.

Cost Volume Profit Analysis

 Is used to build an understanding of the relationship between costs, business volume, and
profitability. This analysis will drive decisions about what products to offer and how to price
them.

 Companies can use CVP to see how many units they need to sell to break even 33(cover all
costs) or reach a certain minimum profit margin.
 CVP analysis makes several assumptions, including that the sales price, fixed, and variable costs
per unit are constant.

Components of CVP Analysis

 CM ratio and variable expense ratio

 Break-even point (in units or dollars)
 Margin of safety
 Changes in net income
 Degree of operating leverage

Break even Point Analysis

  Refers to the point in which total cost and total revenue are equal. A
break even point analysis is used to determine the number of units or
dollars of revenue needed to cover total costs (fixed and variable costs).

Formula:

Note: Selling Price per unit minus variable cost per unit is the Contribution margin per unit.

Graphical Representation of the Breakeven Point

Basic Concepts

Target income analysis

Margin of safety

 The excess of projected sales over the break-even point

 The margin of safety represents the amount by which sales can fall before the company
incurs a loss.

SALES MIX