Cost-Volume-Profit

(CVP) Analysis

Cost Accounting and Control

 Cost-volume-profit (CVP) analysis
- Estimates how changes in costs (variable and
fixed), sales volume and price affect a company’s
profit
- Managers find CVP very useful in making wise
business decisions, predicting future conditions
(planning) as well as in explaining, evaluating and
acting on results (controlling)
 Break-Even Point (BEP)
- The point of zero profit (no profit, no loss),
revenue equals total cost
- Companies, however, do not wish merely to
“break even” on operations
- The BEP is determined to serve as a point of
reference
 CVP Analysis
CVP analysis helps managers answer several
questions such as:
- The number of units to be sold to break-even
- The effect of changes in the fixed cost on the
break-even point
- The effect of changes in the sales price on the
break-even point
 CVP Analysis
- To fully understand the CVP relationship, we will
classify cost according to their tendency to vary with
production (variable, fixed and mixed) instead of their
functional classification (manufacturing, selling and
administrative).
- We need only variable and fixed, so we have to
segregate the variable and fixed components of the
mixed cost by using any of the three methods:
a. High low point
b. Scattergraph
c. Method of least square
 Variable Costs
Variable Costs
- All costs that increase as more units are produced
and sold including:
a. Direct materials
b. Direct labor
c. Variable overhead
d. Variable selling
e. Variable administrative
 Fixed Costs
Fixed costs are costs that remain in total regardless
of units produced and sold and include:
a. Fixed overhead
b. Fixed selling
c. Fixed administrative
 Assumptions under CVP Analysis
A summary of revenue and cost assumptions is
presented at this point to provide a foundation for
BEP and CVP analysis
a. Relevant Range
- The company is assumed to be operating within
the relevant range of activity specified for
determining the revenue and cost information used.
- The relevant range refers to the range of activity
over which variable cost per unit remain constant
or a fixed cost remains fixed in total.
 Assumptions under CVP Analysis
b. Revenue
- Revenue per unit is assumed to remain constant
- Total revenue fluctuates in direct proportion to
volume

c. Variable Cost
- Variable cost are assumed to remain constant on a
per unit basis
- Total variable costs fluctuate in direct proportion
to volume
 Assumptions under CVP Analysis
d. Fixed Cost
- Total fixed costs are assumed to remain constant
regardless of changes in volume
- Fixed cost on a per unit basis increases as volume
decreases and decreases as volume increases
1
 Operating Leverage
- The use of fixed cost to get higher percentage
changes in profit as sales changes.

- The operating leverage is concerned with the

relative mix of fixed cost and variable cost in an
organization.
 Operating Leverage
- Companies with a higher operating leverage will
experience greater reduction in profit as sales
decrease.

- The greater the degree of operating leverage, the

more that changes in sales will affect operating
income.

Degree of Operating Leverage

= Contribution Margin / Operating Income