Cost-Volume-Profit Analysis
the factory
● Cost
○ Classification
■ Assoc w/ cost object
■ Presentation in FS
■ Behavior
● Pay
● Expenses incurred → to gain profit
● Input expenses
● Revenue - sales, ordinary earnings
● Income - revenue + gain
● Gain - extraordinary
● Profit = Net Income - income - expenses
● Management account definition of cost
○ Anything that you have to give
up in order to gain something
○ Qualitative and non-measurable
● Foregoing benefits (quantitative) when
not choosing Taylor Swift over Ben and
Ben - opportunity cost
● Cost object - anything that you want to
determine the cost
○ Direct
■ Direct material -
physically, economically,
functionally traceable
■ Direct labor - wages
salaries or payments
who directly work in
manufacturing
○ Indirect - shared/allocated with
other products; immaterial
■ Indirect material - nails
in an arm chair
■ Indirect labor -
supervisors, quality
control
specialists/inspectors,
security officer
■ Other product costs -
factory overhead,
depreciation, electricity,
utilities, insurance of
● Period cost
● Product Cost
○ Incurred in factory
○ Product materials
○ SCI → cost of goods sold (won’t
appear here)
● Inventory → SFP → inventory
● Period
○ The rest that is not product cost
○ Operating expenses
■ General and
administrative -
depreciation of
equipments in the
office, salaries of the
people in the office
■ Selling and distribution
- sales or marketing of
product
■ Finance cost - interest
expense
■ Income tax expense
● Freight out - SD
● Freight In - Product
Activity Level/ cost driver → Total Cost
● 500 kwh - P2 kwh = P1000
● 400 kwh - P2 kwh = P800
○ Variable cost - cost changing
depending on the production
level, activity level, cost driver
● Mixed cost - fixed + variable
● Depreciation - depends on
depreciation method/formula
● Step-cost - hybrid of mixed cost
○ Tax rates of train law
Management
● It is the judicious use of means to
accomplish an end
● It refers to the set and study of
principles on the administration of
an organization
Management Functions
● Planning
● Organizing
● Leading
● Evaluating/Controlling
Management Accounting
● It is the process of identifying,
measuring, analyzing, interpreting,
and communicating information in
pursuit of an organization’s goals
○ Short-term goals
○ Long-term goals
○ Permanent goals
● End goal: prepare financial
statements
○ Identifying
○ Measuring
○ Analyzing
○ Interpreting
○ Communicating
● Come out with a process to achieve
the goals of the business
Management Accountants
● They are specialists in using the
tools of managerial accounting to
help the organization and its
managers run the operation
effectively
Role of management accounting
● Planning
○ Preparation of budget
■ Includes forecast of
the expected
operations (cost,
profit, revenue, salary)
● Controlling/Evaluating
○ Evaluate the operations of the
entity during a year and
compare the budget
forecasted and the actual
budget used
Objectives of Managerial Accounting Activity
● Providing information for decision
making and planning
● Assisting managers in directing and
controlling operational activities
● Motivating managers and other
employees toward the organization’s
goals
● Measuring the performance of
activities, subunits, managers, and
other employees within the
organization
● Assessing the organization’s
competitive position and working
with other managers to ensure the
organization’s long-run
competitiveness in the industry
Management Accounting vs. Financial
Accounting
● Users
○ Management - managers and
people within the
organization
○ Financial - interested parties
and those outside the
organization
● Regulation
○ Management - Unregulated
○ Financial - Conforms to the
generally accepted
accounting principles and
standards
● Mandatoriness
○ Management - Not required
○ Financial - Required by law
and regulatory bodies
● Source of data
○ Management - Accounting
system
 ○ Other sources which provide
financial data
○ Nonfinancial data
○ Financial - Accounting
System
● Nature of Reports
○ Management - Generally
focused on subunits within
the organization
○ Based on combination of
historical data, estimates,
and projections/forecasts
○ Financially - generally
focused on the enterprise in
its entirety
○ Based almost exclusively on
historical transactional data
Similarity
● They draw information from an
organization’s cost of accounting
system
Cost management system
● It is a management planning and
control system with the following
objectives:
○ Measure the cost of resources
consumed in performing the
organization’s significant
activities
○ Identify and eliminate non-
value-added costs
○ Determine efficiency and
effectiveness of major
activities
○ Identify and evaluate new
activities that can improve
the future performance of an
organization
Management consultant
Introduction to management consultancy
Certified Management Accountant
● Many managerial accountants and
members of corporate finance and
accounting teams are Certified
Public Accountants (CPAs)
● In the Philippines, the primary
requisition for a CPA license is upon
those who do audits of financial
reports and to further increase the
reliability of work of people from
finance and accounting
● These concepts generally provide
increase in credibility in external
aspects of the business, e.g.,
financial reporting
● To focus on best practices and new
developments in accounting and
finance inside of comapnies, the
managerial accounting profession
has its own certifications and
organizations
● Institute of Management
Accountants (Philippines and
Abroad)
● Chartered Institute of Management
Accountants (US)
● Requirements
○ Two-year professional
experience in management
accounting or financial
management
○ Educational requirements
■ Bachelor’s degree
from an accredited
college/university
○ Passing the rigorous CMA
examination
■ Financial planning,
performance and
analytics
■ Strategic financial
management
● It refers to a person, qualified by
education, experience, technical
ability, and temperament to advise or
assist businessmen on a
professional basis, in identifying,
 defining, and solving specific
management problems involving the
organization, planning, direction,
control and operation of form
Not an employee
● Since he is not an employee of the
organization, he can effectively serve
as its objective and impartial adviser
Practitioners
● Management consulting is not
limited to Certified Public
Accountants
● Any professional may practice the
same, as long as he has the required
competence, experience, and
technical ability to solve business
problems
● The practice and the practitioners are
not licensed nor require admission
requirements by a board or through
certification
Reasons for hiring management consultants
● To help define specific problems and
develop solutions
● To provide specialized skills and
experience
● To provide confidential service in
which the identity of the client is
concealed
● To train client personnel
● To provide temporary personnel
● To help improve intra-company
communications
● To render an independent opinion
● To help get results
General areas of management services
● General management consultation
● Project feasibility study
● Organization and personnel
● Industrial engineering
● Marketing
● Operations research
Development and Execution
● Negotiating the engagement
● Preparing for and starting the
engagement
● Conducting the engagement
● Preparing and presenting the reports
and recommendations
● Implementing the recommendations
● Evaluating the engagement
● Post-engagement follow-up
____________________________
Cost
● Cost refers to the resources sacrified
or foregone to achieve a specific
objective. It is measure as the
monetary amount that must be paid
to acquire goods or services
Cost Management System
● A cost management system is a set
of formal methods developed for
planning and controlling and
organization’s cost-generating
activities relative to its strategy,
goals and objectives
Cost Classification Categories
● Associationg with Cost Object
○ Direct cost
○ Indirect cost
■ Allocable to multiple
units
■ Not direct to the use
of the object (not
visible to the final
product)
○ Check if:
■ Physically traceable
■ Economically
traceable
● Reaction to changes in activity
(behavior)
○ Variable cost
 ○ Fixed cost
○ Mixed cost
○ Step cost Relevant range
● Classification on Financial ● It refers to the band of activity within
Statements which the identified cost behavior
○ Product cost patterns are valid
○ Period cost ● Any level of activity outside this
○ Expired cost range may have different cost
○ Unexpired cost behavior patterns

_________________________ Least squares method

● This method uses the statistical
technique that analyzes relationship
Cost Estimation between independent and dependent
● A mixed cost contains both a variables
variable and a fixed component ● Under LSM, the regression line of
○ It does not remain constant best fit is found by predicting the the
with changes in activity nor a and b values in a straight-line
does it fluctuate on a per-unit formula using the actual activity and
basis in direct proportion to cost values from observations
changes in activity ● Regression line of best fit
● In estimating costs, accountants
typically assume that costs are linear
rather than curevilinear. Because of
this assumption, the general formula
for a straight line cane be used to
describe any tupe of cost within a
relevant range of activity
○ y = a + bX
○ y = total cost
○ a = fixed cost
○ b = variable cost
○ X = activity level

High-low method
● This method anaylzes a mixed cost
by first selecting the highest and
lowest levels of activity in a data set
if thse two points are within the
relevant range
● Activity levels are used because
activities cause costs to change, not
vice versa
Highest cost−Lowest Cost
b=
Highest activity level−Lowest Activity Level
March 3, 2023
● Cost behavior
Engagement proposal - sir will provide an ○ Fixed cost
example to us ○ Variable cost

Corporate tax income - variable

● Contribution margin income
Individual income tax - step cost
statement
Real property tax - variable
○ Used decision making
○ distinguish between fixed
Retainer engagement - fixed
expenses and variable
● Specific engagement however could
expenses
be variable
○ Contribution margin - profit
in excess of break even point
Marketing
● Variable - length of commercial, how
● Manufacturing cost - cost in relation
often the commercial will appear
to production
● Fixed -
● Period cost - administrative
proceedings
● If relevant range is not given, then
consider everything is within the
1. Equation/Contribution Margin
range
Method
2. Graphical method

● Variable cost ratio = VC / S

● Fixed cost ratio = FC / S
Management Accounting Income
● Contribution Margin Ration = CM / S
Statement
● ROS = Net / S
● Sales and variable are dependent on
the volume
● CVP Analysis assumptions
● Sales and variable costs are directly
○ Operates in elevant range
proportional
■ Must not be included
if extraordinary
Cost-Volume Profit Analysis
1. Behavior of total revenue is
linear
● 3 important concepts:
2. Expenses are categorized into
○ Target profit
2
○ Breakeven - cost = revenue
a. Fixed cost must be
○ Margin of safety - the range
fixed regardless of
that you can use before
activity level
reaching breakeven point
b. Unit variable cost
does not change
● Change in activity
c. Efficiency and
Effects on:
productivity of
○ Cost
workers does not
○ Revenue
change
○ Profit
 3. The sales mix remains
constant over the relevant
range
a. Sales mix -
Distribution of
saleability of a
product
4. The inventory levels at the
beginning and end of the
period are the same
a. CGM: sold and unsold
b. CGS: only sold
c. CGM = CGS
5. SP, VC and FC are known or
can be determined
Breakeven Anaylsis and Profit Targeting
● Breakeven point: the quantity of
output sold at which total revenue is
equals to the total cost
● Sales level, rev = costs
● 0 profit/ 0 loss
● Loss | Profit
BEP
● BE = FC / CM
● Unit = UCM or CM/N
● Amount = CMR
● VCR + CMR = 100%
● Profit targeting
○ Can be used for
benchmarking
○ Used to comeup with better
procedure
Margin of Safety and Degree of Operating
Leverage
Sensitivity Analysis
● What will happen if there is a change
in one of the factors
● Margin of safety - answers the what if
question if the budgeted revenues
are above the breakeven point and
dropped. How far before the
breakeven point is reached?
● Sales = BES + MOS
● If revenue falls by more than the
margin of safe → loss
● Degree of Leverage or Operating
Leverage factor
○ Factor
○ Imposed on the percentage
change in volume
○ How much income will
change depending on the
change in the activity level
● CM / NIBT
● CM / 1 - Tax Rate