CHAPTER 6 : COST VOLUME PROFIT (CVP) ANALYSIS

Cost-volume-profit analysis is the study of the effects of changes in costs and

volume on a company’s profits.

Cost Behaviour

Variable Cost
E.g: Direct materials, Direct labour,
Indirect materials & Sales commission.
Total Cost :
Varies in total in direct proportion to
changes in the level of activity.
Cost per unit :
Remains constant at any level of activity

Total Cost :
Remains constant in total regardless of
Fixed Cost
the level of activity.
E.g: Advertising expense
Cost per unit :
Varies inversely with changes in activity.

Mixed cost has both behavioural fixed

Mixed Cost
cost and variable cost.

To segregate (separate) mixed cost :

• High-low method

These are the steps on how to use HIGH-LOW METHOD:

1. Identify the highest activity and the lowest activity level

2. Calculate variable cost per unit , b
𝐇𝐀 (𝐑𝐌) − 𝐋𝐀 (𝐑𝐌)
𝐇𝐀 (𝐮𝐧𝐢𝐭) − 𝐋𝐀 (𝐮𝐧𝐢𝐭)
Where, HA = Highest Activity & LA = Lowest Activity

3. Calculate total fixed cost , a

a = Total mixed cost – Total variable cost
= Total mixed cost – (b x Number of units)

4. Generate cost function

Y = a + bx
Y = Total cost, a = Total Fixed Cost, bx = Total Variable Cost
 * Remember, there are 2 situations for HIGH-LOW METHOD

Single Cost Multiple Cost

Situation (TB pg6) Situation (TB pg8)

CVP ANALYSIS METHOD

CVP Analysis Method

Contribution Margin Method

CM per unit
= Selling Price Per unit – Variable Cost Per Unit

To calculate Break-Even Point:

Total Revenue = Total Cost
(Sales price x Sales unit) = TFC + TVC

To calculate Net Profit:

Mathematical Equation Method
Net profit = px – bx – a

px: total sales

bx: total variable cost
a: total fixed cost

*hafal dua formula tu just in case dlm exam minta specific formula to be used
 MARGIN OF SAFETY
• Margin of safety is the difference between actual / expected sales and sales
at the break-even point (BEP).
• The higher of margin of safety, the better it is / the lower the risk of not breaking
even and incurring a loss.

Margin of Safety
M.O.S (unit) = Actual/Expected Sales (unit) – BEP (unit)
M.O.S (RM) = Actual/Expected Sales (RM) – BEP (RM)

Margin of Safety (unit)

M.O.S (%) = x 100%
Actual Sales (unit)

SENSITIVITY ANALYSIS
• Analysis the effects of changes in selling prices (p), fixed costs (a) and variable
costs (b) over cost volume profit through calculations.
• It is a “what if” technique that managers use to examine how an outcome will
change if all elements in CVP analysis changed from the original data by
predictions and assumptions.

* The importance of CVP Analysis (TB pg18)

* Ethical issues involved CVP Analysis (TB pg19)
 CHAPTER 7 : ABSORPTION COSTING AND MARGINAL COSTING

STEP 1 :
Product cost per unit
Absorption Costing Marginal Costing
Costs
(RM) (RM)
Direct materials xx xx
Direct labour xx xx
Variable MOH xx xx
Fixed MOH xx -
Product cost per unit xx xx

STEP 2 :
Over / Under Applied MOH (only applied for NORMAL COSTING)
• Applied > Actual = Over applied
• Applied < Actual = Under applied

* ACTUAL COSTING don’t need to do over applied / under applied MOH.

Budgeted annual overhead cost
* Predetermined Overhead Rate (POR) =
Budgeted annual operating activity
* There are 5 types of BASIS for Predetermined Overhead Rate (POR)
1. Machine hours (RM)
2. Direct labour hours (RM)
3. Direct labour cost (%)
4. Direct material cost (%)
5. Production unit (RM)
 STEP 3 :
S.O.C.I or S.O.P.L – Absorption Costing & Marginal Costing (NORMAL COSTING)

Syarikat ABC
Statement of Comprehensive Income – Absorption Costing
For the year / month ended …
RM RM
Sales (sales unit x selling price per unit) xx
Less : Cost of Goods Sold
Beginning Inventory (B.I. unit x product cost per unit) xx
(+) Cost of Goods Manufactured (production unit x product cost per unit) xx
Cost of Goods Available For Sale xx
(-) Ending Inventory (E.I. unit x product cost per unit) (xx)
Cost of Goods Sold xx
(-) Over applied MOH / (+) Under applied MOH (xx) / xx
Adjusted Cost of Goods Sold (xx)
Gross Profit
Less : Operating Expenses
Variable Selling and Administrative Expenses (price per unit x sales unit) xx
Fixed Selling and Administrative Expenses xx xx
Net Profit / Net Loss xx

* If the question requires “for the MONTH ENDED …” , make sure to divide the
POR (ONLY FIXED MOH) by 12 months. Same goes to the FIXED OPERATING
EXPENSES.
 Syarikat ABC
Statement of Comprehensive Income – Marginal Costing
For the year / month ended …
RM RM
Sales (sales unit x selling price per unit) xx
Less : Variable Costs
Variable Cost of Goods Sold :
Beginning Inventory (B.I. unit x product cost per unit) xx
(+) Cost of Goods Manufactured (production unit x product cost per unit) xx
Cost of Goods Available For Sale xx
(-) Ending Inventory (E.I. unit x product cost per unit) (xx)
Variable Cost of Goods Sold xx
(-) Over applied MOH / (+) Under applied MOH (xx) / xx
Adjusted Variable Cost of Goods Sold xx
(+) Variable Selling and Administrative Expenses (price per unit x sales unit) xx
Variable Costs (xx)
Contribution Margin xx
Less : Fixed Costs
Fixed Selling and Administrative Expenses xx
Fixed Manufacturing Overhead xx xx
Net Profit / Net Loss xx

* If the question requires “for the MONTH ENDED …” , make sure to divide by
12 for FIXED SELLING AND ADMINISTRATIVE EXPENSES & FIXED
MANUFACTURING OVERHEAD.

STEP 4 : (depends on the question)

Reconciliation of Net Profit

RM
Absorption Costing Net Profit xx
(+) Fixed Manufacturing Overhead in Beginning Inventory
xx
= fixed MOH per unit x beginning inventory unit
(-) Fixed Manufacturing Overhead in Ending Inventory
(xx)
= fixed MOH per unit x ending inventory unit
Marginal Costing Net Profit xx
*** S.O.C.I / S.O.P.L for Absorption Costing & Marginal Costing
(ACTUAL COSTING) does not require over/under applied MOH.

Journal for the OVER APPLIED & UNDER APPLIED OVERHEAD

Situation 1 : Under applied overhead

Accounts and Explanation Debit (RM) Credit (RM)

Cost of Goods Sold xx
Manufacturing Overhead xx
(To record adjusted under applied overhead)

Situation 2 : Over applied overhead

Accounts and Explanation Debit (RM) Credit (RM)

Manufacturing Overhead xx
Cost of Goods Sold xx
(To record adjusted over applied overhead)

EXTRA INFO :

Reasons for difference in net profit :

• Due to fixed manufacturing overhead
• In AC, fixed MOH per unit is considered as product cost.
• In MC, fixed MOH per unit is considered as period cost.

Relationship between Absorption net profit

Effect on inventory
production and sales and marginal net profit
Production > Sales Increase AC > MC
Production < Sales Decrease AC < MC
Production = Sales No effect AC = MC
 CHAPTER 8 : JOB ORDER COSTING

Job Order Costing

o Costs are assigned to each job to fulfil customer’s specifications.

o Each job has its own distinguishing characteristics. (Heterogeneous)
o Examples : wedding invitation cards, CUSTOM furniture, CUSTOM t-shirt or
birthday cake.

Step 1

Find Predetermined Overhead Rate (POR) – Manufacturing Overhead

* There are 5 types of BASIS for Predetermined Overhead Rate (POR)

6. Machine hours (RM)
7. Direct labour hours (RM)
8. Direct labour cost (%)
9. Direct material cost (%)
10. Production unit (RM)

Step 2

Total Cost

Example:
Cutting Assembling
Cost Items Total (RM)
Department (RM) Department (RM)
Direct Materials xx xx xx
Direct Labour xx xx xx
Applied
Manufacturing xx xx xx
Overhead
Total xx xx xx

Step 3

𝐓𝐨𝐭𝐚𝐥 𝐂𝐨𝐬𝐭
Cost per unit =
𝐇𝐨𝐰 𝐦𝐚𝐧𝐲 𝐮𝐧𝐢𝐭𝐬 𝐨𝐟 𝐨𝐮𝐭𝐩𝐮𝐭?
 Job Cost Table
Job 01 Job 02 Total
Beginning Work in
xx xx xx
Process (RM)
Direct Materials (RM) xx xx xx
Direct Labour (RM) xx xx xx
Plus all
Applied Manufacturing
xx xx xx
Overhead (RM)
(-) Ending Work in
(xx) (xx) (xx)
Process (RM)
Cost per job (RM) xx xx xx
Divide
Units completed (unit) xx xx xx
Unit Cost (RM per unit) xx xx xx

Job Cost Sheet

Material Requisition
Contains: Form

Time Ticket

Predetermined Overhead
Rate
Example (HAFALLLLLLL)

Job Cost Sheet

Job No. 101 Quantity 1,000

Item Electronic Sensors Date Started 1/5/2023
For Jenn Company Date Completed 25/5/2023

Manufacturing
Date Direct Materials (RM) Direct Labour (RM)
Overhead (RM)
2/5/2023 xx xx xx
10/5/2023 xx xx xx
15/5/2023 xx xx xx
25/5/2023 xx xx xx
xx xx xx

Cost of completed job RM

Direct Materials xx
Direct Labour xx
Manufacturing Overhead xx
Total Cost xx
(÷) Production unit xx
Cost per unit xx
 CHAPTER 9 : PROCESS COSTING

Process Costing

o A system for assigning costs to goods that are mass-produced in a continuous

sequence of steps, called processes.
o Process industries produce large numbers of identical units. (Homogeneous)
o E.g. : tomato ketchup, boxes of cereal, shampoos and sardines.

To calculate Equivalent Units,

Equivalent units = Completed unit + (Ending work in process unit x % of completion)

Physical
Quantity
Units
Beginning work in process xx
Units started xx
Unit to be accounted for xx
* Equivalent Units *
Direct Materials Conversion Costs
Unit Completed & Transferred-out xx xx xx
Ending work in process xx xx xx
Units accounted for xx xx xx

To calculate Product Cost Per Equivalent Unit,

(Beginning WIP costs+Current Cost Incurred)

Cost per equivalent units =
Equivalent Units
Costs Direct Materials Conversion Costs Total
Beginning WIP xx xx xx
(+) Current cost incurred xx xx xx
Total cost xx xx xx
(÷) Equivalent units xx xx xx
Cost per equivalent units xx + xx = xx
To calculate Cost of Completed Units & Cost of Ending Work in Process
Inventory,

Completed units & transferred-out cost

= Units completed & transferred-out x Cost per unit

Ending WIP cost

= (Units ending WIP x % completed) x Cost per unit

Completed & transferred-out cost xx X xx = xxx xxx

Ending work in process :

Direct materials xx X xx = xxx
Conversion costs xx X xx = xxx xxx
Costs accounted for xxx

* There 3 situations when calculating equivalent unit and equivalent cost per unit for
direct materials and conversion costs : (TB pg4-5)

1. If the material added at the beginning of process

2. If the material added at the ending of process
3. If material added uniformly in process

* Prepare a Production Cost Report for 2 Departments

 Syarikat ABC
Production Cost Report – Department 1
For the month ended xxx
Quantity Physical Units
Beginning work in process xxx
Units started xxx
Units to be accounted for xxx
Equivalent Units
Direct Material Conversion Costs
Unit completed & transferred-out xxx xxx xxx
Ending work in process xxx xxx xxx
Units to be accounted for xxx xxx xxx

Conversion
Costs Direct Material Total
Costs
Beginning work in process xxx xxx xxx
+ =
(+) Current cost incurred xxx xxx xxx
Costs to be accounted for xxx xxx xxx
(÷) Equivalent unit xxx xxx
Cost per equivalent unit xxx + xxx = xxx

Completed & transferred-out Unit completed & transferred-out x

xxx
costs Cost per equivalent unit = xxx

Ending work in process :

Ending work in process unit x Cost
Direct material
per equivalent unit = xxx
Conversion costs || xxx
Cost accounted for xxx

Suppose to be the same

however different due to
rounding error
 Syarikat ABC
Production Cost Report – Department 2
For the month ended xxx
Quantity Physical Units
Beginning work in process xxx
Units started xxx
Units to be accounted for xxx
Equivalent Units
Conversion
Transferred in Direct Material
Costs
Units completed &
xxx xxx xxx xxx
transferred out
Ending work in process xxx xxx xxx xxx
Units to be accounted for xxx xxx xxx xxx

Direct Conversion
Costs Transferred in Total
Material Costs
Beginning work in process xxx xxx xxx xxx
+ + =
(+) Current cost incurred xxx xxx xxx xxx
Costs to be accounted for xxx xxx xxx xxx
(÷) Equivalent units xxx xxx xxx
Cost per equivalent units xxx + xxx + xxx = xxx

Completed & transferred Unit completed & transferred-out x Cost per

xxx
out costs equivalent unit = xxx

Ending work in process :

Ending work in process unit x Cost per equivalent
Transferred in
unit = xxx
Direct material ||
Conversion costs || xxx
Costs accounted for xxx

Suppose to be the same

however different due to
rounding error
 CHAPTER 10 : STANDARD COSTING AND VARIANCE ANALYSIS

Standard Costing

Standard costing is a system accounting that uses predetermined standard costs for
direct materials, direct labour and factory overheads. Standard costing is used by
some manufacturers to identify the differences or variances between :

i. The actual cost of the goods that were produced, and

ii. The costs that should have occurred for the actual goods produced

To calculate Direct Material Variance (Purchased = Used) ,

AQ (AP – SP)
Price Variance =
(AP x AQ purchased) – (SP x AQ purchased)

SP (AQ – SQ)
Quantity Variance =
(SP x AQ purchased) – [ SP x (SQ per unit x Actual Unit Produced) ]

To calculate Direct Material Variance (Purchased ≠ Used) ,

AQ (AP – SP)
Price Variance =
(AP x AQ purchased) – (SP x AQ purchased)

SP (AQ – SQ)
Quantity Variance =
(SP x AQ used) – [ SP x (SQ per unit x Actual Unit Produced) ]

To calculate Direct Labour Variance ,

Price / Rate AH (AR – SR)

=
Variance (AR x AH) – (SR x AH)

Quantity /
SR (AH – SH)
Efficiency =
(SR x AH) – [ SR x (SH per unit x Actual Unit Produced) ]
Variance
 To calculate Variable Manufacturing Overhead Variance ,

Expenditure AH (AR – SR)

=
Variance (AR x AH) – (SR x AH)

Efficiency SR (AH – SH)

=
Variance (SR x AH) – [ SR x (SH per unit x Actual Unit Produced) ]

To calculate Fixed Manufacturing Overhead Variance ,

(AR x AH) – (SR x BH) , where BH = SH/u x Normal Production

Budget Variance =
* (SR x BH) > (AR x AH) = Favourable

SR (SH – BH)
[ SR x (SH per unit x Actual Unit Produced) ] – (SR x BH)
Volume Variance =
* Standard Hour > Actual Hour = Favourable
* Budgeted Unit Produced < Actual Unit Produced = Favourable

• Actual Costs < Standard Costs = Favourable (F)

• Actual Costs > Standard Costs = Unfavourable (UF)

• Actual Costs > Budgeted Costs = Unfavourable (UF)

• Actual Costs < Budgeted Costs = Favourable (F)

• Actual unit produced < Budgeted unit = Unfavourable (UF)

• Actual unit produced > Budgeted unit = Favourable (F)

***** HAFAL VARIANCE ANALYSIS REPORT *****

(RUJUK NOTA MDM BAGI)
 CHAPTER 11 : DECISION MAKING

Make or Buy Decision

Net Income
Make Buy
Items Increase / (decrease)
(RM) (RM)
(RM)
Direct material xx xx
Direct labour xx xx
Variable manufacturing
xx xx
overhead
Avoidable fixed cost xx xx
Opportunity cost xx xx
Purchase price xx (xx)
Total costs xx xx xx

Conclusion: Syarikat ABC should buy / make the product because the net income
will increase by RM xx.

Accept or Reject A Special Price Order

Net Income
Reject Accept
Items Increase / (decrease)
(RM) (RM)
(RM)
Sales revenue - xx xx
(-) Variable cost
Costs of goods sold - xx xx
Operating expenses - xx xx
Shipping cost - xx xx
Contribution Margin - xx xx

Conclusion: Syarikat ABC should accept / reject the special order because the net
income will increase by RM xx.
Limiting Factors Analysis

6 steps :

1. Calculate contribution margin per unit / CM per unit

2. Identify limiting factor per unit
3. Calculate contribution per unit per limiting factor
4. Identify profitability ranking
5. Prepare product planning schedule
6. Prepare profit statement

*** rujuk textbook page 9-11 to see the table examples***