Cost-Volume-Profit Analysis.ppt

Cost-Volume-Profit Analysis Chapter 21 Objective 1 Identify how changes in volume affect costs Cost Behavior How costs change in response to changes in a cost driver Cost driver - any factor whose change makes a difference in a related total cost Volume (units or dollars) - most prominent cost driver in cost-volume-profit (CVP) analysis Cost Behavior Variable costs - change directly in proportion to changes in volume Fixed costs - remain constant (fixed) for a given time period despite fluctuations in volume Mixed costs - have both fixed and variable components Total Variable Costs Variable Cost Per Unit Variable costs per unit do not changeas activity increases Total Fixed Costs Mixed Costs Mixed Costs E21-14 _____ 1. Oil filter _____ 2. Building rent _____ 3. Oil _____ 4. Wages of maintenance worker _____ 5. Television _____ 6. Manager’s salary _____ 7. Cash register _____ 8. Equipment E21-15 a E21-15 b E21-15 c High-Low Method Method to separate mixed costs into variable and fixed components Select the highest level and the lowest level of activity over a period of time High-Low Method – E21-16 Step 1: Calculate variable cost/unit =  Δ total cost / Δ volume of activity ($4,000-$3,600) ÷ (1,000-600) $400 ÷ 400 = $1 High-Low Method - E21-16 Step 2: Calculate total fixed costs = Total mixed cost – Total variable cost $4,000 – ($1 * 1,000) = $3,000 or $3,600 – ($1 * 600) = $3,000 High-Low Method – E21-16 Step 3: Create and use an equation to show the behavior of a mixed cost Total mixed cost = $1x + $3,000 = ($1 * 900) + $3,000 = $3,900 Relevant Range Band of volume: Where total fixed costs remain constant and variable cost per unit remains constant Outside the relevant range, the cost either increases or decreases Objective 2 Use CVP analysis to compute breakeven point Assumptions Expenses can be classified as either variable or fixed The only factor that affects costs is change in volume Breakeven Point Sa