COST ACCOUNTING AND CONTROL
Module 4: Cost – Volume = Profit Analysis
I. Description
This module discusses tools developed to answer questions relating to planning, control and decision making.
II. Objectives
1. Know the meaning of break even point
2. Determine the break even point in number of units and in total sales
3. Determine the number of units to be sold to attain a targeted profit
4. Prepare a profit volume graph
5. Prepare a cost-volume-profit graph
6. Know meaning and computation of contribution margin
7. Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis
III. Duration - Week 4
IV. Learning Contents
Cost-Volume-Profit (CVP) Analysis is used to determine how changes in costs, sales volume and price affect the
company’s profit. In performing the CVP analysis there are several assumptions made, including:
• Sales price, variable cost and fixed costs are constant.
• The company is operating within the relevant range of activity. Relevant range refers to the range of activity
where variable cost per unit and total fixed costs is constant.
• Everything produced is sold.
• Costs are only affected by the changes in activity.
• If the company sells more than one product, they must be sold in the same mix.
CVP Analysis is used to determine the break-even point (BEP), which is the point of zero profit. In BEP the company has
no profit nor loss, this point is where the total revenue is equal to total costs.
Several questions can be answered by CVP Analysis including:
• How many numbers of units are to be sold to break-even?
• What is the effect of changes in the fixed costs on the BEP?
• What is the effect of changes in sales price on the BEP?
To fully understand the CVP relationship, we will classify cost according to their tendency to vary with production
(MIXED, FIXED, AND VARIABLE) instead of their functional Classification (manufacturing, selling, and administrative).
Variable costs are 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 cost will include
a. fixed overhead
b. fixed selling
c. fixed administrative
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 a
variable cost per unit remain constant or a fixed cost remains fixed in total.
b. Revenue — Revenue per unit is assumed to remain constant. Total revenue fluctuates in direct proportion to volume.
c. Variable cost — Variable are assumed to remain constant on a per unit basis. Total variable costs fluctuate in direct
proportion to volume.
d. Fixed cost — Total fixed costs re assumed to remain constant regardless of changes in volume and because of this
fixed cost on a per unit basis increases as volume decreases and decreases as volume increases.
e. Mixed cost — before
The Break Even Point
As stated, break-even point (BEP) is the point where the company has no loss nor profit. In other words, sales are equal to
costs or contribution margin equals fixed costs. To compute the BEP in units (BEPu), the formula is:
V.Reference/s:
- De Leon, N., De Leon, E., & De Leon G. (2019). Cost Accounting and Control
