Topic 12 - Management Accounting: CVP Analysis

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This article is a topic within the subject Accounting 1A.

Contents

Required Reading

Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP pp. 'Supplementary Text'.

Cost Volume Profit Analysis

This week deals with behavioural costs. This method of cost classification was mentioned last week (although last weeks focus was functional cost classification).

Behavioural Costs

Behavioural costs are classify costs on how they change based on a cost driver. A cost driver is a factor that causes activity costs, in this course it will generally be unit volume (e.g. increasing production).

  • Fixed Costs - remain constant irrespective of activity e.g. rent

[1] [2]

FC12.jpg

  • Variable - varies proportionally to changes in activity, remains stable on a per unit basis e.g. raw materials

[3] [4]

VC12.jpg

  • Semi Fixed - fixed over a moderate range of activity e.g. Internet payment plans with threshold payments
    • Step Variable

[5] [6] SF12.jpg


  • Mixed (Semi Variable) - directly proportional activity that includes a fixed component

[7] [8]

MSV12.jpg

Cost Volume Profit Analysis

Cost Volume Profit Analysis (CVP) involves analysing how changes in volume effects costs and profits.

Assumptions of CVP Analysis

[9] [10]

  1. Behaviour of costs and revenues are linear over a relevant range - total costs change at a constant rate
  2. Costs are fixed or variable
  3. Selling prices are constant
  4. Only changes in activity levels affects costs
  5. All units of production are sold
  6. Sales mix remains constant in multi-product firms

CVP Key Concepts

These formulas are required knowledge for ACCT1A exams.

FMLS12.jpg

Break Even Analysis

Break Even Analysis is a useful form of CVP analysis.

Net Profit before Tax (NPBT) = Total Revenue - Variable Costs - Fixed Costs

  • NPBT = P x Q - Unit Variable Costs (UVC) x Q - Fixed Costs (FC)
    • NPBT = Q x (P - UVC) - FC
      • (NPBT + FC) / (P - UVC) = Q
        • (P - UVC) is the contribution margin)

For multi product firms a constant weighting is assumed.

To find net profit before tax (if given needed profit) is Profit / (1 - tax rate)

Another way to set out a break even analysis was shown by Ken Trotman [11] but is less likely to be tested in an exam.

KT12.jpg

End

This is the end of this topic. Click Accounting 1A to go back to the main subject page for Accounting 1A

References

Textbook refers to Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP

  1. Lecturer: Dr. Tami Dinh Thi School of Accounting UNSW, ASB Lecture Notes
  2. Ken Trotman's supplementary text
  3. Lecturer: Dr. Tami Dinh Thi School of Accounting UNSW, ASB Lecture Notes
  4. Ken Trotman's supplementary text
  5. Lecturer: Dr. Tami Dinh Thi School of Accounting UNSW, ASB Lecture Notes
  6. Ken Trotman's supplementary text
  7. Lecturer: Dr. Tami Dinh Thi School of Accounting UNSW, ASB Lecture Notes
  8. Ken Trotman's supplementary text
  9. Lecturer: Dr. Tami Dinh Thi School of Accounting UNSW, ASB Lecture Notes
  10. Ken Trotman's supplementary text
  11. Ken Trotman, Management Accounting Supplementary Text
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