Summary of Cost Volume Profit Analysis | Cost Accounting | CPA Exam BAR | CMA Exam

Summary of Cost Volume Profit Analysis Video

Main Ideas:

Cost-Volume-Profit (CVP) Analysis: A model used by managers to understand how changes in costs, volume, and prices affect net income or operating income. It helps in decision-making through what-if analysis.
Types of Costs:
- Variable Costs: Costs that change with the level of production.
- Fixed Costs: Costs that remain constant regardless of production levels.
- Mixed Costs: Contain both variable and fixed components but are not used in CVP analysis directly.

Key Concepts:

Operating Income Formula:
- Operating Income = Revenue - (Variable Costs + Fixed Costs)
- This can be expanded to: Operating Income = (Selling Price × Quantity) - (Variable Cost × Quantity) - Fixed Costs
Contribution Margin (CM): Defined as Selling Price - Variable Cost. It represents the portion of sales revenue that exceeds total Variable Costs, contributing to Fixed Costs and profit.
Break-Even Point: The level of sales at which total revenues equal total costs, resulting in zero profit.
- Break-Even in Units: Fixed Costs / Contribution Margin per Unit
- Break-Even in Dollars: Fixed Costs / Contribution Margin Percentage
Target Profit Calculation:
- To find the number of units needed to achieve a target profit: (Fixed Costs + Target Profit) / Contribution Margin per Unit
- If considering taxes, gross the target profit by dividing by (1 - Tax Rate).

Methodology/Instructions:

Calculate Contribution Margin: CM = Selling Price - Variable Cost
Determine Break-Even Point:
- Break-Even Units = Fixed Costs / Contribution Margin per Unit
- Break-Even Dollars = Fixed Costs / Contribution Margin Percentage
Calculate Required Sales for Target Profit:
- Required Sales = (Fixed Costs + Target Profit) / Contribution Margin per Unit
- For after-tax profit, gross the target profit: Gross Profit = Target Profit / (1 - Tax Rate)
Verify Calculations: Ensure that the calculated revenue covers both variable and Fixed Costs to confirm break-even or target profit.