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CHAPTER 22:
COST-VOLUMEPROFIT
By: Mariane J. Luna-Rivera
Trabajo Especial
ACCT 1162

INTRODUCTION
On this presentation, I will be talking about
the cost-volume-profit. This will include the
fixed costs, variable costs, mixed costs,
relevant range, contribution margin, breakeven point, margins of safety, and costvolume-profit income statement. These for
objectives are they key to understand the
cost-volume-profit.

OBJECTIVES:

Distinguish between a variable and fixed

cost.
Explain the significance of the relevant
range.
Explain the concept of mixed cost.
List the five components of the cost-volumeprofit.
Indicate what contribution margin is and how
it can be expressed.

OBJECTIVES (CONT.)

Identify the three ways to determine the

break-even point.
Give the formulas for determining sales
required to earn target net income.
Define margin of safety, and give the
formulas for computing it.
Describe the essential features of a costvolume-profit income statement.

DISTINGUISH BETWEEN
VARIABLE AND FIXED COSTS.

Cost behavior analysis is the study of how

specific costs respond to changes in the level
of business activities.
Variable costs are costs that vary in total
directly and proportionately with changes in
the activity level.
A variable cost may also be defined as a cost
that remains the same per unit at every level
of activity.

FIXED COSTS

Fixed costs are costs

that remain the
same in total
regardless of changes
in the activity level.
Fixed costs per unit
vary inversely with
activity: As volume
increases, unit cost
declines, and vice
versa.

EXPLAIN THE SIGNIFICANCE OF

THE RELEVANT RANGE

The relevant range is the range

of the activity index over which
the company expects to
operate during the year.
A straight line is drawn
throughout the entire range of
the activity index for the total
variable cost, the assumption is
that the cost are linear.
Linear cost means that the
changes in in the activity will
result in direct, proportional
change in the variable cost.
In most business situations, a
straight-line relationship does
not exist.

CURVILINEAR

In the real world, the

relationship between the
behavior of a variable cost
and changes in the activity
level is often curvilinear.
The linear assumption
produces useful data for CVP
analysis as long as level of
activity remains within the
relevant range.
The relevant range is also
called the normal range or
practical range.

EXPLAIN THE CONCEPT OF

MIXED COSTS

Mixed costs are costs that

contain both variable
element and fixed
element.
Mixed costs, therefore,
change in total but not
proportionately with
changes in the activity
level.
For the purposes of CVP
analysis, mixed costs must
be classified into their
and variable elements.

HIGH-LOW METHOD

The high-low method uses the

total of costs incurred at the
high and low levels of activity
to classify mixed costs into
fixed and variable components.
The high-low method uses two
sets of numbers: 1) the total
dollars of the mixed costs
occurring at the highest volume
of activity, and 2) the total
dollars of the mixed costs
occurring at the lowest volume
of activity.
The high-low method involves
charting out all the purchases
of goods and their prices.

IMPORTANCE OF IDENTIFYING
VARIABLE AND FIXED COSTS

LIST THE FIVE COMPONENTS OF

COST-VOLUME-PROFIT ANALYSIS

Cost-volume-profit (CVP) analysis is the study

of the effects of changes in costs and its
volume on a companys profits.
Its important for profit planning.
The basic components are:
Volume

or level of activity
Unit selling prices
Variable cost per unit
Total fixed costs
Sales mix

CVP COMPONENTS

Activity level is the total number of units sold in the

measurement period.
Price per unit is the average price per unit sold,
including any sales discounts and allowances that
may reduce the gross price.
Variable cost per unit is the totally variable cost per
unit sold, which is usually just the amount of direct
materials and the sales commission associated with a
unit sale.
Total fixed cost is the total fixed cost of the business
within the measurement period.
Sales mix is the proportions of different products and
services that comprise the total sales of a company.

INDICATE WHAT CONTRIBUTION MARGIN

IS AND HOW IT CAN BE EXPRESSED.

CVP income statement is so important for

decision making, management often wants
information reported in a CVP income
statement for internal use.
Contribution margin is the amount of
revenue remaining after deducting variable
costs.
The formula for contribution margin per unit
and the computation is:

CONTRIBUTION MARGIN RATIO

The contribution margin ratio is the

contribution margin per unit divided by the
unit selling price.

IDENTIFY THE THREE WAYS TO DETERMINE BREAK-EVEN POINT

The

break-in analysis is the level of activity

at which total cost (both fixed and variable).
The break-even point can be:
Computed

from a mathematical equation.

Computed using contribution margin.
Derived from a cost-volume-profit (CVP) graph.
Break-even

occurs where the total sales

equal variable costs plus fixed costs.

Mathematical Equation

Contribution Margin Technique

CASH PAYMENTS JOURNAL

In cash payments
journal, companies
record all
disbursements of
cash.
Proving the ledgers
after posting from
the sales, cash
receipts, and cash
payments journals.

EFFECTS OF SPECIAL JOURNALS

Effects of special journals:

Only

transactions that cannot be

entered in a special journal are
recorded in the general journal.
Also, correcting, adjusting, and
closing entries are made in the
general journal.

When control and subsidiary

accounts are involved,
companies makes two changes
from the earlier procedures:
In

journalizing, they identify both

the control and the subsidiary
account.
In posting, there must be a dual
posting.

CONCLUSION
I learned from this chapter the difference between a manual
and computerized system. I consider that the computerized
is easier to work with since the chance of making a mistake is
much less than the manual system. Also, I learned the
different types of subsidiary ledger. A subsidiary ledger
makes the job easier because in a single account shows all
the transactions for one customer. The special journal
contains four different journals. For example, purchase
journals, cash payments journals, cash receipts and sales
journals. I learned their processes are similar but each one
of them hold different information. Basically, they classified
the transaction into four journals. Finally, this chapter show
me that everyday accounting changes and the manual system
is being replaced with computerized system to facilitate and
make more accurate the journalizing and posting
transactions.