This chapter presents the following content: What are cost behaviour, cost estimation and cost prediction? cost drivers; cost behaviour patterns; the relevant range; engineered, committed and discretionary costs; cost structures in modern business environments; cost estimation; practical issues in cost estimation. | Lecture 3:Cost-Volume-Profit Analysis Revisiting Important Concepts Reference Book : Financial & Managerial Accounting By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso A Five-Step Decision Making Process in Planning & Control Revisited Identify the problem and uncertainties Obtain information Make predictions about the future Make decisions by choosing between alternatives, using Cost-Volume-Profit (CVP) analysis Implement the decision, evaluate performance, and learn 2 Foundational Assumptions in CVP Changes in production/sales volume are the sole cause for cost and revenue changes Total costs consist of fixed costs and variable costs Revenue and costs behave and can be graphed as a linear function (a straight line) Selling price, variable cost per unit and fixed costs are all known and constant In many cases only a single product will be analyzed. If multiple products are studied, their relative sales proportions are known and constant The time value of money (interest) is ignored 3 Basic Formulas: 4 CVP: Contribution Margin Manipulation of the basic equations yields an extremely important and powerful tool extensively used in Cost Accounting: the Contribution Margin Contribution Margin equals sales less variable costs CM = S – VC Contribution Margin per Unit equals unit selling price less variable cost per unit CMu = SP – VCu 5 Contribution Margin, continued Contribution Margin also equals contribution margin per unit multiplied by the number of units sold (Q) CM = CMu x Q Contribution Margin Ratio (percentage) equals contribution margin per unit divided by Selling Price CMR = CMu ÷ SP Interpretation: how many cents out of every sales dollar are represented by Contribution Margin Contribution Margin, continued Contribution Margin also equals contribution margin per unit multiplied by the number of units sold (Q) CM = CMu x Q Contribution Margin Ratio (percentage) equals contribution margin per unit divided by Selling Price CMR = CMu ÷ SP Interpretation: . | Lecture 3:Cost-Volume-Profit Analysis Revisiting Important Concepts Reference Book : Financial & Managerial Accounting By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso A Five-Step Decision Making Process in Planning & Control Revisited Identify the problem and uncertainties Obtain information Make predictions about the future Make decisions by choosing between alternatives, using Cost-Volume-Profit (CVP) analysis Implement the decision, evaluate performance, and learn 2 Foundational Assumptions in CVP Changes in production/sales volume are the sole cause for cost and revenue changes Total costs consist of fixed costs and variable costs Revenue and costs behave and can be graphed as a linear function (a straight line) Selling price, variable cost per unit and fixed costs are all known and constant In many cases only a single product will be analyzed. If multiple products are studied, their relative sales proportions are known and constant The time value of money (interest) is .
