Chapter 22 - Cost-volume-profit. In this chapter, the learning objectives are: Distinguish between variable and fixed costs, explain the significance of the relevant range, explain the concept of mixed costs, list the five components of cost-volume-profit analysis, indicate what contribution margin is and how it can be expressed. | Learning Objectives Explain variable, fixed, and mixed costs and the relevant range. 1 Apply the high-low method to determine the components of mixed costs. 2 Prepare a CVP income statement to determine contribution margin. 3 Compute the break-even point using three approaches. 4 Determine the sales required to earn target net income and determine margin of safety. 5 22 Use CVP analysis to respond to changes in the business environment. 6 Cost-Volume-Profit Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity. Some costs change; others remain the same. Helps management plan operations and decide between alternative courses of action. Applies to all types of businesses and entities. Starting point is measuring key business activities. LEARNING OBJECTIVE Explain variable, fixed, and mixed costs and the relevant range. 1 LO 1 Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity. Activity levels may be expressed in terms of: Sales dollars (in a retail company) Miles driven (in a trucking company) Room occupancy (in a hotel) Dance classes taught (by a dance studio) Many companies use more than one measurement base. Cost Behavior Analysis LO 1 Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity. Changes in the level or volume of activity should be correlated with changes in costs. Activity level selected is called activity or volume index. Activity index: Identifies the activity that causes changes in the behavior of costs. Allows costs to be classified as variable, fixed, or mixed. Cost Behavior Analysis LO 1 Costs that vary in total directly and proportionately with changes in the activity level. Example: If the activity level increases 10 percent, total variable costs increase 10 percent. Example: If the activity level decreases by 25 percent, total variable costs decrease by 25 percent. Variable | Learning Objectives Explain variable, fixed, and mixed costs and the relevant range. 1 Apply the high-low method to determine the components of mixed costs. 2 Prepare a CVP income statement to determine contribution margin. 3 Compute the break-even point using three approaches. 4 Determine the sales required to earn target net income and determine margin of safety. 5 22 Use CVP analysis to respond to changes in the business environment. 6 Cost-Volume-Profit Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity. Some costs change; others remain the same. Helps management plan operations and decide between alternative courses of action. Applies to all types of businesses and entities. Starting point is measuring key business activities. LEARNING OBJECTIVE Explain variable, fixed, and mixed costs and the relevant range. 1 LO 1 Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business .
