COST AND MANAGEMENT ACCOUNTING
COST VOLUME PROFIT
ANALYSIS
Desmond Aboagye
March, 2020
Chapter Learning Objectives
At the end of this chapter, you will be able to:
• Explain the concept of ‘Cost-Volume-Profit Analysis’
• Apply contribution margin approach to demonstrate the
relationship between cost, activity level and profit level
• Apply the analysis in providing information for short term
decision
• Prepare a break-even chart for single and multiple product
situations
@desmondaboagye2020
Order of Presentation
1. Introduction
2. C-V-P Analysis Single Product
3. C-V-P Analysis Multiple Products
@desmondaboagye2020
1.0 Introduction to C-V-P Analysis
Cost-Volume-Profit (CVP) Analysis is sometimes used
interchangeably with Breakeven Analysis. However;
• Break-even analysis – focuses on profit or loss
• CVP analysis – focuses on tactical information for decision making
CVP analysis is concerned with the effects of changes in fixed
cost, variable cost, sales price, output volume and multiple
output mix on future profit.
@desmondaboagye2020
1.0 Introduction to C-V-P analysis (cont’d)
Assumption underling C-V-P analysis
a. Marginal Costing technique is applied
b. All cost can be fully resolved into fixed and variable
components
c. The decision making range is defined
d. Total cost and revenue are linear functions of output
e. Applies to single product or constant sale mix
@desmondaboagye2020
2.0 Single Product Analysis
Given that marginal costing is used:
Marginal Income Statement Contribution Per Unit
Sales (P x Q) XX Sale price per unit (P) XX
Variable Cost (Vc X Q) (XX) Variable Cost per unit (Vc) (XX)
Contribution (Cu X Q) XX Contribution per unit (Cu) XX
Fixed Cost (XX)
Profit Before Tax XX Total Contribution = Contribution per unit X Output
Tax (XX)
Profit after tax XX Total Contribution = Fixed Cost + profit before tax
The relationship is between Contribution, fixed cost, and profit
before tax.
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
To carry-out a CVP analysis for a single product
a. Resolve all cost into fixed and variable elements
b. Ascertain the sales price per unit of output
c. Find contribution per unit or the contribution-to-sales ratio
d. Given the desired profit, the impact of variations in fixed
cost, variable cost, sales price and quantity can be examined
Let us refer to the attached illustration question pack which helps us guide a noodles
seller to carry out C-V-P analysis
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Scenario 1a: Break-even point output and revenue
i Computation of contribution per unit iv Profit statement
Sales 10 Given breakeven point of 15,000units
Variable cost 6 GHS
Contribution 4 Sales revenue (15000@10) 150,000
Variable Cost (15,000@6) (90,000)
ii Compuation of Break-even point Total Contribution 60,000
Fixed Cost (60,000)
Profit -
iii Breakeven point in value
BEP (value) = Quantity X Price
BEP (value) = 15,000 X 10
BEP (value) = GHS 150,000
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Scenario 1b: Output to achieve a target profit
i Computation of contribution per unit iv Profit statement
Sales 10 Required Activity level of 20,000units
Variable cost 6 GHS
Contribution 4 Sales revenue (20,000@10) 200,000
Variable Cost (20,000@6) (120,000)
ii Compuation of Required Activity Level Total Contribution 80,000
Fixed Cost (60,000)
Profit 20,000
iii Required Output in Value
Required Output (value) = Quantity X Price
Required Output (value) = 20,000 X 10
Required Output (value) = GHS 200,000
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Scenario 1c: Output to achieve a target profit
i Computation of contribution per unit iv Profit statement
Sales 10 Required Activity level of 25,000units
Variable cost 6 GHS
Contribution 4 Sales revenue (25,000@10) 250,000
Variable Cost (25,000@6) (150,000)
𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑝𝑟𝑜𝑓𝑖𝑡 Total Contribution 100,000
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 =
1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 Fixed Cost (60,000)
𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑝𝑟𝑜𝑓𝑖𝑡 Profit before tax 40,000
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 +
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 = 1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 Tax @ 25% (10,000)
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Profit after Tax 30,000
30,000
60,000 +
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 = 1 − 0.25
4
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 = 25,000 units
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Scenario 1d: Finding the desired sales value (using C/S ratio)
This method is used to find the exact level of sales revenue to be
generated to meet a particular profit objective.
1. Find the contribution-to-sales (C/S) ratio
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑡𝑖𝑜𝑛
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑡𝑜 𝑆𝑎𝑙𝑒𝑠 𝑅𝑎𝑡𝑖𝑜 = 𝑥100%
𝑆𝑎𝑙𝑒𝑠
2. Apply to the formula to ascertain sales value
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 =
𝐶/𝑆 𝑅𝑎𝑡𝑖𝑜
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Scenario 1d: Finding the desired sales value (using C/S ratio)
i Computation of Contribution iii Breakeven sales
Sales 400,000
Variable Cost (300,000)
Contribution 100,000
ii Compuation of C/S ratio
iv Sales value to achieve target target profit
Target Profit of GHS 25,000
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Margin of Safety
Margin of Safety (MOS) is the extent to which sales must fall
before losses accrue.
It compares target (expected or budgeted) sales to breakeven
sales to establish the safety available in value or percentage.
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 = (𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑜𝑟 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠) − 𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑡𝑒𝑦
𝑀𝑂𝑆% = 𝑥100%
(𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑜𝑟 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑆𝑎𝑙𝑒𝑠)
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Changes in Selling Price and Cost
For C-V-P analysis, the variables are considered constant within
the relevant range.
Where any of the variable is considered to vary, all the necessary
computations should be adjusted to reflect the new variation.
• Variations in Variable Cost and Sales price will impact contribution
• Variations in fixed cost and tax rate will affect net profit
• All the above variations have an impact on the target volume
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Breakeven Charts –
Variable Selling Total
Quantity VC/unit Cost Fixed Cost Total Cost Price Sales Profit
0 40 0 600 600 120 0 -600
1 40 40 600 640 120 120 -520
2 40 80 600 680 120 240 -440
3 40 120 600 720 120 360 -360
4 40 160 600 760 120 480 -280
5 40 200 600 800 120 600 -200
6 40 240 600 840 120 720 -120
7 40 280 600 880 120 840 -40
8 40 320 600 920 120 960 40
9 40 360 600 960 120 1080 120
10 40 400 600 1000 120 1200 200
11 40 440 600 1040 120 1320 280
12 40 480 600 1080 120 1440 360
13 40 520 600 1120 120 1560 440
14 40 560 600 1160 120 1680 520
15 40 600 600 1200 120 1800 600
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Breakeven Charts – Traditional breakeven chart
Breakeven Chart
2000
1800
1600
1400 Profit
Cost / Sales (Total)
1200
Bep
1000
800
600
400
Loss
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity
Total Sales Total Cost Fixed Cost
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Breakeven Charts – Contribution breakeven chart
Breakeven chart
1800
1600
1400
Profit
1200
Contribution
Cost or sales
1000
800 Fixed
Cost
600
400 Loss
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity
Variable Cost Total Cost Total Sales
@desmondaboagye2020
2.0 Single Product Analysis (Cont’d)
Breakeven Charts – Profit Volume Chart
Profit Volume Chart
800
600
400
200
Profit
0
-200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-400
-600
-800
Quantitty
Profit
@desmondaboagye2020
3.0 Multiple Products Analysis
Where an entity produces and sells multiple product, the C-V-P
analysis would apply on the assumption that it maintains a
constant sales mix within the relevant range.
Given the constant mix, the desired combined sales (volume and
value) is ascertained and distributed.
• If this assumption does not apply, each of the products should
analyzed individually
@desmondaboagye2020
3.0 Multiple Products Analysis (Cont’d)
To carry out a mixed products C-V-P analysis (BEP units);
1. Calculate the total contribution of the product mix
2. Find the Weighted Average Contribution per unit
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑎𝑙𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠 𝑖𝑛 𝑚𝑖𝑥
3. Compute the desired level of output as may be required
4. Given the product units mix, apportion the target output units
@desmondaboagye2020
3.0 Multiple Products Analysis (Cont’d)
To carry out a mixed products C-V-P analysis (BEP value);
1. Calculate the total contribution of the product mix
2. Find the Weighted Average C/S ratio
3. Compute the desired level of sales as may be required
@desmondaboagye2020
3.0 Multiple Products Analysis (Cont’d)
Scenario 2: Multiple products
i Computation of Weigheted Average Contribution to Sales Ratio
Juice (X) Cakes (Y) Pie (Z) Total
Sales (GHS'000) 800 200 1000 2000
Contribution (GHS'000) 550 50 300 900
Budgeted sales (units) 50,000 10,000 100,000 160,000
C/S ratio 0.69 0.25 0.30 0.45
Rank of C/S ratio 1st 3rd 2nd
Contribution per unit 11.000 5.000 3.000 5.625
@desmondaboagye2020
3.0 Multiple Products Analysis (Cont’d)
Scenario 2: Multiple products (cont’d)
ii Computation of Break-even revenue required (GHS) iv Apportion the sales units per product
iii Computation of Break-even units
To prepare the charts, rank the
product descending order of C/s
ratio and use the order to prepare
the cumulative table
@desmondaboagye2020
3.0 Multiple Products Analysis (Cont’d)
Breakeven charts – Multi-product profit-volume chart
Cumulative Cumulative
Product Contribution Profit/Loss Revenue Revenue
None 0 -450 0 0
X 550 100 800 800
Y 300 400 1000 1800
Z 50 450 200 2000
multi-product chart
600
Pdt z
400
pdt y
200
Profit
0
Pdt X
0 800 BEP 1800 2000
-200
-400
-600
Sales
Cumulative Profit/Loss
@desmondaboagye2020
4.0 Limitations of C-V-P analysis
The reliability and precision of C-V-P analysis is not limited as;
1. All cost cannot be fully resolved into fixed and variable cost
2. All cost are variable in the long run
3. Variable Cost and Sale do not only vary to quantity
4. Efficiency and Productivity is assumed to be constant
@desmondaboagye2020
5.0 Chapter Revision
At the end of the session:
1. You are able to explain the concept of Cost-Volume-Profit
analysis
2. You are able to carry out C-V-P analysis for a single product
under various assumption
3. You are able to carry out C-V-P analysis for multiple products
under various assumption
Please refer to attached question pack to practice concepts
@desmondaboagye2020
