Cost-Volume-Profit Analysis in Managerial Accounting

Name: Cost-Volume-Profit Analysis in Managerial Accounting
Author: William Smith

Learn about cost-volume-profit analysis.

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Course: On-Demand

(bright music) What is cost volume profit analysis and how can you use it? We'll explore this concept along with margins and their related ratios and variances. In addition, we'll go over how cost volume product can be applied to multiple products, sales mix and pricing, what it means to break even, and how to conduct a sensitivity analysis. Cost volume profit or CVP is an analysis method that allows leadership to make projected changes in cost, volume, profit, sales projections and scenarios to see what corresponding impact these changes will have on future operations. Think of CVP analysis as a laboratory that management can use to change different parameters to see what impact they'll have on profit. Running a simulation allows managers to change any of the variables and see what the corresponding effect will be on the variable that management wants to analyze. A simple simulation might include projecting what effect a 10% increase in variable cost would have on revenue if units sold remained constant. To calculate, management would adjust variable costs by 10% and keep direct costs and quantity sold constant. The corresponding change in revenue is the simulations product. CVP analysis starts with the basic breakdown that profit is equal to revenue minus costs. Cost is classified as either fixed or variable. Fixed costs won't be affected by a change in quantity produced or sold. For example, the cost of rent of a manufacturing facility, will remain the same regardless of the number of units of product produced. Variable costs can change as the quantity produced changes. Cost for utilities, such as electricity, gas and water are all variable costs because they can change due to increases or decreases in the manufacturing process such as adding work shifts. Adding another shift to ramp up production and make more products will increase the use and cost of utilities. Completing a CVP analysis requires managerial accountants to make three assumptions. The first is that all organizational costs have to be classified as either fixed or variable. After identifying which costs are fixed and which are variable the next assumption to make is that the sales price and variable costs for each unit will remain constant. Total fixed costs will also need to be constant for the CVP analysis. Finally, the assumption motivating completion of the CVP analysis is that all units will be sold. A CVP analysis is a great tool for management to use to determine their breakeven point.

Intermediate Provider : William Smith 8 Lessons · 18m in Arabic, German, English, Spanish, French, Portuguese, Chinese

Course Description

This module will explore the concept of cost, volume, and profit, and discuss the relationship these factors have on the management decision-making process. You will learn how, by analyzing and manipulating these factors, managers can see how an organization’s profitability will be affected. You will also learn how changing the ratio of the sales mix can help an organization determine their break-even points.

What You'll Learn

Define what Cost-Volume-Profit (CVP) analysis is and how cost, volume, and profit relate to management decision-making
Understand margins, including the contribution margin ratio
Apply margin variance in the decision-making process
Conduct cost-volume-profit analysis with multiple products and product mix
Evaluate the importance of sales mix and pricing
Perform break-even and financial sensitivity analysis

Key Takeaways

Cost-Volume-Profit analysis examines the relationship between cost, volume, and profit and its effect on management decision-making.
By analyzing and manipulating these factors, managers can see how an organization's profitability will be affected.
Changing the ratio of the sales mix can help an organization determine its break-even points.
The course covers margins, the contribution margin ratio, and applying margin variance to decisions.
Sales mix, pricing, breaking even, and financial sensitivity analysis are central topics of the module.

Frequently Asked Questions

What does this course cover?

It explores the concept of cost, volume, and profit and the relationship these factors have on management decision-making, including margins, contribution margin ratio, margin variance, CVP with multiple products, sales mix and pricing, break-even, and financial sensitivity analysis.

What will I be able to do after completing this module?

You will learn what Cost-Volume-Profit analysis is, understand margins, apply margin variance in decision-making, conduct CVP analysis with multiple products, understand the importance of sales mix and pricing, and perform break-even and sensitivity analysis.

How does CVP analysis help managers?

By analyzing and manipulating cost, volume, and profit factors, managers can see how an organization's profitability will be affected, and by changing the sales mix ratio they can determine break-even points.

What topics are taught in the lessons?

Lessons include What is Cost-Volume-Profit Analysis?, Margins, Contribution Margin Ratio, Margin Variance, CVP and Product Mix, Sales Mix and Pricing, Breaking Even, and Financial Sensitivity Analysis.