Cost-volume-profit analysis

Cost-volume-profit analysis

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How should mixed costs be classified in Cost-volume-profit (CVP analysis

Mixed costs should be classified in CVP analysis into fixed costs and variable cost . For , the fixed cost remains regardless of production . On the other hand , the variable cost changes as production level changes (Guidry , Horrigan Craycraft , 1998

Figure 1

Mixed Costs http /ic .ucsc .edu shep /10b /10BOVR /ch22 .ppt 543 ,8 ,Mixed Costs Example

What approach is used to effect the appropriate classification One way is to apply the high low point method . This

method will segregate the mixed costs in variable cost and fixed cost (Poznanski 2006 ,

. 332 ) as follows

Figure 2

Reference : HYPERLINK "http /www .auburn .edu jonesj6 /ac610 /sp3 .pdf http /www .auburn .edu jonesj6 /ac610 /sp3 .pdf

2 ) Cost-volume-profit (CVP ) analysis is based entirely on unit costs ' Do you agree ? Explain

No , cost volume profit is not based entirely on unit costs . For , the cost volume profit formula is Sales - variable cost - fixed cost profit . And , the variable cost is arrived at by multiplying the unit cost of the raw materials and other related costs used to manufacture the product by the number of units sold . However , the fixed cost is deducted expenses from the sales revenue to arrive at the profit . To explain , the unit cost of 20 units if office rent is 500 for January is 25 . In February , the unit cost of 25 units if office rent is 500 still has decreased to 20 . Thus , unit cost is not used in the computation of fixed cost . Unquestionably , cost volume profit is not based entirely on unit costs (Blocher Chen , 2004

3 ) In constructing a CVP graph explain (a ) how the break-even point is plotted (b ) How the level of activity and dollar sales at the break-even point are determined http /ic .ucsc .edu shep /10b /10BOVR /ch22 .ppt 497 ,18 ,Cost-Volume-Profit Analysis

The break even point is plotted by first plotting in the graph the sales revenue line as shown above . Then , the plotted . Lastly , the breakeven sales point is the point where the sales revenue line and the 2004

References

Blocher , E Chen , K . H (2004 . The ALLTEL Pavilion Case : Strategy and CVP Analysis . Issues in Accounting Education , 19 (4 , 555

Guidry , F , Horrigan , J . O Craycraft , C (1998 . CVP Analysis : A New Look . Journal of Managerial Issues , 10 (1 , 74

Poznanski ,

. J (2006 . Management Accounting , 3d Ed . Issues in Accounting Education , 21 (3 , 332

High Low point , Retrieved Dec 8 , 2007

HYPERLINK "http /www .auburn .edu jonesj6 /ac610 /sp3 .pdf http /www .auburn .edu jonesj6 /ac610 /sp3 .pdf

Cost Volume Profit Analysis , Retrieved December 8 , 2007 http /ic .ucsc .edu shep /10b /10BOVR /ch22 .ppt 497 ,18 ,Cost-Volume-Profit Analysis...