Page 1 fixed overhead

Chapter b.Fixed selling

COST-VOLUME=PROFIT ANALYSIS
LEARNING OBJECTIVES
Upon completion of this chapter,you should be able to
Know the meaning of pagbreak even point
Determine the break even point in number of units and in total sales
Determine the number of units to be sold to attain a targeted profit
Prepare a profit volume graph
Prepare a cost-volume-profit graph
Know meaning and computation of contribution margin
Explain the impact of risk,uncertainty,and changing variables on cost-
volume-profit analysis
Cost-volume-profit(CVP)analysis estimates how changes in costs(variable
and
fixed),sales volume,and price affect a company's profit.Managers find CVP
very
useful in making wise business decisions,predicting future conditions
（planning)as well as in explaining,evaluating and acting on
results(controlling)
CVP is being used by companies to determine the break even point,which is
the
c.Fixed administrative
A summary of revenue and cost assumptions is presented at this point to
provide a
foundation for BEP and CVP analysis
a.
Relevant range-the company is assumed to be operating within the
relevant range of activity specified for determining the revenue and cost
information used.The relevant range refers to the range of activity over
which a variable cost per unit remain constant or a fixed cost remains fixed
in total.
b.
Revenue-Revenue per unit is assumed to remain constant.Total revenue
fluctuates in direct proportion to volume.
Variable cost-Variable are assumed to remain constant on a per unit
Fasis.Total variable costs fluctuate in direct proportion to volume.
d.
ixed cost-Total fixed costs re assumed to remain constant regardless of
changes in volume and because of this fixed cost on a per unit basis
increases as volume decreases and decreases as volume increases.

point of zero profit(no profit,no loss).At the break even point total revenue e.

equals total cost,Companies,however,do not wish merely to"break even"on Mixed cost-before

operations.The BEP is determined to serve as a point of reference.Knowing THE BREAK EVEN POINT
BEP, As stated before the break even point is where total revenue equals total
managers are better able to set sales goals that should result in profits from cost.At

operations rather than losses.New companies normally experience net loss at this point there is no loss and also no profit.The formula to use is based on the
the objective.If the objective is the break even in units,the formula is as shown on
start and so they see their CVP analysis as a useful tool.Managers uses CVP the next page
analysi:during times of economic trouble to help them pinpoint problems and 41
find the appropriate solution.
CVP analysis helps managers answer several questions such as Page 3
the number of units to be sold to break even Chapter 4 Cost Volume Profit Analysis
the effect of changes in the fixed cost on the break even point 93
the effect of changes in the sales price on the break even point BREAK EVEN POINT(UNITS)=
To fully understand the CVP relationship,we will classify cost according to Total fixed cost
their Sales price-Variable cost/unit
tendency to vary with production(MIXED,FIXED,AND VARIABLE.)instead BREAK EVEN POINT(UNTTS)
＝Total fixed cost
Page 2 Contribution margin per unit
92 if the objective is the break even in sales(pesos),the formula is
Cost Accounting BREAK EVEN POINT(PESOS)=Total fixed cost
of their functional classification(manufacturing,selling,and Contribution margin ratio
administrative).We
Or BREAK EVEN POINT(PESOS)=BEP in units x Selling Price/unit
need only fixed and variable,so we have to segregate the variable and fixed
For the formula to determine the BEP in pesos,the contribution margin is
components of the mixed cost by using any of the three methods:(high low used.
point,
Contribution margin is the amount remaining after deducting the variable cost
scattergraph and method of least square).The focus is the company as a whole.
per unit from the selling price per unit.The contribution per unit is the amount
The cost,a used in this discussion,refer to all costs of the company-production,
contributed by each unit to the recovery of the fixed.The formula is
selling.and administrative.So variable costs are all costs that increase as more
CONTRIBUTION MARGIN/UNIT=Selling price-Variable cost
units are produced and sold,including
CONTRIBUTION MARGIN RATIO=CM PER UNIT
a.
SALES PRICE/UNIT
direct materials
Illustrative problem 1
b.
Nicolas Company produces a product that sells for P800.00.The variable cost
direct labor' is
variable overhead P360 for direct materials,P200 for labor,P50 for variable overhead and P
C. 30,000
d. for fixed overhead.The units sold for the month is 500 unirts
variable selling Required
e.variable administrative 1.Compute for total variable cost
fixed cost will include 2.Compute the total fixed cost
a. 3.Compute for the BEP(units)
4.Compute for the contribution margin into fixed and variable is called the contribution margin statement which is
5.Compute for the contribution margin ratio used
6.Compute for the BEP(pesos) under direct costing or variable costing.
The contribution margin statement for the Nicolas Company assuming sales
of 500
Page 4
units will appear as
1111
Sales(500x P800)
94
P 400,000
Cost Accounting
Variable cost(500x 600)
SOLUTION
300.000
1.Direct materials
Contribution margin
P 350
100,000
Direct labor
Fixed cost
200
30.000
50
Net income
Variable overhead
P
P600
70.000
Total variable cost
As seen on the statement,the contribution margin is P200/per unit,meaning
2.Total fixed cost each
P30.000 unit sold is contributing P200(100,000/500)to the recovery of the fixed cost.
3.BEP(UNITS)=Total fixed cost Since the contribution margin of P100,000 is more than the fixed cost of
Seling Price/unit-Variable cost/anit P30,000,
＝P30.000 there is net income of P70,000.If contribution margin equals fixed cost,the
P800-P600 company will break even,and if contribution margin is less than fixed cost,it
＝150 units will
4.BDP(PESOS=Total fixed cost be net loss.
CM ratio CVP analysis allows managers to do sensitivity analysis by examining the
effect of
＝P30,000=P
various price or cost levels on profit.CVP analysis shows how
25%
revenues,expenses
4.Contribution margin/mnit=Selling Price-variable cost
and profits behave as volume changes.
＝P 800-P600
If we express the contribution margin statement in form of a formula,then it
＝P200/unit will
5.Contribution margin ratio=Contribution margin/unit be
Selling price/mait Net income= revenue-total variable cost-total fixed cost
＝P200/P800
＝25% Page 6
6.BEP(PESOS) 98
＝Total fixed cost/CM ratlo Cost Accounting
＝P30,000/25% Margin of safety in pesos=350 units x P 800
＝P120.000 ＝P 280,000
or BEP(PESOS) OR Margin of safety in pesos
＝150 UNITS X P800 P400,000-P 120,000
＝P 120.000 ＝P 280,000
Margin of safety ratio
Page 5 ＝Margin of safety
Chapter 4 Cost Volume Profit Analysis Total sales
95 ＝P280,000/P400,000
IF a statement is prepared for the break even sales,it will appear as ＝70%
Sales All of these formulas(computations)mean that sales may decrease by 350
P 120,000 units,or
Variable cost(150xP600) decrease by P280,000 or may decrease by 70% before the company will break
90.000 even.In the event that sales take a downward turn,the risk of suffering a loss
Contribution margin is less if the margin of safety is large than if the margin of safety is small.If
the
30,000
margin of safety is small,managers must take actions to increase sales or
Fixed cost
decrease
30.000
cost.
Net income
If two companies have the same amount of sales,it will not be safe to
At break even sales,contribution margin equals fixed costs.Any excess of conclude
contribution margin over fixed costs is net income. that the BEP,the margin of safety,and the net income will be the same.If one
The statement of comprehensive income that is based on the separation of company has a lower variable cost per unit and/or a lower total fixed cost,then
costs its
operating income will be higher.The differences in variable cost per unit and 10.00
total 14.00
fixed cost would result to different break even revenues.It would be safe to Contribution margin
conclude that the company with the lower break-even sales would have a P 4.00
higher
P 600
margin of safety.
P 4.00
CVP ANALYSIS IN A MULTIPRODUCT
1.Break-even in total units
The CVP analysis is simple and easy to use if the company is producing and
Total fixed cost
selling a single product only.However,few companies are producing a single
Weighted average contribution margin
product only,most companies are producing 2,3,or more products.Even
though 1800.000

CVP analysis becomes more complex with multiple products,the operation 1s 4.50
二
reasonably straightforward.We simply convert the multiple product problem
to a 400.000 units
single product problem.The key to this conversion I to identify the expected
sales Page 8
mix,in units,of the products being produced and marketed.The sales mix is the 100
combination of products being marketed by the company.The sales mix is Cost Accounting
Weighted average contribution margin=Total contribution margin
Page 7 Total expected sales
66 （20.000x4)+(20.000x6)+(40.000x4)
Chapter 4 Cost Volume Profit Analysis 80,000
measured in terms of units sold.By defining the products as a package the ＝4.50/unit
multiple product problem is converted into a single product problem.To 2.Sales in units of A,B,and C at break-even
use,the 400,000x25%(200,000/800,000)
BEP in units,the package selling price and variable cost per package must be ＝100,000
determined. A
Illustrative Problem 2 B
Selina Company produces three products A,B,and C with the following 400,000x 25%(200,000/800,000)
characteristics ＝100,000
PRODUCT A C
PRODUCT B 400,000x 50%(400,000/800,000)
PRODUCT C ＝200,000
Sales price/unit Check
P 10.00 Sales(100,000x10)+(100,000x16)+(200,000x18)6,200,000
P 16.00 Variable cost(100,000 x6)+(100,000x10)+(200,000x14)
P 18.00 4,400,000
Variable cost/uniy Contribution margin
6.00 1,800,000
10.00 Fixed cost
14.00 1,800,000
Expected sales(units) Net income
20,000 3.
20,000 Expected net income
40,000 P
Total fixed costs'are P 1,800,000.Assume that sales mix will be the same at all 350,000
sales levels. Total fixed cost
Required 1.800,000
1.Compute for the break-even point in total units Total contribution margin
2.Compute for the units A,B,and C must sell at break-even point P2.150,000
3.Compute for the total contribution margin if the company expects profit of BEP may be computed using this alternative solution
P350,000. BEP(units)=Total fixed cost
Solution Weighted CM per unit
PRODUCT A 1,800.000
PRODUCT B 1.00+1.50+2.00
PRODUCTC ＝400,000 units
Sales price/unit Weighted CM per unit
P 10.00 B
P16.00 Contribution margin/unit
P18.00 P 4.00
Variable cost/unit P 6.00
6.00 P4.00
Multiply by sales mix ratio Contribution margin ratio
25% 140,000+120,000
25^ 40%
50% P650.000
Weighted contribution Check
margin per unit Sales
P 1.00 P 650,000
P 1.50 Variable cost(650,000x 60%)
P 2.00 390.000
Contribution margin
Page 9 260,000
Chapter 4 Cost Volume Profit Analysis Fixed cost
101 140,000
SALES AND UNITS WITH DESIRED PROFIT Net income
Most companies would not want to break even only,the main objective is to P 120.000
eam The break-even point is affected by the three factors:selling price,variable
profit. cost,
The break even point gives useful information to managers, and volume of sales.Any change in any of these will definitely change the
but break-
companies would want to earn income greater than PO.CVP gives us a way to even point.There will be a decrease in BEP if total fixed cost decrease or unit
determine how many units must be sold,or how much sales revenue must b contribution increase.BEP will increase if there an increase in fixed cost or a
earned to earn a particular net income The formula for computing BEP will decrease in unit(or percentage)contribution margin.
not EFFECT OF CHANGE IN SALES PRICE
change much,we simply add the desired profit to the fixed cost and then Illustrative Problem 4
divide by Nicolas Company produces a product that sells for P800.00.The variable cost
the contribution margin per unit.The formula will be is
Sales=Total fixed cost+desired profit P600 per unit.The units sold for the month is 500 units.Assuming variable
Contribution margin/unit cost
Illustrative Problem 3 is still P600 and fixed cost remain at P30,000.The selling price this time
The Gilas Company is trying to do CVP analysis with the followig increased to P850
information for Required
the month of August. 1.Compute for BEP
Sales 2.Compare with Illustrative Problem 1
P Solution
550,000 BEP(units)=Total fixed cost
Total fixed cost CM per unit
140,000 P30.000
Selling Price P850-P600
20 120 units
Variable cost per unit
12 Page 11
Required Chapter 4 Cost Volume Profit Analysis
1.Sales(units and amount)to break even. 103
2.Sales if the company desires a profit of P 120,000 2.BEP in Problem 1 is 150 anits and with the new selling price tbe BEP
Solution decreased to 120 units because of the increase in the contribution margin/uait
1.BEP(units) EFFECT OF CHANFE IN FIXED COST
＝Total fixed cost/contribution margin per unit Ilustrative Problem SSame data as in Problem I for NicolasCompany.
＝P140,000/(P20-12) The change is the amount of fixed cost that increased to P150,000 Selling
＝17,500 units price is still P800.Variable P600
BEP(amount) Required
＝17,500xP20 1.Compute for BEP
＝P350,000 2.Compare with lllustrative Problem 1
BEP(amount)=Total fixed cost divided by contribution ratio Solution
＝P140,000/40% 1.BEP(units)=Total fixed cost
＝P350,000 CM per unit
Contribution margin ratio=8/20 P50,000/200
＝40% ＝250 units
2.With the increase in fixed cost to P50,000 the new BEP increased to 250
Page 10 units.
102 As we increase the fixed cost BEP increased also.
Cost Accounting EFFECT OF CHANGE IN VARIABLE COST PER UNIT
2.Sales with profit=Fixed cost+Desired Profi Mlastrative Problem 6
Same data as in Problem 1 Nicolas Companybut the change now is on the considered favorable because the effect is a decrease of the cost of goods sold
variable thereby increasing the gross profit.
cost per unit If the closing is done on a monthly basis a special account,Under-and
The selling price is still P800 per unit.Fixed cost is P30,000 but variable cost Overapplied
is Factory Overhead,will accumulate the differences period-to-period At the end
P650 per unit of
Requi ed the calendar or fiscal year,the balance of the under-and overapplied account
I.Con pute for BEP will
2.Comparith Illustrative Problem 1 be closed to Cost of Goods Sold or allocated on a pro-rata basis to Work in
Solation Process,Finished Goods and Cost of Goods Sold.The remaining balance
should
I.BEP(units)=Total fixed cost
be pro-rated if the amount of the balance would materially distort net income
CM per unit if it
P30,000 were charged entirely to Cost of Goods Sold.If a small balance remains in the
P800-P650 Under-and Overapplied Factory Overhead at year-end,it may be closed
200 units directly to
Cost of Goods sold because it will not materially affect net income.
Page 12
104
Cost Accounting
2 The BEP increased to 200 units as compared to 150 BEP in Problem I
because
of the decrease in contribution margin(due to increase in variable cost).
So we can conclude that BEP will increase if total fixed cost increase and
BEP will
decrease if total fixed cost decrease.If selling price increase BEP will decrease
because each unit will be able to contribute more to the recovery of the fixed
cost.
An increase in selling price will result to increase in contribution margin and
decrease in BEP.
Operating Leverage is the use of fixed cost to get higher percentage cbanges
in
profit as sales changes.The operating leverage is concerned with the relative
mix
of fixed cost and variable cost in an organization.Sometimes fixed cost can be
traded off for variable costs.As variable cost is decreased,the contribution
margin increases,making the contribution of each unit to the recovery of the
fixed
cost increase.Companies with lower variable costs by increasing the
proportion
to fixed cost will benefit with greater increases in profit as sales increase.On
the other hand it is also true that companies with a higher operating leverage
will
experience greater reduction in profit as sales decrease The formula to
compute
for the degree of operating leverage is
Degree of operating leverage=Contribution margin
Operating income
Using data from Illustrative Problem 3 on page 100,the operating leverage is
Degree of operating leverage=Contribution margin
Net income
＝
P260,000
P120,000
＝2.17
The greater the degree of operating leverage,the more that changes in sales
will
affect operating income.

or the overapplied(favorable)factory overhead.Underapplied factory overhead

is
considered unfavorable because the effect is an increase in the cost of goods
sod
thereby decreasing the gross profit.On the other hand,the overapplied overtead
is