Office Staff Training

Cost Classification and Cost

Volume Profit Analysis

Dr. May Su Myat Htway Aung

B.Com (Q), M.Com, Ph.D (Commerce, YUE)
Professor/Department of Commerce
 Types of Costs
• Several types of costs should be considered when conducting a breakeven analysis
and decision making for business success. These two are the most relevant:

Fixed costs: base on fixed amount or annually

Variable costs: base on per unit

Other types of costs are:

- Product Cost(Direct Material + Direct Labor + Overhead Cost or Indirect cost)
- Period Cost(Selling and Administration Cost)
- Sunk Cost
- Opportunity Cost
- Relevant Cost
- Controllable Cost
- Differential Cost
- Standard Cost and Actual Cost
 High- Low Method
• Define high and low price and units.
• Define variable cost per unit
*** Variable cost per unit =Change in Cost $
Change in Activity(Units)
• Find High month Total variable cost and low month total
variable cost.
*** Total variable cost= variable cost per unit x Units
• Find high month fixed cost and low month fixed cost.
*** Fixed Cost = Total Cost(Mixed Cost) - Variable Cost
a = Y - b
 High- Low Method Problem

Travis Inc. employed several maintenance engineers to keep the equipment running in
peak condition. Over the past eight months, Travis incurred the following maintenance
cost for these engineers. Plant activity is best measured by direct labor hours.
Month Direct Labor Hours Maintenance Cost
January 1,700 $14,300
February 1,900 $15,200
March 1,800 $16,700
April 1,600 $14,000
May 1,500 $14,300
June 1,300 $13,000
July 1,100 $12,800
August 1,400 $14,200
Required: Using the high-low method, determine the fixed and variable components of
the maintenance costs.
 Cost-volume-Profit Analysis
• Cost-volume-profit analysis is important in
profit planning. It is also a critical factor in
management decisions.
• Cost-volume-profit (CVP) analysis helps to
managers to understand the interrelationships
among Cost, Volume and Profit by focusing their
attention on the interactions among the prices
of products, volume of activity, per unit variable
costs, total fixed costs, and mix of products sold.
 Income Statement
Sale (per unit cost x Units) x
Variable Cost (x)
-------------------
Contribution Margin x
Fixed Cost (x)
-------------------
Net Profit/(loss)before… x
 Breakeven Analysis

Conducting a breakeven analysis is important to determine

precisely when you can expect your business to cover all
expenses and start generating a profit. This is a pivotal milestone
in the early days of any startup business.

Break-even analysis is a very useful cost accounting technique. It

is part of a larger analytical model called cost-volume-profit
(CVP) analysis, and it helps you determine how many product
units your company needs to sell to recover its costs and start
realizing profit.

Limitation of Breakeven : Understand that a breakeven analysis is not a

predictor of demand. If you go to market with the wrong product or the
wrong price, it may be tough to ever hit the breakeven point.
 Breakeven Analysis

Breakeven Point (units)= Fixed Costs

contribution margin per unit
Breakeven Point($) = Fixed Costs / Contribution Margin Percentage
Or (BE units x sales per units)
*** Contribution Per Units = Selling Price Per Unit - Variable Costs Per Units
or Total contribution/Units
*** Contribution Margin Percentage= Contribution / Sale x100
Breakeven (desire profit) (Units)= FC + Desire Profit/ Contribution per unit
Margin of Safety (Units)= Sale unit – BE unit
Margin of Safety ($)= Sale – BE ($)
 Problem
Selling price per unit $ 25
Variable cost per unit $15
Fixed expenses $ 52,000
Unit sold 10000 units.
Required :
(a) Find the net income and break even units for this
business.
(b) If selling price increase by $5, how many unit and price is
break even for this business and also find the margin of
safety units.
(c) When the business desire profit $ 20000, how many unit
is break even?
 Income Statement
Sale ( $25x 10000) 250000
Variable Cost($15x10000) (150000)
-------------------
Contribution Margin 100000
Fixed Cost (52000)
-------------------
Net Profit 48000

Breakeven (units)= Fixed Cost / Contribution per unit

= $52000/ ($25-$15)
= 5200 units
Increase sale per unit $5….
Breakeven (units)= Fixed Cost / Contribution per unit
= $52000/ ($30-$15)
= 3467units
Breakeven ($)= Breakeven Units x sale per units
= 3467 units x $30
=$104010
Margin of Safety (units)= sale unit – breakeven units
= 10000 units – 3467 units
= 6533 units
Breakeven desire profit (units)= Fixed Cost+ desire Profit
Contribution per unit
= $52000+ $ 20000/ ($25-$15)
= 7200units
 Break even chart
• Start to build x and y axes.(x=units, y=$)
• Draw fixed cost line parallel with x axis.
• Draw sale(revenue) line in start “0” point.
• Draw total cost line in start fixed cost point.
$ TY
Sale
TTC

TFC

T0 TX units
 Test Tutorial (Example Question)

I. Enter the following transactions effect upon on the following

items in 2013.
May1. Started in business with $18,000 in the bank .
4. Purchased goods $580 on credit from D.Monty.
8. Bought fixtures and fittings $2,300 paying by cheque.
10.Sold goods for cash $280.
12. Paid rent by cash $400
18. Goods returned to D.Monty $82.
25.Received rent of $240 by cheque for sublet of corner space.
31. The proprietor took cash for his own personal use $510.
Date Account to be Account to be Effect on working capital Effect on Effect on Capital
Debit Credit (CA-CL) Profit (exp&income) employed

May 1 Bank A/C Capital A/C Bank $ 18000 + No effect Capital $

$18000 $18000 No effect 18000(+)

May 4 Purchase D Moty (A/C + goods No effect No effect

payable) - account payable
( no effect)

May 8 Fix and fitting Bank - Bank No effect No effect

May 10 Cash sale + cash No effect No effect

- Goods (No effect)

May 12 rent( exp) Cash - cash - rent (exp) No effect

May 18 D Monty Purchase return + A/C payable No effect No effect
- Goods
(No effect)
May 25 Bank Rent (income) Bank + Rent (income) No effect
+

May 31 Drawing Cash - cash No effect - Drawing

Thank You for your attention !!!