Management Accounting
Chapter 8:
Cost-Volume-Profit analysis (CVP: examines the behavior of total revenues, total costs and
operating profit as changes occur in the output level, selling price, variable costs or fixed costs;
provides a sweeping financial overview of the planning process
revenues: inflows of assets received in exchange for products or services provided to customers
revenue driver: a factor that affects revenue
General case: The most detailed way of predicting total revenues and total costs is to consider
multiple revenue drivers and multiple cost drivers. โ extensive and time-consuming
The term CVP analysis is widely used as representing the special case where a single revenue and
cost driver are used.
Our restriction to units of output as the sole revenue or cost driver is important to keep in mind. It
means that in the CVP model, changes in the level of revenues and costs arise only because the
output level changes.
We assume that: Total costs=Variable costs+fixed costs
operating profit: total revenues from operations minus total costs from operations (excluding
income taxes)
Operating profit=Total revenues โ Total costs
Net profit: operating profit plus non-operating revenues (such as interest revenue) minus non-
operating costs (such as interest cost) minus income taxes
Net profit=operating profit โ income taxes
abbreviations:
USP=unit selling price; UVC=unit variable cost; UCM=unit contribution margin (USP-UVC);
FC=fixed costs; Q=quantity of output units sold (or manufactured); OP=operating profit;
TOP=target operating profit; NP=Net profit; QT=the number of units sold to earn the target profit
CVP assumptions:
1. Total costs can be divided into a fixed component and a component that is variable with
respect to the level of output
2. The behavior of total revenues and total costs is linear in relation to output units within the
relevant range
3. The unit selling price, unit variable costs and unit fixed costs are known and are constant
4. The analysis either covers a single product or assumes that the proportion of different
products when multiple products are sold will remain constant as the level of total units sold
changes
5. All revenues and costs can be added and compared without taking into account the time
value of money
6. Changes in the level of revenues and costs arise only because of changes in the number of
products (or service) units produced and sold. The number of output units is the only
revenue and cost driver
breakeven point: that quantity of output where total revenues and total costs are equal, that is,
where the operating profit is zero
Three methods for determining the breakeven point:
โEquation method: the income statement can be expressed in equation form as follows:
Revenues โ Variable costs โ Fixed costs = Operating profit
