Class Notes (836,374)
Accounting (778)
ACC 406 (255)
Lecture 3

# ACC 406 Lecture 3: ACC 406 Lecture 3 notes Nicholas Bordignon

6 Pages
11 Views

School
Department
Accounting
Course
ACC 406
Professor
Nicholas Bordignon
Semester
Winter

Description
ACC 406 Lecture 3 Chapter 4: Cost-Volume-Profit Analysis: A Managerial Planning Tool Cost-Volume Profit Analysis - This powerful tool for planning and decision making can be used to calculate: o The number of units that must be sold to break even o The impact of a given reduction in fixed costs on the break-even point o The impact of an increase in price on profit Break-Even Point - Break-Even Point (BEP) is where profits are zero Using Operating Income in Cost-Volume-Profit Analysis - The income statement format that is based on the separation of costs into fixed and variable components is called the contribution margin income statement. - Contribution margin is used to cover fixed costs and operating income. - Divides costs based on behaviour. - Costs are divided into variable and fixed components. - Important subtotal is contribution margin = Sales revenue minus variable expenses. - The focus is on the firm as a whole. - Therefore, the costs refer to all costs of the company—production, selling, and administration. - So variable costs are all costs that increase as more units are sold, including: ACC 406 o direct materials o direct labour o variable factory overhead o variable selling and administrative costs - Similarly, fixed costs include: o fixed factory overhead o fixed selling and administrative expenses - Overhead related to the product but not directly Break-Even Point in Units Break-Even Point in Dollars Managers may prefer to use sales revenue as the measure of sales activity instead of units sold. This is especially useful in a multi-product environment Calculate: Units to Be Sold to Achieve a Target Income - CVP analysis gives us a way to determine how many units must be sold, or how much sales revenue must be generated, to earn a particular amount of target income. - Let’s look first at the number of units that must be sold to earn a target operating income. - Remember that at the break-even point, operating income is \$0. - Add the target income amount to the fixed cost to determine the number of units ACC 406 Units to Be Sold to Achieve a Target Income - There are two ways to accomplish this: o 1. Using operating income equation o 2. Using the basic break-even equation Profit-Volume Graph - Visually portrays the relationship between profits and units sold - Operating income is the dependent variable. - Units sold is the independent variable. - The profit-volume graph is the graph of the operating income equation. Cost-Volume Profit Graph - Depicts relationship among cost, volume, and profit - Graphs two separate lines: ACC 406 o Total revenue o Total cost - Vertical axis is measured in dollars. - Horizontal axis is measured in units sold Assumptions of Cost-Volume-Profit Analysis - Revenue and cost functions are linear. - Price, total fixed costs, and unit variable costs can be identified and remain constant over relevant range. - All units produced
More Less

Related notes for ACC 406
Me

OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.