CVP & BEP Analysis

Question 1

one of the tools managers can use in profit planning.
- a systematic examination of the relationships among costs, activity levels or volume, and profit.

Answer 1

Cost-Volume-Profit Analysis

Question 2

Why is the relationship of cost, volume, and profit important to management?

Answer 2

The CVP analysis is very much useful to management as it provides an insight into the effects and inter-relationship of factors, which influence the profits of the firm. The relationship between cost, volume and profit makes up the profit structure of an enterprise. Hence, the CVP relationship becomes essential for budgeting and profit planning.

Question 3

functional classification of costs?

Answer 3

manufacturing, selling and administrative expenses

Question 4

the way cost change with respect to a change in the activity level, such as production or sales volume, labor or machine hours, etc.

Answer 4

Cost behavior

Question 5

costs that DO NOT CHANGE with changing levels of activity, remain constant.

Answer 5

Fixed Cost

Question 6

Examples of Fixed Cost

Answer 6

rental cost of factory building, property taxes, insurance, depreciation computed on straight line basis, salaries of some personnel

Question 7

costs that CHANGE DIRECTLY or PROPORTIONATELY with the level of activity. Total Variable cost increases (decreases), activity level increases (decreases)

Answer 7

Variable Cost

Question 8

direct materials, direct labor, some overhead items like indirect materials, indirect labor, factory supplies, employee fringe benefits on direct labor, sales commissions, office supplies, etc.

Answer 8

Variable Costs

Question 9

cannot be described by a single cost behavior pattern, possess both fixed and variable components.

Answer 9

Mixed Cost

Question 10

vary directly with the change in activity level, the rate of change in these cost items with the change in activity level is not constant. Instead of increasing at a constant rate, semi-variable costs tend to either increase at an increasing rate or increase at decreasing rate.

Answer 10

Semi-variable Cost

Question 11

Examples of Semi-variable Cost

Answer 11

cost of electricity (increase at an increasing rate), learning curve costs (increase at decreasing rate)

Question 12

often called step function cost or step costs.

Answer 12

Semi-fixed Cost

Question 13

the band of activity within which the identified cost behavior patterns are valid.

Answer 13

Relevant Range

Question 14

states that the cost behavior patterns identified are true only over a specific period of TIME.

Answer 14

Time Assumption

Question 15

that point in activity level (sales volume) where total revenues equal total costs (or expenses), there is neither profit nor loss.

Answer 15

Break-even point/sales

Question 16

Break-even Methods

Answer 16

Equation method or Algebraic approach
Contribution margin method or formula approach
Graphic approach

Question 17

the excess of revenue over all the variable costs, and this is the amount available for the recovery of fixed costs and generation of profits.

Answer 17

Contribution Margin

Question 18

Differentiate between the break-even chart and profit volume graph

Answer 18

Unlike the break-even chart, the profit volume graph does not show the total cost and sales lines. What it shows is a profit line drawn on a graph with volume (in units and in pesos) in the horizontal axis and profit/loss in the vertical axis.

Question 19

is the difference between actual or planned sales volume and break-even sales. It indicates the amount by which actual or planned sales may be reduced without incurring loss. It can be expressed in units, in pesos of sales or as a ratio.

Answer 19

Margin of Safety

Question 20

Five Factors Affecting Profit

Answer 20

Selling price per unit
Variable cost per unit
Volume or number of units
Fixed cost
Sales mix

Question 21

Assumptions or Limitations underlying CVP Analysis

Answer 21

All costs are classified as either fixed or variable.

Fixed costs remain constant within the relevant range.

The behavior of total revenues and total cost will be linear over the relevant range.

In case of multiple-product companies, the selling prices cost and proportion of units (sales mix) sold will not change.

There is no significant change in the inventory levels during the period under review.

Other assumptions