Introduction to Managerial Accounting by Professor Tatianna Gershberg Lecture: Cost Volume Profit Analysis (Part 1) Class Overview and Learning Objectives: 0:09 Objective 1 Identify how changes in volume affect costs: 1:27 Types of Costs: 1:42 Variable Costs: 4:50 -- Total Variable Costs: 6:33 Fixed Costs: 9:09 -- Total Fixed Costs and Fixed Costs per Unit: 10:30 Mixed Costs: 12:19 High-Low Method: 15:10 -- Steps 1 & 2: 17:12 -- Step 3: 22:30 Relevant Range: 25:26 S19-1: Variable, Fixed, and Mixed Costs: 28:00 S19-3: Mixed Costs - High-Low Method: 31:56 -- 1. Calculate (a) the variable rate per machine hour and (b) Martin's total fixed utility cost: 32:49 -- 2. Show the equation for determining the total utility cost for Martin's: 36:19 -- 3. If Martin's anticipates using 1,200 machine hours in January, predict his total utility billl using the equation from Req. 2: 37:50 -- 4. Draw a graph illustrating your total cost under this Plan. Label the axes, and show your costs at 900, 1,200, and 1,400 machine hours: 39:29 Objective 2 Use CVP analysis to compute break-even points: 40:45 Basic CVP Analysis: 41:14 Break-Even Point: 43:13 Income Statement Approach: 45:38 Contribution Margin Approach: 51:44 Professor Gershberg goes over different learning objectives. The first objective is identifying how changes in volume affects cost. She talks about many different examples to clarify this topic. Different ways to measure volume are discussed for total variable cost. She goes over Fixed costs, Variable costs, and mixed costs. There are many problems and different examples used to clarify the different topics. There are three types of costs: (1) Variable costs, which increase or decrease in direct proportion to changes in the volume of activity - i.e. if the activity increases, so does the cost. Volume of an activity can be measured in different way - for example, units sold, number of units produced, miles driver, or phone calls made. (2) Fixed costs, which tend to remain static regardless of the volume of the activity. Examples include straight line depreciation, salaries, and setting up machines for a production run. It should be noted that while total fixed costs do not change, the fixed cost per "unit" can change based on the number of events. For example, if it cost $1000 to prepare the machines for a production run, and 50 products are produced, the fixed cost per unit is $20. However, if 100 products are produced, the fixed cost per unit is $10. (3) Mixed costs, which are composed of both fixed and variable costs. For example, a machine or utility may require a fixed fee to use per month (i.e. to rent it) plus a variable fee based on how many hours the machine is used for. The high-low method is a method that separates mixed costs into variable and fixed components. It identifies the highest and lowest levels of an activity over a period of time. The first step is calculating the variable cost per unit. The second step is to calculate the total fixed cost. The third step is to create and use the equation to show the behavior of a mixed cost. Note that the relevant range is the range of volume where the total fixed costs remain constant and variable costs per unit remain constant. The CVP (cost-volume-profit analysis) expresses the relationships among costs, volume, and profit [or loss]. It answers questions such as how many products or services must the company sell to break even, what profits will be if sales increase, and how changes in selling price, variable costs, and fixed costs affect profits. Assumptions made here is that managers can classify each cost as either variable or fixed (no ambiguity) and the only factor that affects total costs is change in volume which increases variable and mixed costs (since fixed costs do not change). The breakeven point is the sales level at which operating income is zero (in other words, no profit and no loss since total costs / expenses are equal to total revenues). There are two methods to compute the breakeven point: (1) income statement approach (which is sales revenue - total costs = operating income) and (2) the contribution margin approach.

• published: 30 May 2013
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