One way to classify costs is by behavior. Managers who understand how costs behave are better able to predict what cost will be under various operating circumstances. Attempts at decision making without a thorough understanding of the costs involved-and how these costs may change with the activity level-can lead to disaster. Cost-volume-profit (CVP) analysis is one of the most powerful tools that managers have at their command. CVP analysis helps managers understand the interrelationships among cost, volume, and profit; it is a vital tool in many business decisions. These decisions include, for example, what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire. Managers must be trained to think in terms of the unit contribution margin, the break-even point, the CM ration, the sales mix, and the other concepts.
- Understand how fixed and variable costs behave and how to use them to predict costs.
- Use a scattergraph plot to diagnose cost behavior.
- Analyze a mixed cost using the high-low method.
- Prepare an income statement using the contribution format.
- Analyze a mixed cost using the least-squares regression method.
- Explain how changes in activity affect contribution margin and net operating income
- Prepare and interpret a cost-volume-profit (CVP) graph.
- Use the contribution margin ration (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.
- Show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume.
- Compute the break-even point.
- Determine the level of sales needed to achieve a desired target profit.
- Compute the margin of safety and explain its significance.
- Compute the degree of operating leverage at a particular level of sales and explain how the degree of operating leverage can be used to predict changes in net operating income.
- Compute the break-even point for a multiple product company and explain the effects of shifts in the sales mix on contribution margin and the break-even point.
- Fixed and variable costs and costs prediction
- Cost behavior diagnosis by means of scatter graph plot
- Mixed cost review by means of high-low method
- Contribution format in preparing income statement
- Mixed cost review using least-squares regression method
- Changes in activity and its impact on contribution margin and net operating income
- Cost-volume-profit (CVP) graph preparation and interpretation
- Calculation of changes in contribution margin and net operating income using the contribution margin ration (CM ratio)
- Impact of changes in variable costs, fixed costs, selling price and volume over contribution margin
- The break-even point
- Sales level defining needed to achieve a desired target profit
- Safety margin calculation and its significance
- Degree of operating leverage at a particular level of sales and prediction of changes in net operating income using degree of operating leverage
- Calculation of the break-even point for a multiple product company and mixed sales shifts’ impact over contribution margin and the break-even point.
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