1. Cost Volume Profit Analysis (CVP)
AFM 31130
STDM -
Cost Volume Profit Analysis (CVP) By
Isuru Manawadu
B.Sc in Accounting Sp. (USJP), ACA, 1

2. Learning Outcomes After studying this session you will be able to:
Understanding Marginal Costing
Understand Absorption Costing
Distinguish between marginal costing and absorption costing
Determine BEP and margin of safety
Prepare different types of break even charts

3. Marginal Costing
Marginal costing is a costing technique where only variable or direct cost will be charged to the cost unit produced.
In Marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the comprehensive income statement (P & L) in the period incurred.

4. Marginal Costing Cont…
Under variable or direct costing, the fixed manufacturing overhead costs are not allocated or assigned to (not absorbed by) the products manufactured.
Variable costing is often useful for management's decision-making.

5. Assumptions of Marginal costing or CVP Analysis.
Fixed cost will remain constant
Operating efficiency will not increase or decrease
There will not be any change in pricing policy due to change in volume, competition etc
Semi variable cost can be segregated into variable and fixed elements
Product mix will remain unchanged
Price of variable cost factors (Such as wage rates, price of materials) will remain unchanged

6. Marginal cost – Cost of one additional unit of output
Marginal cost per unit
(The additional cost needed to produce one more unit of a good or service) =
Direct Material cost per unit xx
Direct Labor cost per unit xx
Other Variable costs xx

7. Total cost of producing 10,000 units is Rs. 50,000/=
Example:
Total cost of producing 10,000 units is Rs. 50,000/=
If the total production is 10,001 units the total cost is Rs. 50,005/=
The Marginal cost of producing the next unit was Rs. 5/=

8. Absorption costing
Absorption costing is that all manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method.

9. Absorption costing Cont…
Absorption costing is often contrasted with variable costing or direct costing.
Absorption costing is required for external financial reporting and for income tax reporting.

10. Cost classifications--Absorption versus Variable costing
Absorption Costing
Variable Costing
Product cost
Direct materials Direct Labor Variable Manufacturing overhead
Fixed manufacturing overhead
Period cost
Variable selling and administrative expenses
Fixed selling and administrative expenses
Source –

11. Exercise
A small company that produces a single product has the following cost structure.
No. of units produced
6,000
Variable costs per unit:
Direct materials
Rs. 2
Direct labor
Rs. 4
Variable manufacturing overheads
Rs. 1
Variable selling & Administrative expenses
Rs. 3
Fixed cost per year:
Fixed manufacturing overhead
Rs. 30,000
Fixed selling & administrative expenses
Rs. 10,000
1. Compute the unit product cost under absorption costing method.
2. Compute the unit product cost under marginal costing method.

12. Absorption Vs. Marginal Costing - Exercise
Following details relate to the 100,000 units of product X produced and sold by ABC Ltd. during the year.
Rs.
Rs. 10 per unit
1,000,000
Direct Rs. 3 per unit
300,000
Direct Rs. 2 per unit
200,000
Variable Rs. 1 per unit
100,000
Fixed overheads for the year
Prepare the profit statements under marginal costing and under absorption costing.

13. Contribution = Selling price – Variable cost
Contribution is the difference between sales
And the marginal (Variable) cost
Contribution = Selling price – Variable cost

14. Break Even Point (BEP) BEP (units) = Fixed cost Contribution per unit
Break Even is the point where businesses are not making profits
At this stage;
TR = TC
BEP (units) = Fixed cost
Contribution per unit

15. Break Even Point (BEP)
BEP (Sales value) = Fixed cost
PV ratio

16. Profit Volume Ratio (PV)
PV = Contribution X 100
Sales

17. Margin of Safety (MOS) MOS = Budgeted Sales − Break-even Sales
In break-even analysis, margin of safety is the extent by which actual or projected sales exceed the break-even sales. It may be calculated simply as the difference between actual or projected sales and the break-even sales.
formula to calculate margin of safety:
MOS = Budgeted Sales − Break-even Sales

18. Use the following information to calculate:
Contribution
BEP in units
BEP in sale value
Margin of safety
Sales price per unit Rs. 40
Variable cost per unit Rs. 32
Total fixed cost Rs. 7,000
Budgeted sales 1000 units