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Acc550-ch_3

# Acc550-ch_3 - ACC550 CHAPTER 3 COST-VOLUME-PROFIT(CVP...

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ACC550 CHAPTER 3 COST-VOLUME-PROFIT (CVP) ANALYSIS CVP analysis 1) The study of the interrelationship between costs and volume and their impact on profit 2) Typical elements of CVP analysis: a) Sell price per unit b) Volume c) Variable cost per unit d) Total fixed cost e) Product sales mix Cost behaviors 1) Variable costs a) These are costs whose TOTAL cost changes in direct proportion to changes in activity units i) Total cost increases as activity units increase ii) Total cost decreases as activity units decrease b) The variable cost PER ACTIVITY UNIT remains constant regardless of changes in activity units c) When graphed, the slope of the total variable cost line represents the variable cost per activity unit. i) Total variable cost is zero when activity units are zero ii) Total variable cost varies IN DIRECT PROPORTION to changes in activity units iii) Variable cost per unit remains constant as activity units change iv) Relevant range: this is the range of activity volume where the variable cost PER UNIT remains constant d) Examples: direct materials, direct labor, utilities 2) Fixed costs a) These are costs whose TOTAL cost remains constant regardless of changes in activity units b) The fixed cost PER ACTIVITY UNIT changes as activity units change i) The cost per unit decreases as activity units increase ii) The cost per unit increases as activity units decrease c) Relevant range: this is the range of activity volume where total fixed costs remain constant d) When graphed, the Y intercept of the total fixed cost line represents total fixed costs. i) Total fixed cost is constant regardless of changes in activity units ii) Fixed cost per unit changes as activity units change e) Examples: depreciation, salaries, property taxes Expanded discussion We are seeking to determine how costs behave so that we can predict future costs and understand product profitability. In short, we can predict any cost as long as we properly identified its activity base (its cost driver) and as long as we understand how the cost changes in relation to changes in activity units.

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