chapter7 - Part II Management Accounting Decision-Making...

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Part II Management Accounting Decision-Making Tools Chapter 7 Cost-Volume-Proft Analysis Chapter 8 Comprehensive Business Budgeting Chapter 9 Incremental Analysis and Decision-making Costs Chapter 10 Incremental Analysis and Cost-Volume-proft Analysis: Special Applications Chapter 11 Economic Order Quantity Models Chapter 12 Capital Budgeting Decisions Tools Chapter 13 Pricing Decision Analysis
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Management Accounting | 113 Cost-Volume-Proft Analysis The success of a business as measured in terms of proFt depends upon adequate sales; that is; the volume of sales must be sufFcient to cover all costs and allow a satisfactory margin for net income. When the proportion of Fxed costs in a business becomes large in relation to total costs, then volume becomes an extremely important factor in achieving proFtability. ±or example, a business with only variable costs would be able to report net income at any level of sales as long as price exceeds the variable cost rate. However, a business with only Fxed costs cannot show a proFt until the contribution from sales is equal to the amount of Fxed expenses. Therefore, a minimum level of sales is absolutely essential in a business that incurs Fxed expenses. Because changes in volume can have a profound impact on the proFts of a business, cost-volume-proFt analysis has been developed as a management tool to enable analysis of the following variables: 1. Price 2. Quantity 3. Variable costs 4. ±ixed costs The focal point of cost-volume-proFt analysis is on the effect that changes in volume have on Fxed and variable costs. Volume may be regarded as either units sold or the dollar amount of sales. Typically, the theory of cost-volume-proFt analysis is explained in terms of units. However, using units as the measure of volume for computing break even point or target income point requires that the business sell
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114 | CHAPTER SEVEN • Cost-Volume-Proft Analysis only a single product. Since all businesses from a practical viewpoint sell multiple products, the real world use of cost-volume-proFt analysis requires that volume be measured in terms of sales dollars. Cost-volume-proFt analysis may be used as (1) a tool for proFt planning and decision-making and (2) as a tool for evaluating the proFtability of proposed business ventures. In this chapter, the discussion of proFt analysis shall be limited to its use as a current period proFt and decision-making tool. Nature oF Cost-Volume-Proft Analysis In chapter 5, the subject of cost behavior was discussed. The point was made that the costs of a business could be classiFed as either Fxed or variable. Mathematically, it was stated: TC = V(Q) + F (1) TC - total costs V - variable cost rate Q - quantity Revenue or sales may be deFned as: S = P(Q) (2) S - sales P - price Income may be deFned as: I = R - E (3) R - revenue E - expense I - income When equations (1) and (2) are substituted into equation (3), equation (3) becomes I = P(Q) - V(Q) - F (4) Equation (4) is recognized in this chapter as the foundation of cost-volume-
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This note was uploaded on 03/23/2010 for the course ACC_ 02 taught by Professor Zeegal during the Fall '10 term at Missouri State University-Springfield.

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chapter7 - Part II Management Accounting Decision-Making...

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