Cost-Volume-Profit Analysis

(CVP)
 Operating Leverage
營業槓桿
• Operating leverage describes the effects that fixed
costs have on changes in operating income as changes
occur in units sold and , hence, in contribution margin.

• The degree of operating leverage (DOL) is defined as:

% change in operating income
DOL=
% change in sales
Operating Leverage

• The DOL at a particular level of sales is calculated as:

Sales - variable costs Contribution margin
DOL= Sales - variable costs – = Contribution margin –
fixed costs fixed costs

Contribution margin
＝
Operating income

Notice these two items are

identical, except for fixed costs
Operating Leverage

EXERCISE
Carlisle Company currently sells 400,000 bottles of perfume
each year. Each bottle costs $0.84 to produce and sells for
$1.00. Fixed costs are $28,000 per year. What is DOL for
Carlisle Company?

The degree of operating leverage for Carlisle Company

DOL= [400,000 × (1- 0.84)]÷[(400,000 × (1- 0.84)) - 28,000]
= 1.78
Operating Leverage

DOL × Margin of safety ratio ＝1 互為倒數

安全邊際
Sales － Breakeven sales
Margin of safety ratio＝
Sales
(Sales － Breakeven sales) × contribution margin ratio
＝
Sales × contribution margin ratio
Operating income
＝
Contribution margin
DOL降低， Margin of
Contribution margin safety ratio提高
DOL＝
Operating income
Effects of Sales Mix on Income

Do-All Superword Total

Units sold 60 40 100
Revenues, $200 and
$12,000 $4,000 $16,000
$100 per unit
Variable costs, $120 and
7,200 2,800 10,000
$70 per unit
Contribution margin,
$4,800 $1,200 6,000
$80 and $30 per unit
Fixed costs 4,500
Operating income $1,500

Budgeted sales mix: 3 units of Do-All: 2 units of Superword

 Effects of Sales Mix on Income

Do-All’s Superword’s
units units
contribution contribution
Weighted-average × sold ＋ × sold
margin per unit margin per unit
contribution ＝
margin per unit Total units sold

($80 per unit×60 units) ＋($30 per unit×40 units)

＝
100 units

＝$60 per unit

Fixed costs $4,500

Breakeven point ＝ ＝ ＝ 75 units
Weighted-average $60
contribution margin per unit
 Effects of Sales Mix on Income
Exercise 3-42

Weighted-average ($6 per unit×150,000 units) ＋($12 per unit×50,000 units)

contribution ＝
margin per unit 200,000 units
＝$7.5 per unit

Fixed costs $1,200,000

Breakeven point ＝ ＝
Weighted-average $7.5
contribution margin per unit
＝160,000 units
 Effects of Sales Mix on Income
Exercise 3-42
Let Q = Number of units of Deluxe carrier to breakeven
3Q = Number of units of Standard carrier to breakeven

Revenues – Variable costs – Fixed costs = Zero operating income

$20(3Q) + $30Q – $14(3Q) – $18Q – $1,200,000 = 0
$60Q + $30Q – $42Q – $18Q = $1,200,000
$30Q = $1,200,000
Q = 40,000 units of Deluxe
3Q = 120,000 units of Standard

The breakeven point is 120,000 Standard units plus 40,000 Deluxe units, a
total of 160,000 units.
 Contribution Margin vs. Gross Margin

Contribution Income Statement Financial Accounting Income Statement

Emphasizing Contribution Margin Emphasizing Gross Margin
Revenues $200 Revenues $200
Variable COGS $120 COGS 120
Variable operating costs 43 163
Contribution margin 37 Gross margin 80
Fixed operating costs 19 Operating costs ($43+$19) 62
Operating income $18 Operating income $18
 Contribution Margin vs. Gross Margin
Financial Accounting Income
Contribution Income Statement Statement
Emphasizing Contribution Margin Emphasizing Gross Margin
Revenues $1,000 Revenues $1,000
Variable manufacturing costs $250 COGS ($250+$160) 410
Variable nonmanufacturing costs 270 520
Contribution margin 480 Gross margin 590
Fixed manufacturing costs 160 Operating costs
408
Fixed nonmanufacturing costs 138 298 ($270+$138)
Operating income $182 Operating income $182
 Contribution Margin vs. Gross Margin
Exercise 3-43
1a. Cost of goods sold $1,600,000
Fixed manufacturing costs (500,000)
Variable manufacturing costs $1,100,000
Variable manufacturing costs per unit = $1,100,000 ÷ 200,000 = $5.50 per unit

1b. Total marketing and distribution costs $1,150,000

Variable marketing and distribution (200,000 ×$4) (800,000)
Fixed marketing and distribution costs $350,000
 Contribution Margin vs. Gross Margin
Exercise 3-43
2. Selling price = $2,600,000 ÷ 200,000 units = $13 per unit
Variable
Variable
Contribution Selling marketing and
＝ － manufacturing －
margin per unit price distribution
cost per unit
costs per unit
= $13 − $5.50 − $4.00 = $3.50

Fixed
Contribution Fixed
Sales marketing and
Operating income = margin per × － manufacturing －
quantity distribution
unit costs
costs
= ($3.50 × 230,000) − $500,000 − $350,000
＝ －$45,000
 Contribution Margin vs. Gross Margin
Exercise 3-43
2. Breakeven point Fixed manufacturing, marketing and distribution costs
in units ＝
Contribution margin per unit

＝850,000 / $3.5 = 242,858 units

Breakeven point in revenue = 242,858 × $13 = $3,157,154

Job Costing
Cost Assignment

Cost Tracing
Direct Costs
成本追溯
Cost
Cost Assignment
Object
成本分攤
Indirect Costs
Cost Allocation

Cost-allocation base
a cost driver is used as a basis upon which to build a
systematic method of distributing indirect costs (number of
machine-hours, direct labor)

The cause-and-effect link between changes in the level of

the cost driver and changes in indirect costs
Costing Systems
分批成本制
• Job-Costing (Job order): system accounting for
distinct cost objects called Jobs. Each job may be
different from the next, and consumes different
resources
• Costs are assigned to each job (or to each batch).

Each job (or batch) has its own distinguishing

characteristics.
Costing Systems
分布成本制

• Process-Costing: system accounting for mass

production of identical or similar products.
• Process-Costing accumulates product-related costs
for a period of time. The costs are assigned to
departments or processes for a set period of time.
Costing Systems
Exercise 4-16
a. Job costing l. Job costing
b. Process costing m. Process costing
c. Job costing n. Job costing
d. Process costing o. Job costing
e. Job costing p. Job costing
f. Process costing q. Job costing
g. Job costing r. Process costing
h. Job costing (but some process costing) s. Job costing
i. Process costing t. Process costing
j. Process costing u. Job costing
k. Job costing
 Actual Costing

• Indirect costs based on the actual indirect-cost rates times

the actual activity consumption.
Actual direct-cost rates
×
Actual quantities of the
direct-cost inputs
Direct Costs
Cost
Actual Costing
Object
(實際成本法)
Indirect Costs
Actual indirect-cost rates
實際製造費用分攤 ×
率計算製造費用 Actual quantities of the
cost-allocation bases
 Normal Costing

• Indirect costs based on the budgeted indirect-cost rates

times the actual activity consumption.
Actual direct-cost rates
×
Actual quantities of the
direct-cost inputs
Direct Costs
Cost
Normal Costing
Object
(正常成本法)
Indirect Costs
Budgeted indirect-cost rates
預計製造費用分攤 ×
率計算製造費用 Actual quantities of the cost-
allocation bases
Seven-step Job Costing
1. Identify the Job to be costed.
2. Identify the Direct Costs of the Job.
3. Select the Cost-Allocation base(s) to use for allocating
Indirect Costs to the Job.
4. Match Indirect Costs to their respective Cost-Allocation
base(s).
5. Calculate an Overhead Allocation Rate.
6. Allocate Overhead Costs to the Job.
7. Compute Total Job Costs by adding all direct and indirect
costs together
Seven-step Job Costing
Exercise 4-17
1. Budgeted
Budgeted manufacturing overhead costs
manufacturing ＝
overhead rate Budgeted direct manufacturing labor costs
＝1,750,000 / 1,000,000 = 1.75

Actual
Actual manufacturing overhead costs
manufacturing ＝
overhead rate Actual direct manufacturing labor costs
＝1,862,000 / 980,000 = 1.9
Seven-step Job Costing
Exercise 4-17
2. Costs of Job 626 under actual and normal costing follow:

Actual Costing Normal Costing

Direct materials $ 40,000 $ 40,000
Direct manufacturing labor costs 30,000 30,000
Manufacturing overhead costs
57,000 52,500
$30,000 × 1.90; $30,000 × 1.75
Total manufacturing costs of Job 626 $ 127,000 $ 122,500
Seven-step Job Costing
Exercise 4-17
3. Total manufacturing Actual
overhead allocated ＝ manufacturing × Budgeted
under normal costing overhead rate
labor costs

= $980,000 × 1.75 ＝$1,715,000

Underallocated
Actual manufacturing Manufacturing
manufacturing ＝ － overhead allocated
overhead costs
overhead

= $1,862,000 －$1,715,000 = $147,000