COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022
A. Course Code – Title : C-AE22: Cost Accounting and Control
B. Module No – Title : M03 – Cost Volume Profit Analysis
C. Time Frame : 1 week (Week 3) – 6 hrs
D. Overview
This learning material deals with the relationship between cost, volume, and
the effects on profit. The analysis will help to set standards as to how many units a
company should sell to reach a target profit.
E. Desired Learning Outcomes
At the end of the learning session, you should be able to:
1. Understand the factors that affect the profit.
2. Determine the break-even point in number of units and in total sales in
pesos.
3. Determine the number of units that must be sold, and the amount of
revenue required, to earn a targeted profit.
4. Prepare a cost-volume-profit graph and explain its meaning.
F. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:
✓ Integrity
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication
G. Interaction/Collaboration
You will be engaging in activities that would make use of:
✓ Google Sheets
✓ Google Forms
✓ Quizizz
H. Content/Discussion
Lesson 1 – Factors Affecting Profit
Cost-Volume-Profit (CVP) Analysis examines the behavior of total revenues, total costs, and
operating income as changes occur in the output level, selling price, variable cost per unit or fixed
costs of a product.
Cost-volume-profit (CVP) analysis estimates how changes in the following three factors affect a
company’s profit
1. Costs (both variable and fixed)
Variable costs are all costs that increase as more units are sold, including:
– direct materials
– direct labor
Faculty: Elizabeth B. Boneo 1 | Page
COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022
– variable overhead
– variable selling expenses
Fixed costs include:
– fixed overhead
– fixed selling and administrative expenses
2. Sales volume
There is a direct relationship between sales volume and profit. Thus, as sales
volume increases the profit also increases.
3. Price
Companies use CVP analysis to help them reach important benchmarks, such as
breakeven point.
Lesson 2. The Break Even Point
The break-even point is the point where total revenue equals total cost (i.e., the
point
of zero profit). The level of sales at which contribution margin just covers fixed costs and
consequently, net income is equal to zero. Since new companies experience losses (negative
operating income) initially, they view their first break-even period as a significant
milestone.
Contribution margin is the difference between sales and variable expense. It is the
amount of sales revenue left over after all the variable expenses are covered that can be
used to contribute to fixed expense and operating income:
Sales P XXX
Total variable cost (XXX)
Total contribution margin P XXX
Total fixed cost (XXX)
Operating income P XXX
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COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022
Illustrative example
Nicolas Company produces a product that sells for P800. The variable cost is P360
for direct materials, P200 for labor, P50 for variable overhead and P30,000 for fixed
overhead. The units sold for the month is 500.
BEP in sales = P30,000/25% = P120,000
BEP in units = P30,000/200 = 150 units
If a statement is prepared at break-even sales it will appear as follows:
Sales P120,000
Variable Cost (150xP600) 90,000
Contribution Margin 30,000
Fixed Cost 30,000
Net Income P0
Lesson 3 – Sales and units with desired profit
Most companies would not want to break even only, the main objective is to earn
profit. The break-even point gives useful information to managers, but companies would
want to earn income greater than zero. CVP gives us a way to determine how many units
must be sold to earn a particular profit.
Required Sales with desired profit.
This is the amount of sales needed to earn a desired amount of profit. The equation
that may be used to compute for this follows:
Sales (unit) = total FC + desired profit/CM per unit
To continue the illustration above, assuming a profit of P100,000 is desired. The
sales amount and in units would be:
Target Sales = (P30,000+P100,000) /25% = P520,000
Target Sales in Units = (P30,000+P100,000) /200 = 650
Faculty: Elizabeth B. Boneo 3 | Page
COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022
If a statement is prepared it will appear as follows:
Sales P520,000
Variable Cost (650xP600) 390,000
Contribution Margin 130,000
Fixed Cost 30,000
Net Income 100,000
Lesson 4 – The cost volume Profit Graph
To illustrate and understand the BEP of Nicolas Company is shown on graph below.
The CVP Graph - Nicolas Company
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
0 40 80 120 160 200
Sales Total Cost Fixed Cost
Margin of Safety
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COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022
This is the excess of actual budgeted sales over break-even sales and indicates the
amount by which sales could decrease before losses are incurred. Once the margin of safety
is determined, the MS ratio may be computed as follows:
MS in units = Actual sales in units – Breakeven Sales in units
MS in Pesos = Actual sales in Pesos – Breakeven Sales in Pesos.
MS in ratio = margin of safety (P)/actual or budgeted sales
To continue the illustration above assuming the units sold is 650 units
MS in units = 650-150 = 500 units
MS in Pesos = P520,000-P120,000 = P400,000
MS ratio = P400,000/P520,000 = 77%
Assessment of Learning/ Progress Check
1. Gandae Company’s projected profit for the incoming year is as follows:
Total Per Unit
Sales P600,000 P60
Variable Cost (650xP600) 360,000 36
Contribution Margin 240,000 24
Fixed Cost 192,000
Net Income 48,000
Compute the BEP in sales and in units
Compute the MS in units, Pesos and in ratio.
I. References
Guerrero, Pedro P., (2018) Cost Accounting: Principles and Procedural Application,
2018 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.
De Leon, Norma D., De Leon, Ellery D., & De Leon, Guillermo M, Jr., (2019) Cost
Accounting and Control 2019 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.
Vanderbeck, Edward J. & Mitchell, Maria R., Principles of Cost Accounting 17 th Edition,
Taguig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).
Modules prepared by : Elizabeth B. Boneo
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