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Cost Accounting: What is CVP and Cost-Volume-Profit Analysis? 2 Views


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What is CVP and Cost-Volume-Profit Analysis? Cost-Volume-Profit analysis is used in accounting to find break-even points (when profit less cost is zero) depending on how much it costs to make a certain volume of product.

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Transcript

00:00

And finance Allah shmoop What is CVP and or cost

00:06

volume Profit analysis All right For starters CVP is not

00:13

that thing that runs a computer That cpu Yeah And

00:16

it's not a drugstore that c v s And it's

00:19

not a fancy name for resumes That's uh just CV

00:23

CVP cost volume profit analysis Well CVP is all about

00:28

profits rather than optimizing profits Yes subtle thing There you

00:32

are running a company You make foam padding for people

00:34

who experienced a psychotic breaks to put on their bedroom

00:38

walls You're trying to figure out what pricing delivers the

00:41

best operating or net income returns All right what time

00:44

is it Yes it's time for CVP analysis Yet you

00:48

knew going well this thing helps you find the answer

00:51

in a kind of matthew way to optimizing your problems

00:54

You know So you're not just throwing darts or shaking

00:56

a magic eight ball or something although we think that's

00:58

pretty cool OK well when you run a CVP you

01:01

make some assumptions You use a whole lot of scenarios

01:04

that don't necessarily reflect real life but they help the

01:07

math along For instance you assume all of your inventory

01:10

gets sold like you're not monkeying around with inventory ballooning

01:14

on your shelves and hiding profits Nor are you depleting

01:17

it suddenly to generate suddenly a lot of cash and

01:20

well taxes Maybe you're also assuming that pricing is flat

01:24

You're neither raising nor lowering pricing and your margins then

01:27

should pretty much stay about the same You know like

01:30

if you're keeping prices flat the price per square yard

01:32

stay steady for the head butter two thousand And that

01:35

thing which is your primary product right You're also assuming

01:39

that your cost of producing the foam is flat and

01:42

squishy Well the variable costs remain constant flat you know

01:45

like the padding And you're assuming that there are no

01:47

meaningful changes to your phone fixed costs like rent or

01:50

insurance or the machine that squeezes out the patting twenty

01:53

four by seven The on ly change here the on

01:56

ly input in the equation you're going to monkey with

01:59

is act activity I e volumes sold So the basic

02:02

question you're asking How does prophet change when we change

02:06

the amount of stuff we make What happens if we

02:10

make Maur What happens if we make less That's what

02:12

we're asking Well the star of the show and CVP

02:14

analysis is country abuse Shin margin So you're producing million

02:19

yards of patting CVP is all about figuring out what

02:21

happens when you produce that million and one thir million

02:25

and first yard of padding When you produce your first

02:28

yard will that yard costs a fortune right from a

02:31

mass standpoint you bought all that equipment hired all those

02:33

workers built a whole factory just to make one yard

02:36

of patting very expensive But as you make more well

02:38

the cost gets spread out over more product All the

02:41

fixed costs like rent insurance and so on get applied

02:44

to a larger number of units There Amor ties across

02:47

a bigger base right the per unit cost then drops

02:51

well Once you're running the factory and churning out patting

02:53

it becomes all about contribution margin like that's the rule

02:57

that runs your company Optimize it So if that last

03:00

pad sells for ten bucks a yard and it cost

03:02

you six bucks a yard to make well then your

03:04

contribution per yard is four bucks and your contribution margin

03:09

is forty percent Yeah that works for over ten It's

03:12

basically revenue or rather sales than subtracting all the variable

03:16

costs in making that yard That's on a per unit

03:18

basis If the whole company's sold twenty million dollarsworth of

03:21

lunatic padding in a given year and it had total

03:24

variable cost If I'LL say fourteen million well then companywide

03:27

contribution margin delivery would be about six million bucks right

03:31

Twenty minutes fourteen contribution think donation to profits from sales

03:35

or something like that So the next big thing think

03:37

about is the break even point At what volume or

03:41

level of sales does the head butter two thousand cover

03:44

It's fixed Recurring costs where profits are zero and the

03:47

company is joss squeaking by like How much should it

03:51

produce Well let's say your factory has six million dollars

03:53

in fixed costs That amount covers things like rent on

03:56

the factory in the cost of the machines and so

03:58

on When you make that first yard of patting it

04:00

cost six million dollars sell it for ten bucks and

04:02

you've lost five million nine hundred ninety nine thousand nine

04:05

hundred ninety dollars Good for you Okay so we need

04:08

to figure out just how many yards you have to

04:10

make until that bottom line reaches zero Well At what

04:13

point Teo sales cover costs wealth the math equation sales

04:16

At this point this break even point equals total variable

04:20

cost plus total fixed costs and fixed costs are the

04:24

same as the contribution totals So the Head Butter two

04:27

thousand has fourteen million dollars invariable costs The cost of

04:30

the raw materials and labor IT center all included in

04:32

there and there are six million dollars in fix recurring

04:35

cost So then it's sales of twenty million box It's

04:37

just breaking even That sales volume equates to two million

04:41

yards worth of padding Sold it ten bucks each with

04:44

two million yards you're covering for the cost of the

04:46

patting itself and the labor and the electricity and the

04:48

raw materials and the facility caused and sales and marketing

04:51

and all of it together is fourteen million dollars invariable

04:55

costs Well you're also covered for the six million bucks

04:58

worth of fixed recurring cost like rent insurance and loading

05:01

dock snacks and so on And note that some cost

05:04

like manufacturing or sales can be both fixed and variable

05:07

right You're storing tons of patting You need rent more

05:10

storage space so your rent goes up So when you

05:12

put together a mini income statement like this you label

05:15

it contribution margin income statement because it's not a gap

05:19

compliance set of numbers There's no set of laws that

05:22

makes you Adam up in a certain way right They're

05:24

just there to help managers you know manage okay back

05:27

to break even The fancy formula runs like this Break

05:30

even Sales is or equals total fixed costs over contribution

05:34

margin ratio Well in your case you have six million

05:37

dollars in fixed costs and a contribution margin of seven

05:40

twenty It's or thirty five percent So you divide the

05:43

six million by the point three five to get twenty

05:45

mill in sales as break even see it's like magic

05:47

Well given the cost structure to break even I'ii stop

05:49

losing money on the whole deal You need to reach

05:51

twenty million in sales After that you've taken care of

05:54

all the fixed costs the rent the equipment and so

05:57

on more than twenty million in sales and you start

05:59

to book profits Yeah which should keep your shareholders from

06:02

hitting their heads against the wall though if they did 00:06:05.295 --> [endTime] Well at least you'd have some new customers

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