Cost Behavior and Cost-Volume-Profit Analysis

Vocabulary terms and analytical formulas related to cost behavior analysis, CVP components, break-even calculations, target net income, and margin of safety.

Cost Behavior Analysis

The study of how specific costs respond to changes in the level of business activity.

Activity Index

Also known as a volume index, this identifies the activity that causes changes in the behavior of costs and allows costs to be classified as variable, fixed, or mixed.

Variable Costs

Costs that vary in total directly and proportionately with changes in the activity level, but remain the same per unit at every level of activity.

Fixed Costs

Costs that remain the same in total regardless of changes in the activity level within a relevant range, while the cost per unit varies inversely with activity.

Cost-volume-profit (CVP) analysis

A study of the effects of changes in costs and volume on a company's profits, which is critical for management decisions like setting prices and determining product mix.

CVP Income Statement

A statement for internal use that classifies costs as fixed or variable and reports the contribution margin.

Contribution Margin

The amount of revenue remaining after deducting variable costs.

Unit Contribution Margin

The amount derived from the formula: Unit\ndot Selling\ndot Price - Unit\ndot Variable\ndot Costs.

Contribution Margin Ratio

The percentage of each sales dollar available to apply toward fixed costs and profits, calculated as: Unit\ndot Contribution\ndot Margin \div Unit\ndot Selling\ndot Price.

Break-even Point

The level of activity at which total revenues equal total costs (fixed and variable), resulting in zero net income.

Break-even Point in Units (Formula)

Fixed\ndot Costs \div Unit\ndot Contribution\ndot Margin

Break-even Point in Dollars (Formula)

Fixed\ndot Costs \div Contribution\ndot Margin\ndot Ratio

Target Net Income

The specific level of sales necessary to achieve a specified profit goals.

Required Sales in Units (Target Net Income Formula)

(Fixed\ndot Costs + Target\ndot Net\ndot Income) \div Unit\ndot Contribution\ndot Margin

Required Sales in Dollars (Target Net Income Formula)

(Fixed\ndot Costs + Target\ndot Net\ndot Income) \div Contribution\ndot Margin\ndot Ratio

Margin of Safety

The difference between actual or expected sales and sales at the break-even point, measuring the cushion provided by a specific level of sales.

Margin of Safety Ratio

Calculated by dividing the margin of safety in dollars by the actual or expected sales: Margin\ndot of\ndot Safety\ndot in\ndot Dollars \div Actual\ndot Sales.