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Acc Cost, Volume, and Profit Formulas

In: Business and Management

Submitted By shukuen0953
Words 961
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Assignment: Cost, Volume, and Profit Formulas
ACC220
February 19, 2012

Assignment: Cost, Volume, and Profit Formulas
In a business, it is profit that ultimately determines whether a business succeeds or fails a financial year. To aid in forming decisions, managers depend on information presented in Cost-Volume-Profit (CVP) analysis. In a CVP analysis, information is built on the interrelation of five general components. By understanding these components and how they relate to one-another, managers and accountants can also determine the contribution margin ratio. With these factors in hand, managers can predict the contribution ratios necessary to balance expenses and maximize profits. For managers to make successful decisions in business, they need to understand the components, the factors, and how they relate to one-another.
Creating a CVP analysis requires knowledge of five general components: The volume of a business’ activities, the selling prices of individual units, the variable and fixed costs of producing each unit, and the net total of multiple types of units sold. The volume of business’ activities generally refers to the total units of any specific merchandise sold, which is multiplied with selling prices. Following the income of sales, the variable costs (costs to produce each unit) is subtracted to determine the contribution margin. Finally, the fixed costs (supporting budget) are subtracted from the contributions margin to determine the net income in a CVP analysis. The net incomes of individual types of units are totaled for every unique type of unit a business produces and sells to determine total profits.
Sales pricing, variable costs, and fixed costs are interconnected in determining the net income. When sales prices rise in comparison to variable costs, then the contribution margin per unit (CMU) increases as well. For example, if producing...

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