 In this presentation, we will take a look at an overview of the process, an overview of an example problem for the cost volume profit analysis, the CVP analysis. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Our goal here is to show both the power and the purpose of the CVP process, the cost volume process analysis. Remember, as we go through everything in the future, this is a managerial accounting concept, not required. A tool for management management can decide to apply it or not what are going to be the benefits of flying such a cost volume profit analysis. Best way to look at that go through an example problem, see how it's formatted, see the big picture, how it's laid out in future presentations will drill down into the components in more detail, talking in more depth about those components. In overview, we can compare and contrast the cost volume profit analysis to an income statement. Oftentimes, we're looking for projections into the future. Cost volume profit analysis helps us to do that. First let's start off with the standard point that being the creation of the income statement from say a trial balance. We have the normal income statement, which is usually based on prior data usually for external users and is usually grouped by the function or what the use of the cost is. For example, if we take a look at our trial balance here and we're just to create an income statement from it, we'll do this for in depth in future presentations. But I just want to point out that this trial balance is in balance. It's everything. The balance sheet and the income statement, it's obvious, doesn't have a lot of detail. But just note that we here, of course, are concentrating on the income statement. We're concentrating on performance. This income statement will be more of the standard type of format. And then we will adjust it. It's coming from the same data to the CVP cost volume profit type of format. So here we have a normal type of income statement, which would usually start off with revenue. Notice we're starting down here on the trial balance. We're not dealing with the balance sheet items in our example because we're focusing in on the income statement. Then we break it out by cost items or by function. What are the expenses and we're grouping them by what they do? What's the purpose of expenses for a business to help us generate revenue? But also we want to put it in there by function. That's what we do in a normal type of income statement. In other words, cost of goods sold is the cost of the inventory. These are costs related to the cost of the inventory. We then have gross profit, revenue minus cost of goods sold, subcategory for manufacturing type of company, typically. Then we have an operating expenses starting with the selling expenses of operating expenses. Again, breaking out the expenses by what they do. What are they for? What's the purpose of these expenses? These are the selling expenses. Then we have the administrative expenses, again broken out by what they do, part of the administration process. That's what they're for within the company for the ultimate goal of revenue generation. Then we're going to have the total operating expenses. We'll calculate the net income and income tax and finally the net income. This is the standard format. We have to do this for generally accepted accounting principles typically. This is the format that most people will want to see that our external users, therefore we must do it. We may want to change this, however, for internal use, especially when we're projecting out into the future because these costs that are grouped by behavior will not change relative to the change in level of production as easily as we would like and therefore forecasting with this format is more difficult. If we change the level of production, change things like the sales number that we're going to have, then this income statement is more difficult to calculate because of the grouping. Therefore we're going to format this into an income statement which we will typically call a contribution margin type of income statement. Same bottom line number, the 72, 270, however, now breaking this out by what the behavior of the cost is. So we'll start off with the revenue again or sales and then we'll break out variable costs as opposed to cost of goods sold and that will give us the total variable cost. More what variable costs are later, but just note that it's being a grouping by behavior as opposed to being grouped by what they are for. In other words, this isn't cost of goods sold. These aren't items that are related to the selling of the inventory. These are items that behave in a similar fashion. In other words, they go up or down in a similar fashion with relation to increases and decreases in production. Again, we'll talk more about that later, but just note that difference between our analysis here, the different format of our contribution margin income statement and then we're going to have the contribution margin and this is in a similar place as the gross profit, but it's different because we're talking about sales minus the total variable costs, giving us the contribution margin. So the revenue line is the same. These are variable costs, however, not cost of goods sold. And then we're going to have the fixed costs. These items then are the fixed cost type items will go into them in more depth in a future presentation, but just note that again, we're grouping these by behavior by how the costs behave as opposed to what the costs are for. Next, we can calculate the income before taxes and the income taxes and finally net income. Finally, getting to that net income 72 to 70. If we compare these two types of income statements, then this being the one that we have to basically use usually for external users, but the normal income statement of this being our internal use income statement, a contribution margin income statement, a CVP income statement, a cost profit volume and cost volume profit analysis income statement. We get to the bottom line in a similar fashion here or same bottom line, but we go about it in different ways. This one being grouped once again, categorizing those expenses by what they do, what's the purpose of the expense as opposed to over here, categorizing expenses by how they behave. Both have their pros and cons. There's a reason why we have the information grouped in this standard format that we want to see it in that format many times because we want to see what the grouping is and how much we're spending in a particular group. However, there are benefits as well to a contribution margin type of income statement as we'll see. So what can we do with this contribution margin income statement? We know what we have to do. First, we got to make this type of income statement, which means we're going to have to break our costs out into variable costs and fixed costs. And then we're going to have to reformat this information into a contribution margin income statement, and that's going to take some work. What do we get from it? Because it's not a requirement. It's an internal manageral accounting tool. Well, one of the things we can do with this is we can take this income statement and break it down to a per unit type of income statement. In other words, we can get to the sales, the variable cost and the contribution margin per unit. And once we're there, we can then use this information to make projections a lot more easily. For example, if this is broken out by behavior, we could say that the revenue then is going to be the total sales. We're going to say is one, two, three, nine, seven, five, zero divided by the number of units, four, three, five, zero. And we get the two eighty five. So we're going to say the revenue per unit is two eighty five. You can imagine if we sell things, of course, we're going to have a fixed sales price. That's one of the assumptions we have to make for this analysis that we have a fixed sales price. But just note that if we make that assumption, we can say, OK, here's the revenue per unit. We could do the same thing with variable costs. And this is the key. This is what we can't typically do in a normal type of income statement. We could take the variable cost items and we can say, all right, this is the two, four, seven, nine, five, zero divided by the number of units, which is four, three, five, zero. And that's going to give us the fifty seven. So in this case, we have fifty seven for the direct materials. So that's what we're getting from this. We're going to break these costs out and we're going to break them out by behavior. And we'll talk more in depth about this type of behavior, variable and fixed. But see, this is going to give us a benefit. Then we have the direct wages also behaving the same. Sales behaving the same. Those items give us our total variable costs per unit. And then the sales minus the total variable costs is what we're going to give our contribution margin per unit, which we could also calculate at the contribution margin total divided by the number of units, four, three, five, zero. Now, it's going to be a useful number for the projection purposes. If we want to think about costs into the future, this is a useful number. Now, you might say, hey, you made some assumptions there when you did that. And we'll talk about some of the assumptions that are made for cost volume profit analysis and what we're going to do about that. But just note, this is a tool that's going to be a useful tool for us. So we're going to move forward here. We can also have the contribution margin percent calculated as this number contribution margin per unit divided by the revenue number or this number divided by the revenue representing the contribution margin as a percentage. Once we have that, we can use our normal, our calculation to get to a break even point. This is going to be kind of the starting point is the first kind of question or one of the fundamental questions we would ask in business is like, well, how many units do we have to sell to basically break even to cover our costs? Once we have our costs broken out between variable and fixed costs, we could start off with the fixed costs. We're going to say, all right, there's the fixed costs, three eighty eight, five hundred. And if we divide that by the contribution margin, here's the contribution margin, the one seventeen. We could say that the break even point is three thousand three twenty one. So let's think about that in a little bit more in depth. If we have the fixed costs, something like the rent, things that don't change with the level of production, they are what they are. This is what it is doesn't change with the level of production. Contribution margin per unit as we see is revenue per unit or sales per unit minus the variable costs per unit. In other words, one hundred and seventeen. And this example is how much we are earning, how much profit, how much we're going home with after variable costs, not including the fixed costs. So this is how much we're going home with until, of course, we have to save that up to pay the rent or the fixed costs. That's a simplified example. There's more than just the rent and fixed costs, but that's going to be the idea. So now we're generating this much revenue or this is how much we're going home with the net kind of profit, the contribution margin per unit. And we divide that into the fixed costs, things like the rent. And we say, well, this is then is how many units three thousand three twenty one, which we must sell in order to cover the fixed costs. In other words, that's our break even point in units. That's what's going to give us a zero net profit. That's a good starting point, because then we can start from there and start to calculate our profit number. And we can also think of our break even point in terms of revenue. What there's a couple of different methods, but one method, obviously, if this is how many units we have and the sales price is two eighty five, we multiply those out. That means that our break even point in terms of dollars, the revenue, the sales we need nine forty six three forty six. Now let's consider a forecasting. Once we have this information broken out, we looked at it in terms of possibly prior information, information we had in the past. Then we would want to forecast into the future, which typically starts with the prior year information, making adjustments on what we think could happen in the future, projections and then making forecasts from it. This is where cost volume profit analysis CVP is really beneficial because we can easily run different scenarios with very few changes. So in other words, if we just adjust the number of units that we expect to produce and sell, we can set up a worksheet to help us with production projections into the future that is far less complex than one we would have to create in a normal type of income statement because we broke out the costs between fixed and variable because we're looking at this information by cost behavior as opposed to the grouping of costs by what they're used for. So a forecast will look something like this similar kind of contribution margin income statement. However, now we're forecasting into the future for it. So what we're going to say here is if I predict then that the units that we're going to sell are three thousand three twenty one, which was our break even point last time. So in essence, we're testing our break even point. Then we would have the total revenue per unit two eighty five times three thousand three twenty one gives us total revenue nine four six three forty six. So we've just these are the two numbers we've just tested basically this number. So there's that number in our contribution margin income statement forecast. And then we've got the total variable costs per unit, which is the six eighty or the one sixty eight times the number of units three three two one that gives us our total variable costs. If we multiply those out contribution margin, then we could do this two different ways. We could say it's the one seventeen one seventeen times the three three two one units gives us three eighty eight five hundred or we could take total revenue minus the variable costs to give us that three eighty eight five hundred as well. If we look at our fixed costs, then in this case, they're going to be the same as the the contribution margin because this is the break even point resulting in the forecast profit or net income forecasted before taxes of the zero. So this then is our break even point. The beauty of this worksheet is that we can then calculate a profit much more easily. If I just change this one number because of the simplicity of this, because we broke it out by behavior of costs, we can then work this through the worksheet very easily and come up with projections very quickly. So if I change this number, for example, to four thousand, then we just change these items in an Excel worksheet, a very pretty simple Excel worksheet, which we'll take a look at. We'll then generate the new numbers and here's the bottom line. Here's the seventy nine five hundred. If I change this to five thousand, here's our bottom line number. If I change this to six thousand, here's our bottom line number. Everything will adjust for us seven thousand. Here's our bottom line number and so on and so for eight thousand. And we can run the comparisons and do this site by site comparisons. You can think about scenarios saying things like, well, what if I increase the fixed cost for something like advertising? And then I figured that I'm going to sell more units from four thousand to five thousand because of the advertising. Well, there's a lot less factors we need to change in a CVP type of analysis. When we start doing these projections, then if we would have a normal type of income statement, when we start changing the units, when we start thinking about different scenarios and increasing capacity and adding things, then in a normal type of income statement, all of those kind of projections is a lot more complex to work through because the income statement is not broken out by behavior of costs. Here, because they are broke out by behavior of costs, they it's a lot easier. Now, there's assumptions we have to make to do this. We'll talk a bit about those and we'll go into some more depths about some of these components that we've been talking about in overview and future presentations.