Hot Topic Article

Please share relevant information (newspaper, magazine, website, etc.) found outside of class related to the objectives covered during class.

Students are required to communicate accounting information. Please write at least 400 words and apply concepts and teachings from the weekly readings. Whenever possible, try to relate the article to real-word applications from your work experiences. Please proofread for grammar and spelling and format your comments consistent with APA guidelines. 1.00 point.

Week 4 Study Guide: Cost-Volume-Profit Analysis

Readings and Key Terms

· Ch. 18 of Accounting

· Cost-volume-profit

· Break-even point

· Contribution margin

· Target income

· Ch. 19

· Absorption costing

· Sales mix

· Variable costing

Content Overview

· Cost behavior analysis

· Every type of cost has a nature as to how it behaves in relationship to production and time. Some costs, such as direct materials, are variable in nature meaning that the more products you produce the more of those materials (and costs) you will incur. In manufacturing automobiles, for example, the number of tires used would vary based on the number of cars you make (4 tires per car). In contrast, some costs, such as factory rent and supervisor salaries, would tend to be fixed and remain constant regardless of how many products you produce. Other costs, such as utilities, will tend to have both fixed and variable elements and are often called mixed or semivariable.

· Cost-volume-profit analysis

· Cost-volume-profit (CVP) analysis is a powerful tool that helps managers make informed decisions. Contribution margin (Sales revenue minus variable costs) is a key component of CVP analysis. Managers can use CVP analysis to determine a break-even point for production and sales and to determine production and sales levels necessary to produce a target amount of profits.

· Absorption and variable costing

· Accountants must use traditional (absorption) costing in preparing financial statements under generally accepted accounting principles (GAAP) and as prescribed by the Securities and Exchange Commission (SEC). However, for internal purposes and decision making, management may direct accountants to reformat the income statement and the balance sheet using variable costing wherein variable costs are isolated for greater control. While the absorption financial statements can be used both for external and internal reporting, variable financial statements can only be used for internal purposes.

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