Financial Accounting Formulas: CVP, BEP, and Costing Methods

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Cost-Volume-Profit (CVP) Analysis Formulas

Contribution Margin Calculations

  • Contribution Margin (CM) per Unit: $P - VC$ (Price minus Variable Cost)
  • Total Contribution Margin (TCM): $(P \times Q) - (VC \times Q)$
  • CM Ratio: Unit CM / Unit Selling Price
  • Variable Expense (VE) Ratio: Unit VE / Unit Selling Price

Break-Even Point (BEP) Determination

1. BEP Equation Method

  • Profits: (Sales - Variable Expenses) - Fixed Expenses
  • Sales at BEP: Variable Expenses + Fixed Expenses + Profits (where Profits = 0)

2. Contribution Margin Method

  • BEP in Units: Fixed Expenses / Unit CM
  • BEP in Total Sales Dollars: Fixed Expenses / CM Ratio

Target Profit Calculations (Contribution Margin Approach)

  • Unit Sales to Attain Target Profit: (Fixed Expenses + Target Income) / Unit CM
  • Dollar Sales to Attain Target Profit: (Fixed Expenses + Target Income) / CM Ratio

Margin of Safety (MOS)

(A higher margin indicates lower risk)

  • Margin of Safety (in Dollars): Total Sales - Break-Even Sales
  • Margin of Safety Percentage (%): (Margin of Safety in Dollars / Total Sales in Dollars)

Degree of Operating Leverage (DOL)

DOL measures how sensitive net operating income is to a percentage change in sales volume.

  • DOL Formula: Contribution Margin / Operating Income

Product Costing Methods Comparison

Unit Product Cost Calculation

The primary difference lies in the treatment of Fixed Manufacturing Overhead (FMO).

Absorption Costing (Full Costing)

  • + Direct Materials
  • + Direct Labor
  • + Variable Manufacturing Overhead (Var Manu OH)
  • + Fixed Manufacturing Overhead (FMO)
  • = Unit Product Cost

Note: FMO is calculated as: Total FMO / Number of Units Produced.

Variable Costing (Direct Costing)

  • + Direct Materials
  • + Direct Labor
  • + Variable Manufacturing Overhead (Var Manu OH)
  • (FMO is treated as a period expense)
  • = Unit Product Cost (Total Variable Manufacturing Cost)

Income Statement Formats

Absorption Costing Income Statement (GAAP)Variable Costing Income Statement (Internal Use)
Sales (Q sold × SP)Sales (Q sold × SP)
Less: Cost of Goods Sold (COGS)Less: Variable Cost of Goods Sold (VCOGS)
  • Beginning Inventory (Q beg × Unit Product Cost)
  • Add: Cost of Goods Manufactured (Q prod × Unit Product Cost)
  • = Goods Available for Sale
  • Less: Ending Inventory (Q end × Unit Product Cost)
  • = COGS
  • Beginning Inventory (Q beg × Variable Unit Cost)
  • Add: Variable Manufacturing Costs (Q prod × Variable Unit Cost)
  • = Goods Available for Sale (Variable)
  • Less: Ending Inventory (Q end × Variable Unit Cost)
  • = Variable COGS
= Gross Profit (Sales - COGS)Less: Variable Selling & Administrative Expenses (Q sold × VC per unit)
Less: Selling & Administrative Expenses= Contribution Margin (Sales - Total Variable Costs)
  • Variable S&A Expenses (Q sold × VC per unit)
  • Fixed S&A Expenses (Fixed Cost per period)
Less: Total Fixed Costs
= Net Operating Income (NOI)
  • Fixed Manufacturing Overhead
  • Fixed Selling & Administrative Expenses
= Net Operating Income (NOI)
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Tags:
variable costs cost accounting managerial accounting contribution margin CVP analysis absorption costing operating leverage margin of safety variable costing financial formulas break-even point fixed costs profit calculation income statement