Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows: Estimated Fixed Cost Estimated Variable Cost (per unit sold) Production costs: Direct materials $24 Direct labor 16 Factory overhead $365,000 12 Selling expenses: Sales salaries and commissions 75,800 5 Advertising 25,700 Travel 5,700 Miscellaneous selling expense 6,300 4 Administrative expenses: Office and officers' salaries 74,100 Supplies 9,100 2 Miscellaneous administrative expense 8,540 3 Total $570,240 $66 It is expected that 5,760 units will be sold at a price of $330 a unit. Maximum sales within the relevant range are 7,000 units.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows:
| Estimated Fixed Cost |
Estimated Variable Cost (per unit sold) |
||||||
| Production costs: | |||||||
| Direct materials | $24 | ||||||
| Direct labor | 16 | ||||||
| Factory overhead | $365,000 | 12 | |||||
| Selling expenses: | |||||||
| Sales salaries and commissions | 75,800 | 5 | |||||
| Advertising | 25,700 | ||||||
| Travel | 5,700 | ||||||
| Miscellaneous selling expense | 6,300 | 4 | |||||
| Administrative expenses: | |||||||
| Office and officers' salaries | 74,100 | ||||||
| Supplies | 9,100 | 2 | |||||
| Miscellaneous administrative expense | 8,540 | 3 | |||||
| Total | $570,240 | $66 |
It is expected that 5,760 units will be sold at a price of $330 a unit. Maximum sales within the relevant range are 7,000 units.
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