Revenue (AR) is constant and equal to the sales price, (i.e., AR = PX÷X = P) as The implications ofĪ horizontal demand function are that the company can sell any number of units at a constant sales price.Īnother way to describe this is to say that consumers are willing and able toīuy any quantity the company offers for sale at a constant price. To assume that the sales price is constant implies that the company is facingĪ horizontal demand function as illustrated in Figure 11-1. Note that these are the same assumptions that are applicable to the masterīudget, with the exception of number five. Variable costing, this chapter helps provide a better foundation for the moreĭetailed comparison of direct and absorption costing presented in Chapter 12.ĪSSUMPTIONS OF CONVENTIONAL LINEAR CVP ANALYSISĬonventional linear cost volume profit analysis is based on five assumptions Since the CVP methodology is closely related to direct or The last section introduces theĬontroversy associated with the CVP approach as it relates to the newer concepts The fourth section is fairly short, but illustrates how toĬonvert the analysis to a cash flow basis. More mechanical than conceptual and are mainly illustrated with a series of The basic analysis to multiproduct companies. Provide the foundation for more realistic problems. Illustrates the basic planning techniques for a single product company that This section is mainlyĬonceptual and is illustrated with a series of graphs. Section addresses the underlying assumptions of the conventional linear modelĪnd the implications of relaxing these assumptions. The chapter is divided into five main sections. The conventional linear cost-volume-profit approach as well as the controversyĬoncerning the compatibility of CVP analysis with ABC and the continuous The purpose of this chapter is to describe the assumptions and techniques of This creates another thought provoking controversial issue. Therefore, the short run emphasis of CVPĪnalysis tends to conflict with the long run emphasis of activity based costingĪnd the lean enterprise concepts of JIT and TOC. Tend to vary in the long run as the company adds to its' capacity to produce andĭistribute products and services. That the concept of fixed and variable costs is a short run concept. Although explicit recognition of non production volume related costĭrivers is a key concept in activity based costing, the idea is ignored in theĬonventional linear CVP model. That these costs are not driven by short run changes in production or sales Remember that fixedĬosts are those costs that do not vary with changes in the activity level.Ĭonceptually, fixed costs are not constant. ![]() The only activities that are allowed to affect variable costs in traditionalĬost-volume-profit analysis are production output and sales. Variable costs are those costs that vary with changes in the level of activity. Recall from our earlier discussions of these terms that Separate total costs into fixed and variable categories using one of the methodsĭescribed in Chapter 3. 1įrom an accounting perspective it is compatible with the direct, or variableĬosting method of inventory valuation. The theoretical model of the firm described in economics textbooks. Simplified, short term planning technique that evolved as a practical version of Margin approach with activity based costing and the lean enterprise concepts of just in time andĬonceptually, conventional linear cost-volume-profit (CVP) analysis is a ![]() ![]() Discuss the controversy concerning the compatibility of the contribution Solve similar problems on a cash flow basis.ĩ. Solve a variety of linear CVP problems for multiproduct companies inĨ. Solve a variety of linear CVP problems for single product companies inħ. ![]() Discuss the difference between performing a "what-if" analysisĪnd converting from the linear model to the theoretical nonlinear model.ĥ. Linear and nonlinear CVP models including production functions, revenueĤ. Explain the meaning of a series of graphic illustrations for both the The theoretical cost- volume-profit model.ģ. Explain the implications of relaxing each of these assumptions in terms of Discuss the assumptions underlying the conventional linear cost-volume-profitĢ. After you have read and studied this chapter, you should be able to:ġ.
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