Cost-Volume- Profit Analysis
(CVP)
Basic Terminology
Variable/Fixed Classification
Cost can be classified according to its behavior into:
Variable Costs
Fixed Costs
Variable cost changes in proportion with
changes in the activity level. For example, if the
number of units produced doubles, direct
materials (a variable cost) would double in
total. Note, however, that the variable cost per
unit stays the same.
Fixed costs do not change due to changes in
the activity level. If units produced doubles,
fixed costs remain the same in total.
However, when expressed on a per-unit
basis, fixed costs would decline with an
increase in activity.
Variable Cost
Units
Total Variable
Cost
0
1000
5000
Units
0
100
500
Total Fixed
Cost
5000
5000
5000
Cost per
unit
∞
50
10
Costs
Costs
0
100
500
Cost per
unit
10
10
10
Fixed Cost
Total
Costs
Units
Costs
Costs
Units
Cost per
Unit
Units
Units
-9-
Exercise 2.20
The Fremont California, plant a New United Motor Manufacturing, Inc. (NUMMI), a joint venture
of General Motors and Toyota, assembles two types of cars (Corollas and Yaris). Separate
assembly lines are used for each type of car.
Required:
Classify each of the following cost items as direct or indirect (D or I) costs with respect to how the
total number of each type assembled and as variable or fixed (V or F) costs.
Cost item
A
B
C
D
E
F
G
H
V or F
Cost of tires used on Yaris
Salary of public relation manger for the plant
Annual rewards dinner for Corolla Suppliers
Salary of engineer who monitors design changes on Yaris
Freight costs of Corolla engines shipped from Toyota City to California
Electricity costs for the plant (single bill covers entire plant)
Annual fire insurance policy costs for the plant.
Wages paid to temporary assembly-line workers hired in periods of high
production (paid on hourly basis)
The answer
Cost Item
A
B
C
D...