Cost-Volume-Profit Relationships for Managerial Accounting

Part of the Managerial Accounting For Dummies Cheat Sheet

Managerial accounting provides useful tools, such as cost-volume-profit relationships, to aid decision-making. Cost-volume-profit analysis helps you understand different ways to meet your company’s net income goals. This image describes the relationship among sales, fixed costs, variable costs, and net income:

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  • The bottom axis indicates the level of production — the number of units you make.

  • The left axis indicates value in dollars.

  • Where total sales equals total costs, the company breaks even (which is why that’s called the break-even point).

  • The shaded area to the upper right of this break-even point is profit.

  • The shaded region to the lower left is net loss.

  • Total variable costs are a diagonal line because the higher the production, the greater the variable costs.

  • The total fixed costs line is horizontal because regardless of the production level, fixed costs stay the same.

  • Total costs equal the sum of total variable costs and total fixed costs.

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