Cost-Volume-Profit Relationships for Management and Cost Accounting

Part of Management and Cost Accounting For Dummies (UK Edition)

Management and cost 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 profit goals. This image describes the relationship among sales, fixed costs, variable costs and profit:

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

  • The left axis indicates value in pounds.

  • Where total sales equals total costs (‘x’ marks the spot), the company breaks even (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.