3.3 CVP Analysis, Break-Even Point And Their Impacts To The Financial Statements

 

Cost – Volume – Profit (CVP) analysis is a technique used to evaluate the viability and ability to scale or grow a business. It is also used to understand the relation between costs, volume and profits.  The focus of the analysis is based on the interaction of product mix, fixed & variable costs, volume and pricing. The CVP analysis will direct decisions on the kinds of offered products, how the products are priced, and how to control or manage the cost structure of an organization. Considering the contribution margin as a starting point, CVP analysis is a vital technique in the calculation of levels of volume required to realize the levels of targeted income, and other similar calculations including the break-even point (BEP) (Walter & Skousen, 2009).

As we previously discussed, BEP in units is division of fixed cost with contribution margin, and BEP in sales is the same way but we use the contribution margin ratio. Further supporting calculation used the fact that Contribution margin is subtraction of sales revenue with variable cost and the ratio is division of the contribution margin with the sales revenue (Walter & Skousen, 2009). Based on that formula, we can recognize the terms involved in detail of financial statement’s specific lines in general are everything in the category of fixed costs, variable costs, and sales revenues. Another name of the addition between fixed and variable cost is the so called cost structure (anonymous, 2020). That’s why the previous discussion forum use this cost structure term to compare only two terms between sale revenues or net revenues which are the total sale revenues of a company in a financial period after subtraction with certain items (Rivers, 2021). All of the terms impact the financial statement (income statement, statement of cash flows and balanced sheets) reports.         

The impact of getting or not getting the required BEP of a company based on the CVP analysis can be seen in the company’s financial statements especially the income statement. Further look at to the detail of an example of how this impacted financial report happens can be seen in specific lines of Krakatau Steel’s income statements ((Karim & Tardi, 2021)) mentioning the information that not only does the Krakatau Steel meet the required BEP but it also has good profit of the period because of the cost structure (Fixed and variable costs) is less than the net sales and other sale revenues based on the following report,

Krakatau Steel’s income statement (Karim & Tardi, 2021)

The above results also mean that after the fixed costs are covered, the remaining revenues are the ones generating the profit. (Team, 2021). In detail, based on the above statement, the profit which can be analyzed in the impacted specific lines is the fact that net revenues and other sale revenues such as sales of waste product are greater than Variable costs such as SG&A (Selling, General and Administrative) expenses (Garcia, 2019), and fixed costs such as final tax.

 The impacted specific lines of the statement of cash flow can be analyzed based on the fact that SG&A which has the same name as operating expenses is one of the input data of the previous cash flow file exercises besides two other data which are the investing and financing activities. The ending of this cash flow calculation is the cash balance at the end of the year.

Finally, the ending cash balance at the end of the period of the cash flow statement as one of the company’s asset in addition to the retained earnings at the end of the period as one of the stockholder’s equity becomes the inputs of the balanced sheet calculations.  By this analysis, it is true that the effect of BEP achievement based on CVP analysis affected all financial statements.

 

References

Walter, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting (Ser. 978-87-7681-491-5). bookboon.com.

Anonimous. (2020, March 23). Cost structure. Corporate Finance Institute. Retrieved September 22, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/finance/cost-structure/.

Rivers, J. (2021). Net sales DEFINED: Net sales vs. gross sales . The Strategic CFO iCal. Retrieved September 24, 2021, from https://strategiccfo.com/net-sales/.  

Karim, S., & Tardi. (2021). Financial Reports / Statements of PT. Krakatau Steel. www.krakatausteel.com. Retrieved September 16, 2021, from https://www.krakatausteel.com/public/pdf/Financial%20Report%20KRAS%20June%202021.pdf.

Team, T. I. (2021, September 13). Understanding contribution margins. Investopedia. Retrieved September 21, 2021, from https://www.investopedia.com/terms/c/contributionmargin.asp.

Garcia, M. (2019, August 27). How to determine variable costs from financial statements. Bizfluent. Retrieved September 21, 2021, from https://bizfluent.com/how-12009134-determine-variable-costs-financial-statements.html.