Cost Accounting: Impact of Variable and Fixed Costs on Forecast

Running head: COST ACCOUNTING
Cost accounting
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1COST ACCOUNTING
Table of Contents
Introduction................................................................................................................................2
1. Reduction of variable cost or fixed cost or variable cost to have impact on forecast.....2
1. Potential cost savings......................................................................................................3
2. Negative impact of decision on value chain...................................................................4
Conclusion..................................................................................................................................4
Reference....................................................................................................................................5

2COST ACCOUNTING
Introduction
Cost – volume – profit (CVP) analysis is the cost accounting method that focuses on
the impact of various levels of volumes and costs have on the operating profit. CVP analysis
determines break-even point for various cost structure and sales volumes that can be used for
the managers to take short-term economic decisions (Banker et al., 2013). However, it makes
various assumptions like variable costs, fixed costs and selling price are constant.
1. Reduction of variable cost or fixed cost or variable cost to have impact on
forecast
The CVP analysis generally computes the number of units the company must sell to
achieve the break-even and to earn profit. Net income = Total revenue – Total cost where,
total cost = fixed cost + variable cost. Determining the relationship among the expenses and
revenue is the major thing to understand the profitability of the business. How the expenses
change the income level determines the business’s cost structure. Generally the costs are
segregated into variable accost and fixed cost. Fixed costs are independent of the product unit
that is the fixed cost remains constant with the changes in the unit. For instance, the
machinery expenses and rent expenses do not vary with the changes in output. On the
contrary, the variable costs vary with the changes in units. For instance, the material costs and
labour costs changes with the change in the units (Leong, 2014).
Example – If selling unit is 1000, selling price per unit is $ 50, variable cost per unit is $ 20,
total fixed cost is $ 10000, profit = (1000*50) – (1000*20) – 10000 = $ 20,000. However, if
the selling unit is changed to 900, others things being equal the profit will be = (900*50) –
(900*20) – 10000 = $ 17000.