Submit Search
Upload
Chapter11.ppt/Cost Volume Profit Analysis
ā¢
Download as PPT, PDF
ā¢
0 likes
ā¢
14 views
S
SrikantKapoor1
Follow
Cost Volume Profit Analysis
Read less
Read more
Business
Report
Share
Report
Share
1 of 40
Download now
Recommended
Chapter06.ppt/Management Accounting-Activity Based Accounting
Chapter06.ppt/Management Accounting-Activity Based Accounting
SrikantKapoor1
Ā
L6 marginal & absorption costing
L6 marginal & absorption costing
Ov Nomaan
Ā
Marginal costing & breakeven analysis
Marginal costing & breakeven analysis
Faltu Focat
Ā
Marginal and absorption costing zimsec zimbabwe cambridge
Marginal and absorption costing zimsec zimbabwe cambridge
alproelearning
Ā
Cvp
Cvp
AbhinavJohn
Ā
Marginal and absorption costing
Marginal and absorption costing
GarimaGoel25
Ā
Chapter 07 Marginal Costing
Chapter 07 Marginal Costing
ayanthimadhumali
Ā
ch5 CVP .pdf
ch5 CVP .pdf
khawlamuseabd
Ā
Recommended
Chapter06.ppt/Management Accounting-Activity Based Accounting
Chapter06.ppt/Management Accounting-Activity Based Accounting
SrikantKapoor1
Ā
L6 marginal & absorption costing
L6 marginal & absorption costing
Ov Nomaan
Ā
Marginal costing & breakeven analysis
Marginal costing & breakeven analysis
Faltu Focat
Ā
Marginal and absorption costing zimsec zimbabwe cambridge
Marginal and absorption costing zimsec zimbabwe cambridge
alproelearning
Ā
Cvp
Cvp
AbhinavJohn
Ā
Marginal and absorption costing
Marginal and absorption costing
GarimaGoel25
Ā
Chapter 07 Marginal Costing
Chapter 07 Marginal Costing
ayanthimadhumali
Ā
ch5 CVP .pdf
ch5 CVP .pdf
khawlamuseabd
Ā
17a marginal costing & breakeven analysis
17a marginal costing & breakeven analysis
Umar Gul
Ā
Apollo Food Industries new - Presentation.pptx
Apollo Food Industries new - Presentation.pptx
SiewMei13
Ā
Topic 6 f fc(1)
Topic 6 f fc(1)
fahimkhan65
Ā
Mb0041
Mb0041
Swati Sharma
Ā
Lecture 10 leverage
Lecture 10 leverage
Kritika Jain
Ā
Notes on Cost volume profit analysis
Notes on Cost volume profit analysis
Yamini Kahaliya
Ā
Cost accounting of Brittania
Cost accounting of Brittania
JinceyJose
Ā
Profit
Profit
tutor2u
Ā
Measuring and increasing profit
Measuring and increasing profit
gemdeane1
Ā
Study manual icab chapter 4, Management Information, ICAB
Study manual icab chapter 4, Management Information, ICAB
Sazzad Hossain, ITP, MBA, CSCAā¢
Ā
Short term decision making.pptx
Short term decision making.pptx
HARSHITGARG688173
Ā
CVP , BEP and OL.pptx
CVP , BEP and OL.pptx
MelatHailu3
Ā
Break even analysis
Break even analysis
Maheshwari Gummapu
Ā
Business model financial viability 2013
Business model financial viability 2013
Valeryia Kazheunikava
Ā
Fundamental economic concepts used in business decisions
Fundamental economic concepts used in business decisions
Zainul Lamak
Ā
Break even analysis Final.pptx
Break even analysis Final.pptx
PuneetGarg111103
Ā
cost_and_management_acc_accounting-manual
cost_and_management_acc_accounting-manual
muumaimar
Ā
Chapter 9.pptx
Chapter 9.pptx
ShriefMohi1
Ā
Pricing Strategy for the third year- Updated.pdf
Pricing Strategy for the third year- Updated.pdf
charlesmartial77
Ā
Hansen aise im ch11
Hansen aise im ch11
Daeng Aiman
Ā
4-patents.pptx Intellectual property systems
4-patents.pptx Intellectual property systems
SrikantKapoor1
Ā
Barringer-Chapter3.ppt Analysing Small Businesses
Barringer-Chapter3.ppt Analysing Small Businesses
SrikantKapoor1
Ā
More Related Content
Similar to Chapter11.ppt/Cost Volume Profit Analysis
17a marginal costing & breakeven analysis
17a marginal costing & breakeven analysis
Umar Gul
Ā
Apollo Food Industries new - Presentation.pptx
Apollo Food Industries new - Presentation.pptx
SiewMei13
Ā
Topic 6 f fc(1)
Topic 6 f fc(1)
fahimkhan65
Ā
Mb0041
Mb0041
Swati Sharma
Ā
Lecture 10 leverage
Lecture 10 leverage
Kritika Jain
Ā
Notes on Cost volume profit analysis
Notes on Cost volume profit analysis
Yamini Kahaliya
Ā
Cost accounting of Brittania
Cost accounting of Brittania
JinceyJose
Ā
Profit
Profit
tutor2u
Ā
Measuring and increasing profit
Measuring and increasing profit
gemdeane1
Ā
Study manual icab chapter 4, Management Information, ICAB
Study manual icab chapter 4, Management Information, ICAB
Sazzad Hossain, ITP, MBA, CSCAā¢
Ā
Short term decision making.pptx
Short term decision making.pptx
HARSHITGARG688173
Ā
CVP , BEP and OL.pptx
CVP , BEP and OL.pptx
MelatHailu3
Ā
Break even analysis
Break even analysis
Maheshwari Gummapu
Ā
Business model financial viability 2013
Business model financial viability 2013
Valeryia Kazheunikava
Ā
Fundamental economic concepts used in business decisions
Fundamental economic concepts used in business decisions
Zainul Lamak
Ā
Break even analysis Final.pptx
Break even analysis Final.pptx
PuneetGarg111103
Ā
cost_and_management_acc_accounting-manual
cost_and_management_acc_accounting-manual
muumaimar
Ā
Chapter 9.pptx
Chapter 9.pptx
ShriefMohi1
Ā
Pricing Strategy for the third year- Updated.pdf
Pricing Strategy for the third year- Updated.pdf
charlesmartial77
Ā
Hansen aise im ch11
Hansen aise im ch11
Daeng Aiman
Ā
Similar to Chapter11.ppt/Cost Volume Profit Analysis
(20)
17a marginal costing & breakeven analysis
17a marginal costing & breakeven analysis
Ā
Apollo Food Industries new - Presentation.pptx
Apollo Food Industries new - Presentation.pptx
Ā
Topic 6 f fc(1)
Topic 6 f fc(1)
Ā
Mb0041
Mb0041
Ā
Lecture 10 leverage
Lecture 10 leverage
Ā
Notes on Cost volume profit analysis
Notes on Cost volume profit analysis
Ā
Cost accounting of Brittania
Cost accounting of Brittania
Ā
Profit
Profit
Ā
Measuring and increasing profit
Measuring and increasing profit
Ā
Study manual icab chapter 4, Management Information, ICAB
Study manual icab chapter 4, Management Information, ICAB
Ā
Short term decision making.pptx
Short term decision making.pptx
Ā
CVP , BEP and OL.pptx
CVP , BEP and OL.pptx
Ā
Break even analysis
Break even analysis
Ā
Business model financial viability 2013
Business model financial viability 2013
Ā
Fundamental economic concepts used in business decisions
Fundamental economic concepts used in business decisions
Ā
Break even analysis Final.pptx
Break even analysis Final.pptx
Ā
cost_and_management_acc_accounting-manual
cost_and_management_acc_accounting-manual
Ā
Chapter 9.pptx
Chapter 9.pptx
Ā
Pricing Strategy for the third year- Updated.pdf
Pricing Strategy for the third year- Updated.pdf
Ā
Hansen aise im ch11
Hansen aise im ch11
Ā
More from SrikantKapoor1
4-patents.pptx Intellectual property systems
4-patents.pptx Intellectual property systems
SrikantKapoor1
Ā
Barringer-Chapter3.ppt Analysing Small Businesses
Barringer-Chapter3.ppt Analysing Small Businesses
SrikantKapoor1
Ā
Byrd_PPT_Ch01.pptx SMALL BUSINESS MANAGEMENT
Byrd_PPT_Ch01.pptx SMALL BUSINESS MANAGEMENT
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-15-qualitative-research.ppt
271_33_powerpoint-slides_chapter-15-qualitative-research.ppt
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-16-qualitative-research-methodology.ppt
271_33_powerpoint-slides_chapter-16-qualitative-research-methodology.ppt
SrikantKapoor1
Ā
271_33_powerpoint-slides_Chapter-18.pptx
271_33_powerpoint-slides_Chapter-18.pptx
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-9-sampling.ppt
271_33_powerpoint-slides_chapter-9-sampling.ppt
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-6-types-sources-data.ppt
271_33_powerpoint-slides_chapter-6-types-sources-data.ppt
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-5-types-research.ppt
271_33_powerpoint-slides_chapter-5-types-research.ppt
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-3-practical-tips-researchers.ppt
271_33_powerpoint-slides_chapter-3-practical-tips-researchers.ppt
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-2-role-research-marketing.ppt
271_33_powerpoint-slides_chapter-2-role-research-marketing.ppt
SrikantKapoor1
Ā
271_33_powerpoint-slides_chapter-1-nature-scope-marketing-research.ppt/MR
271_33_powerpoint-slides_chapter-1-nature-scope-marketing-research.ppt/MR
SrikantKapoor1
Ā
0273706786_08_media_light.ppt/International
0273706786_08_media_light.ppt/International
SrikantKapoor1
Ā
Chapter10.ppt/ Management Accounting Beyond Budgeting
Chapter10.ppt/ Management Accounting Beyond Budgeting
SrikantKapoor1
Ā
Chapter08.ppt/Management Accounting Budgeting
Chapter08.ppt/Management Accounting Budgeting
SrikantKapoor1
Ā
Chapter04.ppt/Management Accounting Costing Systems
Chapter04.ppt/Management Accounting Costing Systems
SrikantKapoor1
Ā
Chapter03.ppt/Management Accounting Classification
Chapter03.ppt/Management Accounting Classification
SrikantKapoor1
Ā
Chapter02.ppt/Management Accounting & Information
Chapter02.ppt/Management Accounting & Information
SrikantKapoor1
Ā
Chapter01.ppt/Mgt Accounting Introduction
Chapter01.ppt/Mgt Accounting Introduction
SrikantKapoor1
Ā
SPPTChap009 (1).pptx/Business Communications
SPPTChap009 (1).pptx/Business Communications
SrikantKapoor1
Ā
More from SrikantKapoor1
(20)
4-patents.pptx Intellectual property systems
4-patents.pptx Intellectual property systems
Ā
Barringer-Chapter3.ppt Analysing Small Businesses
Barringer-Chapter3.ppt Analysing Small Businesses
Ā
Byrd_PPT_Ch01.pptx SMALL BUSINESS MANAGEMENT
Byrd_PPT_Ch01.pptx SMALL BUSINESS MANAGEMENT
Ā
271_33_powerpoint-slides_chapter-15-qualitative-research.ppt
271_33_powerpoint-slides_chapter-15-qualitative-research.ppt
Ā
271_33_powerpoint-slides_chapter-16-qualitative-research-methodology.ppt
271_33_powerpoint-slides_chapter-16-qualitative-research-methodology.ppt
Ā
271_33_powerpoint-slides_Chapter-18.pptx
271_33_powerpoint-slides_Chapter-18.pptx
Ā
271_33_powerpoint-slides_chapter-9-sampling.ppt
271_33_powerpoint-slides_chapter-9-sampling.ppt
Ā
271_33_powerpoint-slides_chapter-6-types-sources-data.ppt
271_33_powerpoint-slides_chapter-6-types-sources-data.ppt
Ā
271_33_powerpoint-slides_chapter-5-types-research.ppt
271_33_powerpoint-slides_chapter-5-types-research.ppt
Ā
271_33_powerpoint-slides_chapter-3-practical-tips-researchers.ppt
271_33_powerpoint-slides_chapter-3-practical-tips-researchers.ppt
Ā
271_33_powerpoint-slides_chapter-2-role-research-marketing.ppt
271_33_powerpoint-slides_chapter-2-role-research-marketing.ppt
Ā
271_33_powerpoint-slides_chapter-1-nature-scope-marketing-research.ppt/MR
271_33_powerpoint-slides_chapter-1-nature-scope-marketing-research.ppt/MR
Ā
0273706786_08_media_light.ppt/International
0273706786_08_media_light.ppt/International
Ā
Chapter10.ppt/ Management Accounting Beyond Budgeting
Chapter10.ppt/ Management Accounting Beyond Budgeting
Ā
Chapter08.ppt/Management Accounting Budgeting
Chapter08.ppt/Management Accounting Budgeting
Ā
Chapter04.ppt/Management Accounting Costing Systems
Chapter04.ppt/Management Accounting Costing Systems
Ā
Chapter03.ppt/Management Accounting Classification
Chapter03.ppt/Management Accounting Classification
Ā
Chapter02.ppt/Management Accounting & Information
Chapter02.ppt/Management Accounting & Information
Ā
Chapter01.ppt/Mgt Accounting Introduction
Chapter01.ppt/Mgt Accounting Introduction
Ā
SPPTChap009 (1).pptx/Business Communications
SPPTChap009 (1).pptx/Business Communications
Ā
Recently uploaded
Monthly Social Media Update April 2024 pptx.pptx
Monthly Social Media Update April 2024 pptx.pptx
Andy Lambert
Ā
John Halpern sued for sexual assault.pdf
John Halpern sued for sexual assault.pdf
AmzadHosen3
Ā
Chandigarh Escorts Service š8868886958š Justš² Call Nihal Chandigarh Call Girl...
Chandigarh Escorts Service š8868886958š Justš² Call Nihal Chandigarh Call Girl...
Sheetaleventcompany
Ā
Forklift Operations: Safety through Cartoons
Forklift Operations: Safety through Cartoons
Forklift Trucks in Minnesota
Ā
Insurers' journeys to build a mastery in the IoT usage
Insurers' journeys to build a mastery in the IoT usage
Matteo Carbone
Ā
BAGALUR CALL GIRL IN 98274*61493 ā¤CALL GIRLS IN ESCORT SERVICEā¤CALL GIRL
BAGALUR CALL GIRL IN 98274*61493 ā¤CALL GIRLS IN ESCORT SERVICEā¤CALL GIRL
kapoorjyoti4444
Ā
Call Girls In Panjim North Goa 9971646499 Genuine Service
Call Girls In Panjim North Goa 9971646499 Genuine Service
ritikaroy0888
Ā
Enhancing and Restoring Safety & Quality Cultures - Dave Litwiller - May 2024...
Enhancing and Restoring Safety & Quality Cultures - Dave Litwiller - May 2024...
Dave Litwiller
Ā
Pharma Works Profile of Karan Communications
Pharma Works Profile of Karan Communications
karancommunications
Ā
MONA 98765-12871 CALL GIRLS IN LUDHIANA LUDHIANA CALL GIRL
MONA 98765-12871 CALL GIRLS IN LUDHIANA LUDHIANA CALL GIRL
Seo
Ā
Call Girls Ludhiana Just Call 98765-12871 Top Class Call Girl Service Available
Call Girls Ludhiana Just Call 98765-12871 Top Class Call Girl Service Available
Seo
Ā
Call Girls Electronic City Just Call š 7737669865 š Top Class Call Girl Servi...
Call Girls Electronic City Just Call š 7737669865 š Top Class Call Girl Servi...
amitlee9823
Ā
FULL ENJOY Call Girls In Mahipalpur Delhi Contact Us 8377877756
FULL ENJOY Call Girls In Mahipalpur Delhi Contact Us 8377877756
dollysharma2066
Ā
B.COM Unit ā 4 ( CORPORATE SOCIAL RESPONSIBILITY ( CSR ).pptx
B.COM Unit ā 4 ( CORPORATE SOCIAL RESPONSIBILITY ( CSR ).pptx
priyanshujha201
Ā
Mondelez State of Snacking and Future Trends 2023
Mondelez State of Snacking and Future Trends 2023
Neil Kimberley
Ā
Katrina Personal Brand Project and portfolio 1
Katrina Personal Brand Project and portfolio 1
kcpayne
Ā
Organizational Transformation Lead with Culture
Organizational Transformation Lead with Culture
Seta Wicaksana
Ā
Call Girls Service In Old Town Dubai ((0551707352)) Old Town Dubai Call Girl ...
Call Girls Service In Old Town Dubai ((0551707352)) Old Town Dubai Call Girl ...
allensay1
Ā
The Path to Product Excellence: Avoiding Common Pitfalls and Enhancing Commun...
The Path to Product Excellence: Avoiding Common Pitfalls and Enhancing Commun...
Aggregage
Ā
Business Model Canvas (BMC)- A new venture concept
Business Model Canvas (BMC)- A new venture concept
P&CO
Ā
Recently uploaded
(20)
Monthly Social Media Update April 2024 pptx.pptx
Monthly Social Media Update April 2024 pptx.pptx
Ā
John Halpern sued for sexual assault.pdf
John Halpern sued for sexual assault.pdf
Ā
Chandigarh Escorts Service š8868886958š Justš² Call Nihal Chandigarh Call Girl...
Chandigarh Escorts Service š8868886958š Justš² Call Nihal Chandigarh Call Girl...
Ā
Forklift Operations: Safety through Cartoons
Forklift Operations: Safety through Cartoons
Ā
Insurers' journeys to build a mastery in the IoT usage
Insurers' journeys to build a mastery in the IoT usage
Ā
BAGALUR CALL GIRL IN 98274*61493 ā¤CALL GIRLS IN ESCORT SERVICEā¤CALL GIRL
BAGALUR CALL GIRL IN 98274*61493 ā¤CALL GIRLS IN ESCORT SERVICEā¤CALL GIRL
Ā
Call Girls In Panjim North Goa 9971646499 Genuine Service
Call Girls In Panjim North Goa 9971646499 Genuine Service
Ā
Enhancing and Restoring Safety & Quality Cultures - Dave Litwiller - May 2024...
Enhancing and Restoring Safety & Quality Cultures - Dave Litwiller - May 2024...
Ā
Pharma Works Profile of Karan Communications
Pharma Works Profile of Karan Communications
Ā
MONA 98765-12871 CALL GIRLS IN LUDHIANA LUDHIANA CALL GIRL
MONA 98765-12871 CALL GIRLS IN LUDHIANA LUDHIANA CALL GIRL
Ā
Call Girls Ludhiana Just Call 98765-12871 Top Class Call Girl Service Available
Call Girls Ludhiana Just Call 98765-12871 Top Class Call Girl Service Available
Ā
Call Girls Electronic City Just Call š 7737669865 š Top Class Call Girl Servi...
Call Girls Electronic City Just Call š 7737669865 š Top Class Call Girl Servi...
Ā
FULL ENJOY Call Girls In Mahipalpur Delhi Contact Us 8377877756
FULL ENJOY Call Girls In Mahipalpur Delhi Contact Us 8377877756
Ā
B.COM Unit ā 4 ( CORPORATE SOCIAL RESPONSIBILITY ( CSR ).pptx
B.COM Unit ā 4 ( CORPORATE SOCIAL RESPONSIBILITY ( CSR ).pptx
Ā
Mondelez State of Snacking and Future Trends 2023
Mondelez State of Snacking and Future Trends 2023
Ā
Katrina Personal Brand Project and portfolio 1
Katrina Personal Brand Project and portfolio 1
Ā
Organizational Transformation Lead with Culture
Organizational Transformation Lead with Culture
Ā
Call Girls Service In Old Town Dubai ((0551707352)) Old Town Dubai Call Girl ...
Call Girls Service In Old Town Dubai ((0551707352)) Old Town Dubai Call Girl ...
Ā
The Path to Product Excellence: Avoiding Common Pitfalls and Enhancing Commun...
The Path to Product Excellence: Avoiding Common Pitfalls and Enhancing Commun...
Ā
Business Model Canvas (BMC)- A new venture concept
Business Model Canvas (BMC)- A new venture concept
Ā
Chapter11.ppt/Cost Volume Profit Analysis
1.
Ā© McGraw-Hill Education
(UK) Limited 2013 Short-Term Decision Making: Cost-Volume- Profit Analysis Chapter 11 1
2.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ LO1 Calculate the level of sales or business activity needed to break even or earn a desired profit ā¢ LO2 Determine the revenue required to break even or earn a desired profit ā¢ LO3 Apply cost-volume-profit analysis in a multi- product setting ā¢ LO4 Graphically depict the relationship between costs, volume and profits ā¢ LO5 Consider impacts of uncertainty and change in variables on cost-volume-profit analysis Learning Outcomes 2
3.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ Cost-volume-profit (CVP) analysis is a very useful tool for managers, accountants and business owners in making short- term decisions. ā¢ CVP analysis brings together the costs and revenues of a business and emphasises the relationship with volumes ā¢ It helps to answer questions such as āHow much do I need to sell to cover my costs?ā or ā¢ āHow will an increase in costs affect the sales level required to maintain current profit levels?ā Introduction 3
4.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ Economists originally developed the relationship between cost, prices and volumes The Economist versus Management 4 Exhibit 11.1: The economistās view
5.
Ā© McGraw-Hill Education
(UK) Limited 2013 The Economistās Model As in Exhibit 11.1 ā¢ As production increases, the selling price will be reduced in order to attract buyers for the goods. This means that at higher output levels, total revenues do not increase or may decrease in proportion to total output ā¢ The total cost line depicts costs as rising fast at first as the output levels are lower ā¢ Total cost and total revenue lines intersect at points A and B, where the business would break even 5 The Economist versus Management
6.
Ā© McGraw-Hill Education
(UK) Limited 2013 The Economistās Model of costs 6 The Economist versus Management Exhibit 11.2: The economistās variable cost function
7.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ Economists assume that variable costs per unit initially declines ā increasing returns to scale ā¢ Between output levels V1 and V2, the organization is operating at its most efficient level ā¢ When output exceeds capacity, variable cost per unit increases; this is called decreasing returns to scale 7 The Economist versus Management
8.
Ā© McGraw-Hill Education
(UK) Limited 2013 The Accountantās Model 8 Based on the economistās model, the accountantās approach to cost-volume-profit relationship is viewed in the shorter term The Economist versus Management Exhibit 11.3: The accountants cost- volume-profit relationships here
9.
Ā© McGraw-Hill Education
(UK) Limited 2013 The Accountantās Model ā¢ In the short term, output is likely to be relatively stable, or at least within a stable range ā¢ In this model total revenues and costs are assumed to follow a linear pattern ā¢ The fixed cost is constant, this is valid in the short term. Total costs (fixed and variable) will rise as output increases ā¢ The intersection between total costs line and total revenue line is called the break-even point The Economist versus Management 9
10.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ To use CVP analysis as a decision-making tool, the following assumptions on cost are important, as without them it would not be possible to calculate a break-even point. ā Costs are assumed to remain relatively stable in the short term ā Fixed costs are costs incurred regardless of output ā Variable costs increase as output increases Calculating Break-even 10
11.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ The point where costs are covered and no profit is made is called the break-even point ā¢ Separate costs into fixed and variable ā¢ The profit of a business can be represented in the following equation: Profit = Sales revenue ā Variable costs ā Fixed costs Calculating Break-even 11
12.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ The previous equation can be expanded by expressing sales and variable costs ā Profit = (Sales Price*Units sold) ā (Variable cost per unit * Units sold) ā Fixed costs ā Example Whitely Ltd ā¢ Sales (1,000 units @ Ā£400) Ā£400 000 ā¢ Variable costs Ā£325 000 ā¢ Contribution Ā£75 000 ā¢ Fixed costs Ā£45 000 ā¢ Profit Ā£30 000 Calculating Break-even 12
13.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ 0 = (Ā£400 Ć Units) ā (Ā£325 Ć Units) ā Ā£45 000 āUnits = 45,000/75 = 600 ā¢ We can check this as follows: ā¢ Sales (600 units @ Ā£400) Ā£240 000 ā¢ Variable costs (600 units @ Ā£325) Ā£195,000 ā¢ Contribution Ā£45 000 ā¢ Fixed costs Ā£45 000 ā¢ Profit Ā£0 Calculating Break-even 13
14.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ We can calculate break-even in units using contribution ā¢ Contribution is sales revenue less variable costs ā Profit = (Units sold x Contribution per unit) ā Fixed Costs ā¢ Solving this equation we obtain the formula for break-even: Break-even in units = Fixed costs Contribution per unit Break-even in units = Ā£45,000 = 600 units (Ā£400-325) Calculating Break-even 14
15.
Ā© McGraw-Hill Education
(UK) Limited 2013 Target Profits ā¢ The break-even point is useful information for any business ā¢ The techniques illustrated for break-even can also be used to determine how many units need to be sold to achieve a targeted profit ā¢ We can use the break-even formula to calculate the units required to achieve this desired profit Calculating Break-even 15
16.
Ā© McGraw-Hill Education
(UK) Limited 2013 Target Profits ā¢ Using the Whitely Ltd example calculate the units required to attain the following target profit scenarios: ā Scenario 1: Obtain a profit of Ā£60 000 ā Scenario 2: Obtain a profit of 15 per cent of sales revenue ā Scenario 3: Obtain a profit after tax of Ā£50 000, where the tax rate is 20 per cent. Calculating Break-even 16
17.
Ā© McGraw-Hill Education
(UK) Limited 2013 Target Profits ā¢ Scenario 1 ā¢ Using the break-even formula, we can simply add the target profit of Ā£60 000 to the fixed costs, as follows: ā¢ Units = (Ā£45 000 + Ā£60 000)/ (Ā£400 ā Ā£325) = Ā£105 000/Ā£75 = 1400 units ā¢ As a check, here is the income statement if sales of 1400 units are made. ā¢ Sales (1400 units @ Ā£400) Ā£560 000 ā¢ Variable costs (1400 units @ Ā£325) Ā£455 000 ā¢ Contribution Ā£105 000 ā¢ Fixed costs Ā£45 000 ā¢ Profit Ā£60 000 ā¢ We know the contribution is Ā£75 per unit. We can thus multiply the contribution per unit of Ā£75 by the number of units above break-even, that is, Ā£75 Ć 800 = Ā£60 000. Calculating Break-even 17
18.
Ā© McGraw-Hill Education
(UK) Limited 2013 Target Profits ā¢ Scenario 2 ā¢ Profit = (Sales price Ć Units sold) ā (Variable cost per unit Ć Units sold) ā Fixed costs ā¢ If profit is to be 15% of sales revenue, the equation can be rewritten as follows based on the previous example ā 0.15(Ā£400 Ć Units) = (Ā£400 Ć Units) ā (Ā£325 Ć Units) ā Ā£45 000 ā Ā£60 Ć Units = (Ā£75 Ć Units) ā Ā£45 000 ā Ā£15 Ć Units = Ā£45 000 ā = 3000 ā¢ We can check this using contribution per unit for units above the break-even point to calculate profit: ā¢ Ā£75,000 x (3,000 ā 600 units) ā¢ Ā£75 x 2,400 units = Ā£180,000 Calculating Break-even 18
19.
Ā© McGraw-Hill Education
(UK) Limited 2013 Target Profits ā¢ Scenario 3 ā¢ In this case, we need to work out the profit before tax first. This can be calculated as follows: Ā» Profit after tax ā (1 ā tax rate) Ā» Thus, profit before tax is: Ā£50,000 Ć (1 ā 0.20) = Ā£62,500 ā¢ The break-even units can now be calculated. ā¢ Units = (Ā£45,000 + Ā£62,500)/(Ā£75) = Ā£107,500/Ā£75 ā¢ = 1 433.33 units ā¢ Again, we can perform a quick check. Units sold above break-even is 833.33 (1433.33 ā 600) Ć Ā£75 contribution gives a profit of Ā£62,500, less tax at 20 % of Ā£12,500 (Ā£62 500 Ć 20%) equals Ā£50,000 profit. Calculating Break-even 19
20.
Ā© McGraw-Hill Education
(UK) Limited 2013 Target Profits ā¢ Contribution margin ratio ā¢ This ratio is the contribution as a proportion of sales. ā¢ In the example, the contribution margin ratio is 0.1875 (Ā£75/Ā£400). ā¢ As CVP analysis assumes costs and prices are constant in the short term, then the contribution margin ratio is also constant. Thus, it can be used in the break-even formula used previously. ā Profit = Sales revenue ā Variable costs ā Fixed costs ā We can insert the contribution margin ratio as follows: ā Profit = (Sales Revenue Ć CM ratio) ā Fixed costs ā¢ At break-even, profit is nil so this equation can be solved as follows: ā¢ Sales revenue = Fixed costs/ CM ratio ā¢ Sales revenue = Ā£ 45 000 = Ā£240,000 0.1875 Calculating Break-even 20
21.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ Thus far, the examples given have presented a single product scenario. ā¢ In reality, most businesses will make and sell many products. CVP analysis can be used in multiple product scenarios ā¢ Assume Whitely Ltd manufactures personal and business computers Multiple product analysis 21 Personal computer Business computer Total Sales price Ā£ 400 800 Units 1200 800 Ā£ Ā£ Ā£ Sales 480 000 640,000 1,120 000 Variable costs 390 000 480,000 870,000 Contribution 90,000 160,000 250,000 Direct fixed costs 30,000 40,000 70,000 Profit per product 60,000 120,000 180,000 Common fixed costs 26,250 Operating profit 153,750
22.
Ā© McGraw-Hill Education
(UK) Limited 2013 Multiple product analysis 22 ā¢ There are two types of fixed costs in the example above. ā Direct fixed costs are costs which can be traced to the product and would not be incurred if the product was not made. ā Common fixed costs are those which are not traceable to either product, and would remain if either were discontinued ā¢ It is possible to calculate a break-even point for each computer type separately. The contribution per unit for the personal computer is (Ā£90,000/1200 units) Ā£75 and (Ā£160,000/800 units) and Ā£200 for the business computer. The break-even point in sales units is thus: ā Personal computer Ā£30,000 Ā£75 units = 400 ā Business computer Ā£40,000 Ā£200 units = 200
23.
Ā© McGraw-Hill Education
(UK) Limited 2013 SALES MIX AND CVP ANALYSIS ā¢ Sales mix refers to the relative proportions of products sold. It can be measured in terms of units or sales revenue ā¢ A sales mix in units will typically not be the same as a sales mix in revenue as the prices of products are unlikely to be identical ā¢ To begin, we need to calculate the contribution for each sales mix bundle as follows Multiple product analysis 23 Product Unit Contribution Mix Bundle Contribution Personal computer Ā£75 3 Ā£225 (3 x Ā£75) Business computer Ā£200 2 Ā£400 (2 x Ā£200)
24.
Ā© McGraw-Hill Education
(UK) Limited 2013 SALES MIX AND CVP ANALYSIS ā¢ We can equate this to the contribution per unit in the break-even formula we have used thus far. We can also now add the direct and common fixed costs and treat them as one cost ā¢ Break-even bundles = Ā£96,250/ Ā£625 = 154 ā¢ Thus, sales of 154 bundles will mean the business breaks even. This means that 462 (154 Ć 3) personal computers and 308 (154 Ć 2) business computers need to be sold. We can check this quickly as follows: ā Contribution from personal computer (462 Ć Ā£75) Ā£34 650 ā Contribution from business computer (308 Ć Ā£200) Ā£61 600 ā Total contribution Ā£96 250 ā Less fixed costs Ā£96 250 ā Profit Nil Multiple product analysis 24
25.
Ā© McGraw-Hill Education
(UK) Limited 2013 SALES MIX AND CVP ANALYSIS ā¢ As before, the break-even sales revenue can be calculated by using the sales price for each computer type and the number of units required to break even. Thus break-even sales revenue will be (462 Ć Ā£400) + (208 Ć Ā£800), or Ā£431 200 ā¢ Businesses today typically produce or sell multiple complex products or services, and product mix can change significantly in the short term ā¢ Thus, effects of changes in product mix could be assessed to determine the effect on contribution, and with relatively stable fixed costs, the effects on profitability may also be easily assessed Multiple product analysis 25
26.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ We have already seen the accountantās model of costs, revenues and volumes depicted in Exhibit 11.3. ā¢ This model of costs can be used to graphically represent the relationships of costs, volumes and profit in more detail. ā¢ The resulting graph (or chart) is termed a cost-volume-profit graph. ā¢ Whitely Ltd data: ā Sales (1000 units @ Ā£400) Ā£400 000 ā Variable costs Ā£325 000 ā Contribution Ā£75 000 ā Fixed costs Ā£45 000 ā Profit Ā£30 000 Graphical representations of CVP analysis 26
27.
Ā© McGraw-Hill Education
(UK) Limited 2013 Graphical representations of CVP analysis 27 Exhibit 11.4: Cost- volume-profit graph for Whitely Ltd
28.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ A variation of the graph shown in Exhibit 11.4 is called the profit-volume graph (PV). This shows the relationship between profit and sales volume and is depicted for Whitely Ltd in Exhibit 11.5 Graphical representations of CVP analysis 28 Exhibit 11.5: Profit-volume graph for Whitely Ltd
29.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ The profit-volume graph for Whitely Ltd is drawn by again choosing some known points. For example, we know that at zero output a loss equal to the fixed costs (Ā£45,000) occurs. At break-even point the profit is zero, and as given, when output is 1000 units profit is Ā£30,000. ā¢ A profit-volume graph can be used to access the profit or loss at any level of output, but it does not reflect the nature of costs, that is, fixed versus variable. ā¢ In multi-product scenarios, a profit-volume type chart is used to depict the profit and sales of each product. The chart typically starts with the product with the highest contribution to sales ratio and plots the cumulative sales and profit by adding each additional product. ā¢ The point at which profit is zero is the highest sales level at which break-even occurs. An example is given in the exercises at the end of the chapter Graphical representations of CVP analysis 29
30.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ You might question why use a graphical method when the calculations can be done easily, as shown earlier in the chapter. ā¢ Remember that one of the key roles of a management accountant is to provide information to managers for decision making. ā¢ Information in a graphical format is quite common, and readily understood and accepted by managers. Graphical representations of CVP analysis 30
31.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ The accountantās model on cost-volume- profit makes a number of assumptions, the main ones being: 1) Costs and revenues are linear functions of output. 2) It is assumed that costs and prices remain constant within a relevant range. 3) All units produced are sold. 4) In multiple product scenarios, sales mix is known and remains constant. 5) All prices and costs are known with certainty Assumptions of CVP 31
32.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ The first assumption can be seen in Exhibit 11.4. That is, as output increases, costs and sales increase in proportion. This is depicted by straight, evenly sloped lines for costs and revenues. ā¢ In practice, this may not be so, as cost and revenues may increase or decrease as output varies. This takes us back to the economistās model depicted earlier. However, it is likely that costs and revenues do behave in a linear fashion in the short term and within a relevant range, suggesting the first two assumptions are reasonably valid. ā¢ The third assumption is likely to be unrealistic, as some inventory is always possible. However, in the context of the decisions to be made using CVP analysis, we are looking to cover all costs of a particular period of time. ā¢ The fourth assumption is also likely to be unrealistic as sales mix will vary. ā¢ Finally, while most businesses have a good knowledge of costs, it is unlikely that any business can be absolutely certain that its costs, and classification of costs, are correct. Assumptions of CVP 32
33.
Ā© McGraw-Hill Education
(UK) Limited 2013 Margin of Safety ā¢ As noted above, an important assumption of CVP analysis is that costs and revenues are known with certainty. ā¢ This is unlikely to be the case in reality, but if managers and accountants have a good knowledge of underlying costs they can use this knowledge to (1) extend the concept of break-even to a band or range, (2) assess how risky the business or product cost structure is and, (3) conduct āwhat ifā or sensitivity analysis. Risk & Uncertainty 33
34.
Ā© McGraw-Hill Education
(UK) Limited 2013 Margin of Safety ā¢ The margin of safety is the number of units which are expected to be sold above break-even. ā¢ In equation format the Margin of safety = Expected sales ā Break-even sales ā¢ The sales figure can be expressed in units or monetary terms ā¢ The margin of safety can be used by managers as a rule-of-thumb to ensure sales are not lost to the degree that the business fails to breakeven Risk & Uncertainty 34
35.
Ā© McGraw-Hill Education
(UK) Limited 2013 Operating leverage Risk & Uncertainty 35 Operating leverage refers to relative amount of costs that are fixed and variable in the cost structure of a business Exhibit 11.7: Cost- volume-profit chart of Whitely Ltd, including margin of safety
36.
Ā© McGraw-Hill Education
(UK) Limited 2013 Operating leverage ā¢ The degree of operating leverage can be measured by taking the contribution in proportion to profit as follows (remember that contribution is sale minus variable costs): ā¢ Degree of operating leverage = Contribution/Profit ā¢ Assume a software company has invested Ā£10 million into developing and marketing an application, which sells for Ā£45 per copy. Each copy costs the company Ā£5 to sell. Sales volume is expected to reach 1 million copies. The degree of operating leverage can be calculated as follows: Ā» 1,000,000 x (Ā£45- 5) Ā» 1,000,000 x (Ā£45- 5) - Ā£10,000,000 Ā» = Ā£40,000,000 / Ā£30,000,000 Risk & Uncertainty 36
37.
Ā© McGraw-Hill Education
(UK) Limited 2013 Operating leverage ā¢ Thus, the degree of operating leverage is 1.33. This means that, for example, a 25 per cent increase in sales volume would produce a 33 per cent (25% Ć 1.33) increase in profits ā here are the figures to prove this: Ā£million Sales (1.25 m Ć Ā£45) 56.25 Variable costs (1.25 Ć Ā£5) 6.25 50.00 Fixed costs 10.00 Profit 40.00 ā¢ Itās important to have an appreciation of the degree of operating leverage to assist managers in judging the effects of changes, the relative proportion of fixed and variable costs Risk & Uncertainty 37
38.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ Sensitivity analysis is used in many aspects of business and management accounting. ā¢ It is in effect a āwhat ifā technique that examines effects of changes in underlying assumptions of a business scenario Sensitivity Analysis 38
39.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ Any number of possible analyses could be quickly prepared in a spreadsheet, but remember that spreadsheets are only as useful as the data input to them Sensitivity Analysis 39
40.
Ā© McGraw-Hill Education
(UK) Limited 2013 ā¢ Management accountants assume costs and revenues follow a linear pattern ā¢ Using these assumptions, cost-volume-profit analysis can determine breakeven, target profits and effects of changes in cost structure on profit ā¢ Risk and uncertainty can be incorporated using margin of safety and/or sensitivity analysis Summary 40
Download now