CVP (cost-volume-profit) analysis examines the relationships between costs, volume, and profit. It is a useful short-term planning tool for decision making. Key elements include break-even point, contribution margin, and profit-volume charts. CVP assumes fixed costs are constant at all activity levels and unit variable costs are also constant. It can be applied to single or multiple products if they have a fixed sales mix. The document provides an example CVP analysis for a company with three hair product lines.
Cost Volume Profit (CVP).
Introduction
Fixed costs
Variable costs
Semi variable costs
Contribution margin
Break even point
PV Ratio
BEP ANalysis.
break even point
Cost-volume-Profit.
Cost Volume Profit (CVP).
Introduction
Fixed costs
Variable costs
Semi variable costs
Contribution margin
Break even point
PV Ratio
BEP ANalysis.
break even point
Cost-volume-Profit.
the document is on Cost volume profit analysis.
(Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income.)
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
INFORMATION ABOUT
B.E.P.
Definition
Cost Volume Profit analysis & Application
Assumption of BEP analysis
Calculation
Method
Formula
Target profit
Margin of safety
Definition
Formula
Limitation of B.E.P.
Basic equation of Marginal Costing
Uses Of CVP Analysis
Limitations Of CVP Analysis
Profit Volume (P/V) Ratio
Marginal costing
Determination Of Marginal Cost
Features of Marginal Costing
the document is on Cost volume profit analysis.
(Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income.)
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
INFORMATION ABOUT
B.E.P.
Definition
Cost Volume Profit analysis & Application
Assumption of BEP analysis
Calculation
Method
Formula
Target profit
Margin of safety
Definition
Formula
Limitation of B.E.P.
Basic equation of Marginal Costing
Uses Of CVP Analysis
Limitations Of CVP Analysis
Profit Volume (P/V) Ratio
Marginal costing
Determination Of Marginal Cost
Features of Marginal Costing
This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go here
http://flevy.com/browse/business-document/activity-based-costing-198
Activity Based Costing (ABC) analysis is a methodology for assigning costs to those activities that truly drive these costs. It is more accurate than traditional costing methods. It is a valuable technique to know for a number of key reasons:
* ABC allows you to develop a picture of the true profitability of product lines, customer segments, distribution channels, geographies, and other market segments.
* ABC aids in a number of strategic decisions, from determining target markets to selecting the optimal product mix to making informed pricing decisions.
Specifically, ABC leads to a more accurate assignment of costs to cost objects through a process of:
* Matching the logical flow of costs through the cost system to the economics of true cost flows.
* Mapping costs from "resources" ( wages paid, supplies purchased) to activities performed ( units manufactured) to cost objects ( products, customers, distribution channels) that drive those costs.
ABC is an invaluable tool for making strategic decisions, as it allows you to develop a picture of true profitability of product lines, customer segments, geographies, distribution channels, and other markets. This document explains a 7-phase approach to Activity Based Costing and includes examples.
Prima Plastics, as the name suggests manufactures plastic moulded furniture (PMF). The company manufactures products ranging from chairs, baby chairs, dining tables, stools, teapoys, material handling products etc and competes with the likes of Nilkamal, Wimplast, and several unorganized players.
Till recently the company also had another business line of Aluminum Composite Panels (ACP), however the same was consistently reporting losses and in FY 15 the management
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Activity Based Costing (ABC) analysis is a methodology for assigning costs to those activities that truly drive these costs. ABC is an invaluable tool for making strategic decisions, as it allows you to develop a picture of true profitability of product lines, customer segments, geographies, distribution channels, and other markets.
To view and download the full document, please go here:
http://learnppt.com/powerpoint/68_Activity-Based-Costing.php
For more business strategy frameworks, check out this page:
http://learnppt.com/business-strategy.php
http://learnppt.com/powerpoint/frameworks/
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
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2. CVP Analysis
CVP (Cost-volume-profit) analysis is a term given to the study
of the interrelationships between the elements of costs and
volume over the profit of the business.
CVP Analysis is an important short-term planning tool and
useful for decision making – Marginal Costing Principle
Key Formulae:
Units $
BEP Fixed cost /
contribution per unit
Fixed costs / CS ratio
MOS Profit / Contribution
per unit
Profit / CS ratio
Sales
required
Fixed costs + Profit
Contribution per unit
Fixed costs + Profit
CS ratio
3. Assumptions
CVP analysis can apply to one product only, or to more
than one product only if they are sold in a fixed sales mix
(fixed proportions).
Fixed costs per period are same in total, and unit variable
costs are a constant amount at all levels of output and
sales.
Sales price are constant at all levels of activity.
Production volume = sales volume
5. Multiple Products CVP
To perform breakeven analysis for a multi-product organization,
either a constant sales mix must be assumed, or all products must
have the same C/S ratio.
To breakeven point for a standard sales mix of products is calculated
by dividing the total fixed costs by the weighted average
contribution per unit, or by the weighted average C/S ratio.
Formulae:
BEP(unit) = Fixed cost
Weighted average contribution per unit
BEP($) = Fixed cost
Weighted average C/S ratio
6. Illustration:
Hair Co (12/12)
Hair Co manufactures three types of electrical for hair: curlers (C), straightening irons
(S) and dryers (D). The budgeted sales prices and volumes for the next year are as
follows:
Each product is made using a different mix of the same materials and labour. The
budgeted sales volumes for all the products have been calculated by adding 10% to
last year’s sales.
The standard cost for each product is shown below.
Labour costs are variable. The general fixed overheads are expected to be $640,000
for the next year.
C S D
Selling price $110 $160 $120
Units 20,000 22,000 26,000
C S D
$ $ $
Materials 20 50 42
Labour 30 54 50
7. Cont’d
Required:
Calculate the weighted average contribution to sales ratio for
Hair Co. (4 marks)
Calculate the total break-even sales revenue for the next
year for Hair Co. (2 marks)
Draw a multi-product profit-volume (PV) chart showing
clearly the profit/loss line assuming:
You are able to sell the products in order of the ones with the
highest ranking contribution to sales ratios first; and
You sell the products in a constant mix.
(9 marks)
Note: Round all workings to two decimal
(15 marks)
8. Limitations
It is assumed that fixed costs are the same in total and variable costs
are the same per unit at all levels of output. This is assumption is a
great simplification.
Fixed costs will change if output falls or increases substantially (most
fixed costs are step costs).
The variable cost per unit will decrease where economies of scale
are made at higher output volumes, but the variable cost per unit
will also eventually rise when diseconomies of scale begin to appear
at even higher volumes of output (for example the extra cost of
labour in overtime working).
9. Limitations (Cont’d)
The assumption is only correct within a normal range or relevant
range of output. It is generally assumed that both the budgeted
output and the breakeven point lie within this relevant range.
It is assumed that sales prices will be constant at all levels of activity.
This may not be true, especially at higher volumes of output, where
the price may have to be reduced to win the extra sales.
Production and sales are assumed to be the same, so that the
consequences of any increase in inventory levels or of “de-stocking”
are ignored.
Uncertainty in the estimates of fixed costs and unit variable costs is
often ignores.
10. Advantages
Graphical representation of cost and revenue data (breakeven
charts) can be more easily understood by non-financial
managers.
A breakeven model enables profit or loss at any level of
activity within the range for which the model is valid to be
determined, and the C/S ratio can indicate the relative
profitability of different products.
Highlighting the breakeven point and the margin of safety
gives managers some indication of the level of risk involved.