anuj nijhon-volume cost profit analysis
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8/4/2019 ANUJ NIJHON-Volume Cost Profit Analysis
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BY: ANUJ NIJHON
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It is a management accounting tool to show therelationship between the ingredients of profitplanning.
The entire gamut of profit planning isassociated with VCP relationships.
A widely-used technique to study VCP
relationship is Break Even Analysis.
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Level or volume of activity
Unit Selling Prices
Variable cost per unit Total fixed costs
Sales mix
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Fixed cost are business expenses, that are notdependent on the level of goods or servicesproduced by the business.
They are defined as expenses that do notchange as a function of the activity of abusiness.
They tend to be time-related, such as salaries orrents being paid per month.
For example, a retailer must pay rent andutility bills irrespective of sales.
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They are expenses that change in proportion tothe activity of a business.
It is the sum of marginal costs over all unitsproduced.
It can also be considered normal costs.
Direct labour and overhead are often
called conversion cost, while direct materialand direct labour are often referred to as primecost.
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Decomposing Total Cost as Fixed Cost and variable Cost
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The Break- Even Point (BEP) is the point atwhich cost or expenses and revenue are equal:there is no net loss or gain, and one has "broken
even A profit or a loss has not been made,
although opportunity cost have been paid, andcapital has received the risk-adjusted, expectedreturn.
It is shown graphically, at the point where thetotal revenue and total cost curves meet.
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A calculation of the sales volume (in units)required to just cover costs. A lower salesvolume would be unprofitable and a higher
volume would be profitable. Break-evenanalysis focuses on the relationship betweenfixed cost, variable cost (or cost per unit), andselling price (or selling price per unit).
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The Profit Volume (PV) Ratio is the ratio ofContribution over Sales. It measures theProfitability of the firm and is one of the
important ratios for computing profitability.The Contribution is the extra amount of salesover variable cost.
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A principle of investing in which an investoronly purchases securities when the marketprice is significantly below its intrinsic
value. In other words, when market price issignificantly below your estimation of theintrinsic value, the difference is the margin ofsafety. This difference allows an investment to
be made with minimal downside risk.
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Profit = Sales - Variable Cost - Fixed Cost.
Thus Contribution is:
Profit + Fixed Cost = Sales - Variable Cost.
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The formula or equation for the calculation ofmargin of safety is as follows:
Margin of Safety =
Margin of safety in dollars / Total budgeted or actual sales
The margin of safety can also be expressed inpercentage form. This percentage is obtained by
dividing the margin of safety in dollar terms bytotal sales.
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