cvp analysis final 1
TRANSCRIPT
Marginal Costing and Cost-Volume-Profit Analysis (CVP)
References: M.N.Arrora -Cost and Management
Accounting Khan and Jain-Management Accounting Accounting for Management-Dr.
Jawahar Lal Management Accounting-I.M.Pandey Cost Accounting for Business
Managers-Ashish K Bhattacharyya
What is cost and Total cost? Cost-Amount incurred to get
something/ resources used for the production of goods and services
Total Cost-is the total cost of producing unit of product. It is the total of all variable cost and fixed cost incurred to produce the goods.
Variable
Fixed
Mixed
Types of Costs
Minutes Talked
Tota
l Lon
g D
ista
nce
Tele
phon
e B
ill variable costs change
when activity/unit changes.
Your total long distancetelephone bill is basedon how many minutes
you talk.
Variable Cost
Minutes Talked
Per M
inut
eTe
leph
one
Cha
rge
Variable costs per unit do not changeas activity/unit increases.
The cost per long distance
minute talked is constant.
For example, Rs.7 per minute.
Variable Cost Per Unit
Variable Costs Example
Consider Indian Railway. Assume that Tea costs in Indian
Railway Rs.3 per person. If the railway carries 2,000
passengers, it will spend Rs 6,000 for Tea services.
Variable Costs Example
0 1 2 3 4 5
24 –
18 –
12 –
6 –
– – ––
Volume(Thousands of passengers)
Tot
al V
aria
ble
Cos
ts(t
hous
ands
)
Number of Local Calls
Mon
thly
Bas
ic
Tele
phon
e B
ill
Total fixed costs remain unchangedwhen activity changes.
Your monthly basic
telephone bill probably
does not change when
you make more calls.
Total Fixed Cost
Mixed Costs Contain fixed portion that is incurred
even when facility is unused & variable portion that increases with usage.
Example: monthly electric utility charge Fixed service fee Variable charge per kilowatt hour used
Total mixed costVariable
Utility Charge
Activity (Kilowatt Hours)
Tota
l Util
ity C
ost
Fixed MonthlyUtility Charge
Mixed Costs
Marginal Cost
Marginal Cost-is the cost of producing an additional unit of product. It is the total of all variable cost incurred to produce the extra one unit.
Marginal Costing Marginal Costing Technique is used for
short term decision-making. It assumes that fixed costs are not
affected by the decision to allocate resources to different activities.
Therefore, variable costs are the only relevant cost for decision making.
Marginal costing is also known as Variable costing and Direct Costing
Marginal Cost StatementSales
- Variable CostsContribution - Fixed Costs
Profit
Example Mr.Thomas manufacture a device that
allows users to take a closer look at icebergs from a ship.
Expected price of the device Rs.1000 Variable costs are Rs700 per unit. He receive a proposal from a company
Tiggertol to sell 20,000 units at a price of Rs.850.
Contribution Margin Concept Example
There is sufficient capacity to produce the order.
How do we analyze this situation? Earning=Rs.850 – Rs.700 = Rs.150 Total Earning=Rs.150 × 20,000
units = Rs.30,00,000
Marginal Cost StatementSales (20,000 x Rs.850)
Rs.1,70,00000Variable costs (20,000 x Rs.700) (1,40,00000)Contribution margin
Rs.30,00000
If Fixed cost is Rs.40,00000.What will be his decision?
Cost-Volume-Profit Analysis
Cost-Volume-Profit Analysis (CVP)
CVP analysis is an extension of principles of marginal Costing
Cost-Volume-Profit Analysis (CVP) is the study of the relationship between selling prices, sales volumes, fixed costs, variable costs and profits at various levels of activity.
CVP analysis is used by the management in budgeting and profit planning.
CVP analysis is also known as Break even point Analysis
Assumptions of CVP/BEP Analysis Expenses can be classified as either
variable or fixed. Mixed cost have to be divided into
fixed and variable elements. Sales prices, unit variable cost, and
total fixed expenses will not vary. Synchronisation between production
and sales
Objective Use CVP analysis to compute Contribution Profit Volume Ratio (P/V) Break Even Point Margin of Safety
Marginal Cost StatementSales
- Variable CostsContribution - Fixed Costs
Profit
Contribution The contribution is calculated by following
formula:Contribution=Sales-Variable cost (C=S-V)Also, Contribution=Fixed cost + Profit
(C=F+P)Or Contribution=Fixed cost – Loss (C=F-L)From this the following marginal cost equation
is developedS-V = F+P
Example:If Given Sales =Rs 12000 Variable Cost = Rs 7000 Fixed Cost =Rs. 4000Find out Contribution and Profit.
Example:If Given Profit = Rs 1000 Contribution=Rs 5000 Variable Cost = Rs 7000Find out :-Sales and Fixed Cost
P/V ratio( Also Known as C/S ratio or Contribution Margin Ratio) P/V ratio= Profit-volume ratio C/S= Contribution to Sales ratio This ratio denotes the percentage
of each sales rupee available to cover the fixed cost and to provide income to firm.
Computing P/V Ratio P/V Ratio= Contribution Sales = C/S = (S-V)/SBy Transposition, we have(i) C=S X P/V ratio(ii) S= C P/V ratio
Example Sales= Rs 10000 Variable Cost = Rs. 8000Then P/V Ratio = C/S = (S-V)/S =10000-8000 10000 = 20%
Alternative Formula P/V ratio= Change in contribution Change in Sales = Change in Profit Change in sales
Example-P/V ratioYear Sales Net Profit2009 20000 10002010 22000 1600
P/V Ratio = Change in Profit Change in Sales = 1600 – 1000 X 100 = 30% 22000-20000
The unique sales level at which a company earns neither a profit nor incurs a loss.
Profit = 0Sales – Total Cost = 0
Sales – Variable Costs – Fixed Costs = 0
What is Break-Even Point?
Break-Even Analysis Break Even Analysis may be
performed by the following two methods
a) Algebraic Calculationb) Graphic presentation
Algebraic Method-
Breakeven point in Sales Rupees = Fixed costs
P/V Ratio
Breakeven point in units = Fixed costs
Contribution per unit
Break Even Point Example Sales Rs.100000 Variable cost Rs.70000 Fixed costs Rs.15000Required:
Compute the breakeven point (in Rupees)
Breakeven point is = Fixed costs P/V Ratio
= Rs.15000 30/100
= Rs 50000 Sales revenue at breakeven point = Rs.50000
Break Even Point Example Selling price per unit Rs.12 Variable cost per unit Rs.3 Fixed costs
Rs.45000Required:
Compute the breakeven point (in units) and in Rupees
Breakeven point in units = Fixed costs Contribution per unit
= Rs.45000
Rs.12-Rs.3
= 5000 units
Sales revenue at breakeven point = Rs.12 * 5000 = Rs.60000
Target Profit Example Suppose that our business would
be content with Profit of _________________.(Target Profit)
How many units must be sold?
FormulaNo. of units to be sold at target profit
Fixed cost + Target profit
Contribution per unit=
Required sales revenueFixed cost + Target profit
Contribution to sales ratio=
Example Selling price per unit Rs.12 Variable cost per unit Rs.3 Fixed costs Rs.45000 Target profit Rs.18000Required:
Compute the sales volume required to achieve the target profit
No. of units at target profit Fixed cost + Target profit
Contribution per unit=
Rs.45000 + Rs.18000
Rs.12 - Rs.3=
= 7000 units
Required to sales revenue = Rs.12 *7000 = Rs.84000
Alternative methodRequired sales revenue
Fixed cost + Target profit
Contribution to sales ratio=
Rs.45000 + Rs.18000
75%=
= Rs.84000
Units sold at target profit = Rs.84000 /Rs.12 = 7000 units
Problem:- The following data is given:Fixed Cost Rs. 12000Selling Price Rs. 12 per unitVariable Cost Rs. 9 per unitWhat will be the Amount of Sales if it is
desired to earn a profit ofa) Rs. 6000b) Rs 15000
Answer
a) Rs 72,000b) Rs. 1,08,000
Calculate the missing figures Given Break –even point=Rs 30000Profit = Rs. 1500Fixed Cost = Rs.6000What is the amount of Variable cost?
Solution Contribution=Fixed cost + Profit =6000 + 1500=7500Break-Even Point= Fixed Cost P/V Ratio
P/V Ratio=6000 x 100 = 20% 30000
P/V Ratio=Contribution/Sales Sales =7500 / 20*100 Sales = 37500Variable cost=Sales-Contribution =37500-7500 =30000
Problem:- The following data is given:Fixed Cost Rs. 12000Selling Price Rs. 12 per unitVariable Cost Rs. 9 per unitWhat will be the profit when sales area) Rs. 60000b) Rs 100000
Solution P/V Ratio=C/S=3/12=25%a) When Sales=Rs 60000 Contribution =Sales x P/V ratio =60000 x 25 % =Rs.15000 Profit = Contribution-Fixed Cost = 15000 – 12000 = 3000
B) Answer=Rs.13000
Problem The following information is given:Sales=Rs. 200000Variable Cost=Rs. 120000Fixed Cost=Rs. 30000Calculatea) Break Even Pointb) New BEP
a) If Selling price is reduced by 10%b) If Variable cost increases by 10%c) If fixed Cost increases by 10%
Answera) 75000
a) 90000b) 88235c) 82500
Home work Sales=4000 units @ Rs 10 per
unit Break Even Point=Rs. 1500 units Fixed Cost= Rs. 3,000What is the amount ofa) Variable Costb) Profit
Graphic Presentation (BEP) Use CVP analysis for profit
planning and graph the cost-volume-profit relations
Volume in Units
Cos
ts a
nd R
even
uein
Rup
ees Total fixed costs
Preparing a CVP Chart
Total costs
Volume in Units
Cos
ts a
nd R
even
uein
Rup
ees Total fixed costs
Preparing a CVP Chart
Total costs
Sales
Break-even Point
Margin of safety
Margin of safety Excess of expected sales over
breakeven sales. Margin of safety is a measure of
amount by which the sales may decrease before a company suffers a loss.
This can be expressed as a number of units or a percentage of sales
Formula
Margin of safety= Margin of safety Budget sales level
*100%
Margin of safety= Budget sales level – breakeven sales level
Sales revenueT
otal
Cos
t/Rev
enue
R
s.
Sales (units)
Total costProfit
BEP
Margin of safety
Example The breakeven sales level is at 5000
units. The company sets the target profit at Rs.18000 and the budget sales level at 7000 units
Required:Calculate the margin of safety in units and express it as a percentage of the budgeted sales revenue
Margin of safety= Budget sales level – breakeven sales level= 7000 units – 5000 units= 2000 units
Margin of safety= Margin of safety Budget sales level= 2000 7000= 28.6%
*100 %
*100 %
The margin of safety indicates that the actual sales can fall by2000 units or 28.6% from the budgeted level before losses areincurred.
Example Selling price per unit Rs.12 Variable price per unitRs.3 Fixed costs Rs.45000 Current profit Rs.18000 If the selling prices is raised from
Rs.12 to Rs.13, the minimum volume of sales required to maintain the current profit will be:
Change in Sales Price Example
If the selling prices is raised from Rs.12 to Rs.13, the minimum volume of sales required to maintain the current profit will be:
Fixed cost + Target profit
Contribution per unit
=Rs.45000 + Rs.18000
Rs.13 - Rs.3= 6300 units
Change in Fixed and Variable Costs Example If the fixed cost fall by Rs.5000 but
the variable costs rise to Rs.4 per unit, the minimum volume of sales required to maintain the current profit will be:Fixed cost + Target profit
Contribution per unit
= Rs.40000 + Rs.18000Rs.12 - Rs.4
= 7250 units
Problem-Mysore university 2009
The trading results of Manish Stores for the last two years were as under:
Year Sales(Rs.) Profit (Rs)2005 14400001080002006 1680000156000
Assuming that the capital structure and the selling price remains the same, calculate
Problem-Mysore university 2009
1) P/V Ratio 2) Break Even Point3) Margin of Safety of 2005 and
20064) Sales required to earn a desired
profit of Rs. 1,80,0005) Profit at sales of Rs. 15,00,000
Solution-1)P/V Ratio = Change in profit x 100 Change in Sales =156000-108000 x 100= 20% 1680000-1440000Fixed cost=Contribution-Profit =(1440000x20%)-108000 =288000-108000=Rs.180000
Solution-2)Break Even Point = Fixed cost P/V Ratio =180000/20% =Rs.9000003) Margin of Safety = Actual sales – BEP Sales Margin of Safety for 2005=1440000-900000 = Rs. 540000 Margin of Safety for 2006=1680000-900000 = Rs. 780000
Solution-4) Sales = Fixed cost +Target Profit P/V Ratio = 180000 + 180000 20% = 360000 x100 20 = 1800000
Solution5) Given, Sales= 1500000 Profit =? Profit = Contribution-Fixed Cost = (Sales x P/V Ratio)-Fixed Cost = (1500000 x 20%) – 1800000 = 3000000 – 1800000 = Rs.1200000
Problem-Mysore university 2010
RJM Ltd, has prepared the following budget for the year 2009-10.
Sales in units 15000Fixed Expenses(in Rs) 34000Sales in Rs. 150000Variable cost in Rs. 6 per unit
You are required to :1)Find out P/V ratio, Break even point and
Margin of Safety.2)Calculate the revised P/V ratio, break
even point and margin of safety in each of the cases:
a) Decrease of 10% in Selling Priceb) Increase of 10% in Variable costsc) Increase of Sales Volume by 2000 unitsd) Increase of Rs. 6000 in Fixed Costs.
Solution P/V Ratio = Contribution x100 Sales = Sales-V.cost x100 Sales = 150000-90000 x 100 150000 = 60000 x 100 = 40 % 150000
Break even point and Margin of Safety. B.E.P = Fixed Expenses P/V Ratio = 34000/.40 = Rs. 85000
M.O.S = Sales – B.E.P Sales = 150000 – 85000 =
Rs.65000
Decrease of 10% in Selling Price
Revised P/V Ratio = Contributionx100/ Sales = ( Sales-V.Cost)x100 / Sales = (135000-90000)x100/135000 = 33.33% Revised B.E.P = Fixed Expenses P/V Ratio = 34000/.33 = Rs. 102000Revised M.O.S = Sales – B.E.P Sales = 135000 -102000 =33000
Increase of 10% in Variable costs Revised P/V Ratio = Contributionx100/
Sales = ( Sales-V.Cost)x100 / Sales = (150000-99000)x100/150000 = 34% Revised B.E.P = Fixed Expenses P/V Ratio = 34000/.34 = Rs. 100000 Revised M.O.S = Sales – B.E.P Sales = 150000 -100000 =50000
Increase of Sales Volume by 2000 units
Revised P/V Ratio = Contributionx100/ Sales = ( 170000-V.Cost)x100 / 170000 = (170000-102000)x100/170000 =( 68000/170000) x 100=40% Revised B.E.P = Fixed Expenses P/V Ratio = 34000/40% = Rs. 85000 Revised M.O.S = Sales – B.E.P Sales = 170000 -85000 =Rs.85000
Increase of Rs. 6000 in Fixed Costs.
Revised P/V Ratio = Contributionx100/ Sales = ( Sales-V.Cost)x100 / Sales = (150000-90000)x100/150000= 40% Revised B.E.P = Fixed Expenses P/V Ratio = 40000/.40 = Rs. 100000 Revised M.O.S = Sales – B.E.P Sales = 150000 -100000 =50000
Problem Alpha Company Budgeted for the year
2010 sales of Rs. 5,00,000 (Selling price being Rs. 20 per unit), Fixed Costs Rs. 1,80,000 and variable costs Rs. 2,60,000. Find out break even point
a) taking into consideration the budgeted figure and
b) assuming 20% increase in Fixed Cost.Also draw a break even Chart
Solution P/V Ratio = Contributionx100/ Sales = ( Sales-V.Cost)x100 / Sales = (500000-260000)x100/500000 = 48% Break Even Point = Fixed Expenses P/V Ratio = 180000/48% = Rs. 375000B.E.P (in units) = 375000/20=18750 units
Assuming 20% increase in Fixed Cost P/V = 48%
Break Even Point = Fixed Expenses P/V Ratio = 180000x 1.20/48% = 216000/48% = Rs.450000B.E.P in units=450000/20= 22500 units
No. of units sold= 500000/20=25000 units
Variable cost per unit= Variable cost/No. of units =260000/25000= Rs.10.4p.u
Graphic Presentation (BEP) Use CVP analysis for profit
planning and graph the cost-volume-profit relations
Volume in Units
Cos
ts a
nd R
even
uein
Rup
ees Total fixed costs
Preparing a CVP Chart
Total costs
Volume in Units
Cos
ts a
nd R
even
uein
Rup
ees Total fixed costs
Preparing a CVP Chart
Total costs
Sales
Break-even Point
No of units soldFixed Cost
Variable Cost Total Cost Sales
0 180 0 180 0
5 180 52 232 100
10 180 104 284 200
15 180 156 336 300
20 180 208 382 400
25 180 260 440 500
30 180 312 492 600
Marginal Costing The following are some of the
managerial decision which are taken with the help of marginal costing technique
Fixation of Selling Prices Exploring new market/outsourcing Make or buy decisions Alternative methods of production and Suspending activities i.e closing down
Home work-Case Study-1 The bins and tins limited produces and markets
industrial containers and packing cases. Due to competition the company proposes to reduce the selling price. If the present level of profits is to maintained, indicate the number of units to be sold if the proposed reduction in selling price is a)5%, b) 10% and c) 15%.The following additional information is available.
Present Sales Turnover(30000)units 300000 Variable Cost (30000 units) 180000 Fixed Cost 70000
-250000 Net Profit 50000
Answer At present price = 30000 units At 5% = 34286 units At 10 % = 40000 units At 15 % = 48000 units
Case Study-2XY Co. sold in two successive years 7000 and 9000 units and incurred a loss of Rs. 10000 and earned Rs. 10000 as profit respectively,
The selling price per unit is Rs 100.You are required to find out:-a)Amount of fixed cost, b)the number of units to break even andc) the no. of units to earn a profit of Rs. 50000
Answera)Fixed Cost = 80000b)B. E. P = 8000 unitsc) 13000 units