Sustainable Management Accounting

cost structure

refers to the relative proportion of variable and fixed costs

Cost-Volume-Profit (CVP) analysis 

a decision-making tool helping managers understand and explain the impact of changes in volumes, product mix, prices, unit variable costs, and fixed costs on the cost structure, operating income, and operating risks.

operating risks

volatility of operating income resulting from a company’s cost structure.

operating income

the profit from a company's core business operations, calculated as revenue minus operating expenses (wages, rent etc)

steps of a CVP analysis

1. Profit function, contribution income statement and CVP graph

2. computation of the break even and target profit points

3. assessment of operating risk

4. sensitivity analysis

break even point

the minimum sales volumes or revenues they must achieve to cover their fixed costs and start making a profit.

target profit point

the minimum sales volumes or revenues they must achieve to meet their objectives of profitability.

sensitivity analysis

basically “what if” analyses by relaxing some of the underlying assumptions to see how operating income and operating risks would be affected.

product mix

refers to the relative proportion of each product of a company in the total sales volume or revenue.

unit contribution margin (UCM)

-       the contribution that each unit makes to first covering fixed costs and then, once fixed costs are covered, generating a profit.

(UCM = P – UC)

e.g: How much money does each smoothie bring in AFTER paying for the ingredients?

first pay fixed costs then its profit

contribution margin ratio

the increase in contribution margin and thus in profit for every additional euro of revenues. It is the fraction of each sales euro that is available first to cover fixed expenses and then, when this is done, to generate a profit.