Managerial Accounting Study Guide

Managerial Accounting Study Guide: Cost-Volume-Profit (CVP) Analysis

Chapter 5: Cost-Volume-Profit (CVP) Analysis

• Definition: Provides insight into how profits are influenced by various factors, including:

  • Selling prices
  • Unit sales
  • Unit variable costs
  • Total fixed costs
  • Mix of products sold

• Key Questions Addressed:

  • How many units must be sold to break even?
  • How do fixed costs impact profitability?
  • How does the contribution margin affect income?

• Assumptions in CVP Analysis:

  • Selling price remains constant irrespective of volume.
  • Costs are linear, distinguishable as variable and fixed costs.
  • Variable costs per unit and total fixed costs are constant.

Contribution Approach Income Statement

• Definition: Segments costs into variable and fixed categories.
• Key Formulas:
  • Contribution margin = Sales - Variable expenses
  • Variable expense ratio = Variable expenses / Sales
  • Contribution margin ratio = Contribution margin / Sales
    • Represents the proportion of each sales dollar contributing toward covering fixed expenses.

Profit Equations

• Profit Formula:

  • Profit = (Sales - Variable expenses) - Fixed expenses

• Breakdown:

  • Sales = Selling price per unit x Quantity sold
  • Variable expenses = Variable expenses per unit x Quantity sold

• Implications of Changes:

  1. Impact of Unit Sales Change:
     • Change in Profit = CM ratio * change in sales - change in fixed expenses
  2. Operating Leverage:
     • Measures sensitivity of net income to changes in unit sales.
     • Degree of Operating Leverage = Contribution margin / Net operating income
  3. Break-even Point:
     • Sales level where profit is zero:
     • Break-even in units = Fixed Costs / Unit CM
     • Break-even in dollars = Fixed Costs / CM Ratio

Target Profit and Break-Even Analysis

• Unit Sales to Achieve Target Profit:

  • Unit sales = (Target profit + Fixed expenses) / Unit CM
  • Dollar Sales = (Target profit + Fixed expenses) / CM Ratio

• Margin of Safety:

  • Defines how much sales can fall before incurring losses:
    • Margin of Safety = Total Sales - Break-even Sales
    • Margin of Safety Percentage = Margin of Safety in dollars / Total budgeted sales

Changes in Fixed Costs and Sales

• Incremental Analysis:
  • Focuses on costs and revenues that change with proposed actions.
  • Selling Price Adjustments: Higher prices generally improve NOI, but reductions could harm it unless offset by higher sales.

CVP Graph

• Purpose:
  • Illustrates the relationship between sales, costs, and profit across varying unit sales.

Multiproduct Break-Even Analysis

• Sales Mix:
  • Represents the relative proportions of products sold.
  • Changing the mix affects the total contribution margin and break-even point.
  • Formulas:
    • CM = Selling Price - Variable Costs
    • CM Ratio = CM / Selling price
    • Break-even Sales = Fixed Expenses / Overall CMR

Chapter 8: Master Budgeting

• Purpose of Budgets:
  • Planning: Establishing goals and budgeting to achieve them.
  • Control: Monitoring progress and making necessary adjustments.

Structure of Master Budget

• Components:
  • Sales Budget
  • Production Budget
  • Direct Materials Budget
  • Direct Labor Budget
  • Overhead Budget
  • Selling & Administrative Budget
  • Cash Budget
  • Budgeting Income Statement
  • Budgeting Balance Sheet

Chapter 9: Flexible Budget and Performance Analysis

• Variance Analysis Cycle:

  • Addresses actual vs. budget performance to highlight significant deviations.
  • Types of Variances:
    • Activity Variance (changes in activity levels)
    • Revenue Variance (actual vs. flexible budget revenue)
    • Spending Variance (actual costs vs. flexible budget costs)

• Performance Reports:

  • Summarize various variances to aid managerial decision-making by pinpointing problem areas.