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.