MDI COST MDP(Managerial accounting) .ppt
- 1. Accounting for decision making COST VOLUME PROFIT ANALYSIS
- 2. 1. Identify common cost behavior patterns. 2. Estimate the relation between cost and activity using account analysis, the high-low method. 3. Perform cost-volume-profit-analysis for single products. 4. Perform cost-volume-profit-analysis for multiple products. 5. Computation of desired level of sales to achieve targeted profit. 6. Decisions for continuation of product or segment. Learning Objectives:
- 4. TYPES OF COSTS Cost classification is the process of grouping costs according to their common characteristics. A suitable classification of costs is very helpful in identifying a given cost with cost centers or cost units. Costs may be classified according to their nature, i.e., material, labor and expenses and a number of other characteristics. Depending upon the purpose to be achieved and requirements of a particular concern the same cost figures may be classified into different categories. The classification of costs can be done in the following ways: • By Nature of Element • By Functions • By Traceability • By Variability • By Controllability • By Normality • By Capital or Revenue • By Time • By Association with Product • According to Planning and Control • For Managerial Decisions
- 5. By Nature of Element Materials Labor Expenses By Functions Manufacturing And Production Costs Administrative Costs Selling And Distribution Costs 5
- 6. By Traceability Direct cost Indirect cost By Variability Fixed Costs Variable Costs Semi-variable Costs 6 By Controllability •Controllable Costs •Uncontrollable Costs
- 7. By Normality •Normal Cost •Abnormal Cost By Financial Accounting Classification •Capital Expenditure •Revenue Expenditure •Deferred Revenue Expenditure By Time •Historical costs •Predetermined costs. 7
- 8. By Association with Product •Product Costs •Period Costs. According to Planning and Control •Budgeted Costs •Standard Costs 8
- 9. •Future Costs •Programmed Cost •Joint Cost •Conversion Cost •Discretionary Costs •Committed Cost Other Types of Costs For Managerial Decisions •Marginal Cost •Out Of Pocket Costs •Differential Costs •Sunk Costs •Imputed (Or Notional) Costs •Opportunity Cost •Replacement Cost •Avoidable And Unavoidable Cost
- 10. Examines the behavior of total revenues, total costs, and operating income as changes occur in the output level, selling price, variable costs or fixed costs Cost-Volume-Profit Analysis Assumptions of CVP Analysis 1.Revenues change in relation to production and sales 2.Costs can be divided in variable and fixed categories 3.Revenues and costs behave in a linear fashion 4.Costs and prices are known 5.If more than one product exists, the sales mix is constant 6.We can ignore the time value of money
- 12. Contribution Margin Contribution margin is equal to the difference between total revenue and total variable costs Contribution margin per unit = Selling price - Variable cost per unit Contribution margin percentage = Contribution margin per unit / selling price per unit Revenue/unit Rs.200 100% Variable costs/unit Rs.120 60% Contribution margin/unit Rs. 80 40% Revenue/unit is net revenue after giving all discounts, vat, provision for pilferage etc.
- 13. SP 200 VC 120 CONT 80 TFC 800000 QTY SALES TVC TFC TOTAL COST PROFIT 1000 200000 120000 800000 920000 -720000 2000 400000 240000 800000 1040000 -640000 3000 600000 360000 800000 1160000 -560000 4000 800000 480000 800000 1280000 -480000 5000 1000000 600000 800000 1400000 -400000 6000 1200000 720000 800000 1520000 -320000 7000 1400000 840000 800000 1640000 -240000 8000 1600000 960000 800000 1760000 -160000 9000 1800000 1080000 800000 1880000 -80000 10000 2000000 1200000 800000 2000000 0 11000 2200000 1320000 800000 2120000 80000 12000 2400000 1440000 800000 2240000 160000 13000 2600000 1560000 800000 2360000 240000 14000 2800000 1680000 800000 2480000 320000 15000 3000000 1800000 800000 2600000 400000 16000 3200000 1920000 800000 2720000 480000
- 14. BREAK EVEN QUANTITY FOR SINGLE PRODUCT SALES = TOTAL COST + PROFIT SALES = TOTAL VARIABLE COST + FIXED COST + PROFIT SP * Q = VC * Q + TFC + P (SP – VC) * Q = TFC + P AT BREAK EVEN POINT , PROFIT = 0 (SP – VC) * Q = TFC Q = TFC/(SP – VC) 1. If fixed cost for branch is Rs. 8,00,000 per month, how many units branch must sell to achieve break even? 2. If branch wants to earn profit of Rs. 2,00,000 per month, what should be the targeted sales in units?
- 15. BREAK EVEN QUANTITY FOR MULTIPLE PRODUCT A B C D E TOTAL BUDGETED SALE(QTY.) 10000 7500 20000 15000 12000 SP/UNIT 40 120 28 42 65 3270000 VC/UNIT 35 100 22 40 64 CONTRIBUTION/UNIT 5 20 6 2 1 TOTAL CONTRIBUTION 50000 150000 120000 30000 12000 362000 FIXED EXPENSES/MONTH : Rs.500000 1. How many units branch must sell to break even with item wise break up? 2. How many units branch must sell to earn profit of Rs. 500000 with item wise break up?
- 16. BREAK EVEN QUANTITY FOR MULTIPLE PRODUCT A B C D E TOTAL BUDGETED SALE(QTY.) 10000 7500 20000 15000 12000 SP/UNIT 40 120 28 42 65 3270000 VC/UNIT 35 100 22 40 64 CONTRIBUTION/UNIT 5 20 6 2 1 TOTAL CONTRIBUTION 50000 150000 120000 30000 12000 362000 FIXED EXPENSES/MONTH : Rs.500000
- 17. A B C D E TOTAL BUDGETED SALE(QTY.) 10000 7500 20000 15000 12000 64500 SP/UNIT 40 120 28 42 65 3270000 VC/UNIT 35 100 22 40 64 CONTRIBUTION/UNIT 5 20 6 2 1 TOTAL CONTRIBUTION 50000 150000 120000 30000 12000 362000 FIXED EXPENSES/MONTH : Rs.500000 WA CONTRIBUTION TOTAL CONT./TOTAL NO OF UNITS = 362000/64500 5.612403 COMPOSITE BEQ =500000/5.612403 89088 UNITS SP SALES A 13812 40 552486 B 10359 120 1243094 C 27624 28 773481 D 20718 42 870166 E 16575 65 1077348 TOTAL 89088 4516575
- 18. FIXED EXPENSES/MONTH : Rs.500000 REQUIRED PROFIT : Rs.500000 WA CONTRIBUTION/UNIT TOTAL CONT./TOTAL NO OF UNITS = 362000/64500 5.6124 REQUIRED CONTRIBUTION =500000+500000=1000000 UNITS REQUIRED =1000000/5.6124 178177 UNITS SP SALES A 27624 40 1104972 B 20718 120 2486188 C 55249 28 1546961 D 41436 42 1740331 E 33149 65 2154696 TOTAL 178177 9033149
- 19. Gautam manufacturing company produces a product Gello .Production capacity of the company is 150000 units per annum. The summarized profit and loss account for the year is given: Sales @Rs 15 per unit 15, 00,000 Direct material 3, 00,000 Direct labour 1, 00,000 Production overheads -Variable 50,000 -Fixed 2, 00,000 Administration overhead -Fixed 75,000 Selling overheads -Variable 75,000 -Fixed 1,75,000 Profit 5,25,000 a.The chairman felt that the packing of product needs improvement .He wanted to know the sales required to earn a target profit of 10% on turnover with introduction of an improved packing at an additional cost of 30 paise per unit. CASE
- 20. Gautam manufacturing company produces a product Gello .Production capacity of the company is 150000 units per annum. The summarized profit and loss account for the year is given: Sales @Rs 15 per unit 15, 00,000 Direct material 3, 00,000 Direct labour 1, 00,000 Production overheads -Variable 50,000 -Fixed 2, 00,000 Administration overhead -Fixed 75,000 Selling overheads -Variable 75,000 -Fixed 1,75,000 Profit 5,25,000 b. The MD conveyed to the board that a large retailer is interested to take a regular order of 30000 units per annum at special price. This would in no way affect the volume or price of the regular sales of the company. No selling and distribution costs would be incurred because the retailer was prepared to collect the product from the company warehouse at regular intervals. Only a special packaging would be required for display purpose and it will cost 20 paise per unit. He wanted to know for his information the price per unit at which the special order would break even and the price for quoting purpose providing a contribution of Rs 60000.
- 21. Gautam manufacturing company produces a product Gello .Production capacity of the company is 150000 units per annum. The summarized profit and loss account for the year is given: Sales @Rs 15 per unit 15, 00,000 Direct material 3, 00,000 Direct labour 1, 00,000 Production overheads -Variable 50,000 -Fixed 2, 00,000 Administration overhead -Fixed 75,000 Selling overheads -Variable 75,000 -Fixed 1,75,000 Profit 5,25,000 c. The marketing director proposed that he should be allowed to increase advertising by Rs 2,40000 and simultaneously increase the price of the product by 20%.He expected that he would be able to increase sales from 1,00,000units to 1,20,000.
- 22. Gautam manufacturing company produces a product Gello .Production capacity of the company is 150000 units per annum. The summarized profit and loss account for the year is given: Sales @Rs 15 per unit 15, 00,000 Direct material 3, 00,000 Direct labour 1, 00,000 Production overheads -Variable 50,000 -Fixed 2, 00,000 Administration overhead -Fixed 75,000 Selling overheads -Variable 75,000 -Fixed 1,75,000 Profit 5,25,000 d. The production manager opined that the selling price should be reduced to Rs 12 per unit in order to reach a wider sales market and thus to achieve full utilization of the production resources.
- 23. Gautam manufacturing company produces a product Gello .Production capacity of the company is 150000 units per annum. The summarized profit and loss account for the year is given: Sales @Rs 15 per unit 15, 00,000 Direct material 3, 00,000 Direct labour 1, 00,000 Production overheads -Variable 50,000 -Fixed 2, 00,000 Administration overhead -Fixed 75,000 Selling overheads -Variable 75,000 -Fixed 1,75,000 Profit 5,25,000 e. The finance director intervened to say that an aggressive advertisement campaign was the answer. He wondered how much that would cost if it were to improve sales to 1,40,000 units per annum yielding a profit of 10% of the turnover.
- 24. Longman Pvt. Ltd. of Kolkata is currently operating at 80% capacity. The following is the income statement furnished by the company: Particulars Rs. in lakh Rs. in lakh Sales 640 Cost of sales: Direct materials 200 Direct expenses 80 Variable overheads 60 Fixed overheads 240 Total cost 580 Net income 60 The Managing Director has been discussing an offer from Middle East for the supply of a quantity, which will require 50% capacity of the factory. The price is 10% less than the current price in the local market. Order cannot be split. The capacity of the factory can be augmented by 10% by adding facilities at an increase of Rs.30 lakh in fixed cost. If the proposal is accepted with the increased facilities, compute