Lecture Management accounting: An Australian perspective: Chapter 17 - Kim Langfield-Smith

This chapter introduce the cost volume profit analysis. This chapter includes contents: Cost volume profit analysis at the Melbourne Theatre Company, the break-even point, the importance of the break-even point at Linneys, graphing cost volume profit relationships,...
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Lecture Management accounting: An Australian perspective: Chapter 17 - Kim Langfield-Smith Chapter 17 Cost volume profit analysisCopyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 1Cost volume profit (CVP)analysis Atechniqueusedtodeterminetheeffects ofchangesinanorganisation’ssales volumeonitscosts,revenueandprofit Canbeusedinprofitseekingandnotfor profitorganisationsCopyrightª2003McGrawHillAustraliaPtyLtd, 2The break-even point Thevolumeofsaleswherethetotal revenuesandexpensesareequal,andthe operationbreakseven Canbecalculatedforanentireorganisation orindividualprojectsoractivitiesCopyrightª2003McGrawHillAustraliaPtyLtd, 3 Formulas Fixed expensesBreak - even point (in units) = Unit contributi on margin Fixed expensesBreak - even point (in sales dollar) = Unit contribution margin ratioCopyrightª2003McGrawHillAustraliaPtyLtd, 4Terminology Contributionmargin(orvariablecosting) statement Areportingformatwherecostsarereportedby costbehaviourandacontributionmarginis calculated Totalcontributionmargin Thedifferencebetweenthesalesrevenueand thevariablecosts Theamountavailabletocoverfixedcostsand thencontributetoprofits continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 5Terminology Unitcontributionmargin Thedifferencebetweenthesalespriceperunit andvariablecostperunit Contributionmarginratio Theunitcontributionmargindividedbytheunit salesprice Theproportionofeachsalesdollaravailableto coverfixedcostsandearnaprofit continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 6Terminology Contributionmarginpercentage Theunitcontributionmarginratiomultipliedby 100 Thepercentageofeachsalesdollaravailableto coverfixedcostsandearnaprofitCopyrightª2003McGrawHillAustraliaPtyLtd, 7Cost volume profit (CVP)graph Showshowcosts,revenueandprofits changeassalesvolumechanges Fivesteps Drawthefixedexpenseline Drawthetotalexpenseline Drawthetotalrevenueline Breakevenpoint—wherethetotalrevenueand totalexpenselinesintersectCopyrightª2003McGrawHillAustraliaPtyLtd, 8Copyrightª2003McGrawHillAustraliaPtyLtd, 9Profit volume (PV) graph Showsthetotalamountofprofitorlossat differentsalesvolumes Thegraphintercepttheverticalaxisatthe amountequaltothefixedcosts Thebreakevenpointisthepointatwhich thelinecrossesthehorizontalaxisCopyrightª2003McGrawHillAustraliaPtyLtd, 10Copyrightª2003McGrawHillAustraliaPtyLtd, 11Target net profit Adesiredprofitleveldeterminedby management Canbeusedwithinthebreakevenformula Fixed expenses + target profit Target sales volume = Unit contribution marginCopyrightª2003McGrawHillAustraliaPtyLtd, 12CVP analysis andmanagement decision making Commonapplicationsinclude Safetymargin Changesinfixedexpenses Changesintheunitcontributionmargin MultiplechangesinkeyvariablesCopyrightª2003McGrawHillAustraliaPtyLtd, 13Safety margin Differencebetweenthebudgetedsales revenueandthebreakevensalesrevenue Givesafeelforhowcloseprojected operationsaretothebreakevenpointCopyrightª2003McGrawHillAustraliaPtyLtd, 14Changes in fixed expenses Whenestimatesoffixedcostsarerevised, thebreakevenpointwillchange Percentagechangeinfixedexpenseswilllead tosimilarincreaseinthebreakevenpoint(in unitsordollars) Differentfixedcostsmayapplytodifferent levelsofsales/productionvolume MorethanonebreakevenpointCopyrightª2003McGrawHillAustraliaPtyLtd, 15Changes in the unitcontribution margin Changeinunitvariableexpenses Changestheunitcontributionmargin Anewbreakevenpoint Anincreaseinunitvariableexpenseswill increasethebreakevenpoint continuedCo ...