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CVP Analysis

Formula
Breakeven
o Units=TFC/CM Per unit(SP per unit-VC per unit )
o $$$=TFC/CM RATIO
o CM RATIO =CM perunit/SP per unit x100%
o CM Ratio = Total CM /Total Sales x100%

Target NI
o Units = TFC+Target+ NI/CM perunit
o $$$=TFC+Target+NI/CM Ratio
o CM RATIO =CM perunit/SP per unit x100%
o CM Ratio = Total CM /Total Sales x100%
Margin of Safety
o Units= Actual or budgeted sales (units)- Breakeven units
o $$ =Actual or budgeted sales ($) Breakeven ($)
o Margin of safety %= MOS (units or $)/ Budgeted or actual
sales(unitsor$) x100%

VC %, CM %
o VC=TVC/Sales x100
o CM Ratio = Total CM /Total Sales x100%
o CM ratio + VC ratio = 100%

ARR=Avg NI/Avg Inv+Working Capital


o Avg investment=(intial investment + salvage value /2)
Theory :Assumptions, limitations

o 1.Changes in the level of revenues and costs arise only because


of changes in the number of products units produced and sold
o 2. Total costs can be divided into a fixed component and a
variable component with respect to the level of output
o 3. The behavior of total revenues and total costs is linear
(straight-line) in relation to output units within the relevant range
o 4. The unit selling price, unit variable costs, and fixed costs are
known and constant
1. some costs can be classified as semi-variable
2.some goods that businesses continue to produce may have some goods in
stock
3. when more than one type of product is sold the sales mix remains
unchanged. The limitation is that firms cannot remain static as demand
changes

4.break even is based on only one product.limitation is that but a few firms
produce only one product.

Capital Budgeting
Calculate Value of Initial Investment
o Cost of project +Installation-Proceeds from disposal of existing
asset +/- taxes on sale of assets
Calculate annual net cash flows
o Net Income + Depreciation OR Total Cash Flow

Using appraisal techniques-Appraisal is NPV, ARR, IRR and Payback


period
o Payback period
Accept if payback is within required limits. Projects with
shorter payback periods are considered less risky therefore
making them more desirable
o ARR- Avg Estimated NI/Avg investment x100 =X%
If ARR exceeds a target rate of return the project should be
considered
o NPV-(Annuity Cash Flows x present value annuity factor)-Initial
investment
Accept projects with NPV >O
The higher the NPV,the higher ranked the project is under
NPV
Projects with Negative NPV are not acceptable
o IRR
Positive NPV Rate+=[Distance between the 2 rates x
Positive NPV / Distance betweem Postive &Negative NPV]
Higher the % the higher you want

Regular budgeting
Objectives of budgeting
o

Planning- Long range plans (look at product quality):market share


;growth rate
Short range plans (product lines and profit):designs a specific
Personnel (defines responsibilities and interaction ):identifies a
director who is to participate and the communication necessary
In-house principles(ensures realism);strict dealines and flexibility
Monitor (Periodic review):periodic performance reports : review
of problems
Decision Making-How much market share , growth rate
Sales:profit of product lines ; personnel needs and expected
changes
Coordinator and staff selection ; level of participation and
communication
Realism (organisation before department) ; deadline importance
to all
Frequent checking and connecting
Control-To help establish procedures to achieve planned revenues and
costs
To aid coordination and communication of plans to all
concerened
To formulate a basis for effective revenue and cost control
To compare results;budgeting is actual

Areas where budgeting cause problems


o Lack of management commitment
o Creation of inflexibility
o Behavioural responses
o Conflict between short term and long term objectives
o Goal incongruence
Schedules for collection and Disbursement
Cash collection schedule (head up the quarter)
Purchases Budgeting

1.Calculation of variances ( price and efficiency)


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o

o
o
o
o

o
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DM Price Variance
(MPV)AQ purchased (AP-SP)
DM Efficiency Variance (MEV)
(AQ used x SP)-(SQ allowed xSP)
SP(AQ used-SQ Allowed (sq per unitxActual units produced))

SP (AQ used -SQ allowed)


LRV=AH(AR-SR)
LEV =SR(AH-SH allowed)
SH allowed is SH per unit x actual unit produce
FOH Expenditure(spending) Variance= (Actual Expenditure)-(Budgeted
Expenditure)
FOH EFFIciency Variance=(Actual Horsx POHR)-(Standard Hours
allowed xPOHR)
=POHR(Actual hors-Standard hours allowed)
VOH efficiency variance = SP (AH - SH all)
VOH spending variance = AH (AP - SP)

2. Causes of DM variances (check handout)

The causes of Variances- A detailed analysis of the variances by type is


insufficient for control porposes. One of the main purposes of variance
analysis is to signpost areas of the business which are not performing
according to plan. The accountant must be able to understand the causes of
variances in order to take corrective action. Variances may have any of the
following causes:
DM Price :
o Changes in purchase price due to external factors, such as inflation
o Changes in purchase price due to internal reasons, such as purchasing
in smaller or larger quantities
o Change of supllier
o Errors in pricing

o Bad buying
o substitution of materials of a different type or grade
DM Usage
o Defective materials, due to bad buying, use of wrong grade or type,
deterioration.
o Excessive scrap due to insufficient use, like insufficiency of workers,
incorrect setting of machinery, defectives machinery
o Theft of materials
o Errors in the recording of quantities
o Rework of defective production

3. Advantages of standard cost

Useful in setting selling prices


Facilitates management planning
Promotes greater economy by making employees more cost conscious
It contributes to management control by providing a basis for
evaluating cost control
Useful in highlighting variances in management by exception ( only
take action when you notice something is off)