CVP NOTES

Compute contribution margin

- Contribution Margin = Net Sales – Variable Cost

- Contribution Margin Per Unit = Sale Per Unit – Variable Expense Per Unit
- Total Contribution Margin = Number of units sold x Contribution Margin Per Unit

Contribution Margin Ratio

- Contribution Margin Ratio = Contribution Margin

Net Sales
- Contribution Margin % = Contribution Margin x 100
Net Sales

Breakeven Points in Dollars and Units

- Breakeven Sales ($) = Total Fixed Cost

Contribution Margin Ratio
- Breakeven Sales (Units) = Total Fixed Cost
Contribution Margin Unit
- Breakeven Sales (Units) = Total Fixed Cost
Selling Price – Variable Cost Per Unit

Required Sales in Dollars

- Required Sales in Dollars = Fixed Cost + Targeted Income

Contribution Margin Ratio
- Required Sales in Dollars = Fixed Cost + Targeted Income + Income Tax
Contribution Margin Ratio

Required Sales in Units/ Target Profit

- Required Sales in Units = Fixed Cost + Targeted Income

Contribution Margin Per Unit
- Required Sales in Units = Fixed Cost + Targeted Income + Income Tax
Contribution Margin Per Unit

Margin of Safety

- Margin of Safety (Units)= Actual Sales – Breakeven Point

- Margin of Safety ($)= Actual Sales – Breakeven Point
- Margin of Safety (%) = Margin of Safety x 100
Actual Sales/ Budget
If the target income is on a after tax basis, the formula to compute for the target sales would be:

- Target Sales (Units) = Fixed Cost + (Targeted Income/(1-Tax rate) )

Contribution Margin Per Unit
- Target Sales ($) = Fixed Cost + (Targeted Income/(1-Tax rate) )
Contribution Margin Per Ratio

If the target income is expected is expressed in terms of percentage of sales (example, 12 % of sales ),
the formula would be:

- Target Sales (Units) = Fixed Cost

Contribution Margin Per Unit – (percentage x selling Price)

CVP Chart

Drawing a breakeven chart or graph

1. Having read the question you may now start to follow a procedure. You will be given fixed costs,
price and variable costs for a product and a period of time. Remember alternative words for
fixed cost and variable costs.
- Extract the data: you should be able to identify fixed costs per period of time, price per unit and
variable cost per unit.

NB// The decision whether a cost is fixed and variable, sometimes causes problems. Do not confuse
by title or name but look at the units given. If costs are per unit or per number made or sold then
the cost concerned is variable. If the cost are per unit time, example, per year then the cost are fixed
costs.

2. Calculate Breakeven units

3. Fix the X axis (Capacity)
- If you are given a maximum capacity use that figure
4. Fix the Y axis (Revenue/Sales /Cost)
- Revenue is usually the greatest figure. Example the maximum revenue is = price per unit x
maximum sales (16000 x $120 = 1.92mil)
5. Plot the total revenue axis
-This passes through the origin, since there is no revenue if there are sales. Total revenue = (1.92
m or where sales = 16000 per unit)
6. Add the Fixed Cost line
- Fixed costs are the same irrespective of out puts. So you mark on the Y axis the value of fixed
cost. In cases it is $480,000, then drawn the fixed cost curve
7. Add the total Cost Line
- You know that this crosses the total revenue line at the breakeven units and that it starts at the
fixed costs.
- Remember always add labels to the two axis and to give the chart a title

Sales per unit is constant

Variable per unit is constant
Total fixed cost is constant
Costs re affected because of activity changes

CVP
Sales
-Variable Cost
= Contribution Margin
-Fixed Cost
=Income before Tax
X Income Taxes (Percentage) of Income before tax
=Net Income

OR
Sales
-Variable Cost
= Contribution Margin
-Fixed Cost
=Net Income
 CAPITAL BUGET NOTES

What is the payback period of each project

ARR

Average Accounting Profit

ARR =
Average Investment

An initial investment of $130,000 is expected to generate annual cash inflow of $32,000 for
6 years. Depreciation is allowed on the straight line basis. It is estimated that the project
will generate scrap value of $10,500 at end of the 6th year. Calculate its accounting rate of
return assuming that there are no other expenses on the project.
Solution
Annual Depreciation = (Initial Investment − Scrap Value) ÷ Useful Life in Years
Annual Depreciation = ($130,000 − $10,500) ÷ 6 ≈ $19,917
Average Accounting Income = $32,000 − $19,917 = $12,083
Accounting Rate of Return = $12,083 ÷ $130,000 ≈ 9.3%

Profitability Index

IRR

Payback

NPV

Cost of Capital

Independent

Mutually exclusive

Non - financial (qualitative) factors that impacts the decision of a project:

i. The environment
ii. Employee morale
iii. Relationship with the community
iv. Corporate image

Explain the four (4) core ethical responsibilities of a management accountant. (6 marks)
b. Explain how sensitivity analysis can benefit management’s decision making when
using
cost-volume-profit techniques. (5 marks)
c. Outline three (3) benefits of budgeting. (6 marks)
d. Sketch and fully label a traditional break-even chart. (8 marks)
(Total 25 marks)
Question 1
If two projects are mutually exclusive and the cost of capital is 10% and requires an
investment
of $50m. The following cash flows are expected from the investment
Year Project A Project B
1 10 40
2 20 20
3 30 16
4 40 12
a. What is the payback period for each of the projects? (5 marks)
b. If the two projects are independent and the cost of capital is 5%, which projector
projects
should the firm undertake? (10 marks)
c. If the two projects are mutually exclusive and the cost of capital is 10%, which project
should the firm undertake? (10 marks)
(Total 25 marks)
State five assumptions of the Breakeven / Cost Volume profit analysis

Define the terms Management Accounting and Cost Accounting. (3 marks)

b. Explain the roles of Management Accountant in an organization in the context of the
following:
i. Assistance in Planning (2 marks)
ii. Assistance in Controlling (2 marks)
ACCT3502
The Council of Community Colleges of Jamaica Page 15
iii. Assistance in Organizing (2 marks)
iv. Assistance in Decision making (2 marks)
v. Assistance in Motivating (2 marks)
c. Explain the ethical responsibilities of Management Accountant with regards to the
following:
i. Competence (3 marks)
ii. Objectivity (2 marks)
iii. Integrity (4 marks)
v. Confidentiality (3
VARIANCE

SP (STANDARD PRICE)

AP (ACTUAL PRICE)

AQ (ACTUAL QUANTITY)

SQ (STANADARD QUANTITY)

TOTAL MATERIAL COST VARIANCE = (SP X SQ) – (AP X AQ)

MATERIAL PRICE VARIANCE = (SP – AP) x AQ

MATERIAL USAGE VARIANCE = SP (SQ (STANDARD QUANTITY FOR ACTUAL OUTPUT) - AQ)

TOTAL LABOUR COST VARIANCE = (STANDARD RATE X STANDARD HOURS) - (ACTUAL RATE X ACTUAL
HOURS)

LABOUR RATE VARIANCE = (STANDARD RATE – ACTUAL RATE) X ACTUAL HOURS

LABOUR EFFICIENCY VARIANCE =

TOTAL VARIABLE OVERHEAD VARIANCE =

VARIABLE OVERHEAD RATE VARIANCE (expressed in terms of the number of machine hours
or labor hours) = (ACTUAL VARIABLE OVERHEAD RATE (ACTUAL HOURS X ACTUAL VARIABLE
OVERHEAD RATE) - STANDARD VARIABLE OVERHEAD RATE (ACTUAL HOURS X STANDARD VARIABLE
OVERHEAD RATE)) X ACTUAL LABOUR HOURS

VARIABLE OVERHEAD EFFICIENCY VARIANCE = STANDARD OVERHEAD RATE X (ACTUAL HOURS –

STANDARD HOURS)