Afternoon... The following is excerpted from my cost accounting seminar text... I can send you a protected copy of the seminar if you think it would be helpful... I discuss various scenarios for planning and analysis in the text..
dougsledge@...
thanks...
Sledge
Cost-Volume-Profit.. aka: Break Even Analysis
Cost relationships and concepts are basic tools for management control at every operational level. Understanding the principles of cost-volume-profit (CVP) interactions (aka: break even analysis) is key to effective cost management for all business disciplines... sales, production inventory control, finance, accounting, to name a few.... A discussion of CVP (break-even analysis) follows. Let's review some terminology to enhance understanding of the concepts..
TERM: Variable Costs are those costs which change in direct relation to, and as a result of, changes in cost object activity, within the relevant range of activity. This cost object activity is different for different businesses... Examples include:
- Production cost for manufacturing
- Installation and service cost for HVAC and other and service operations.
- Feet drilled direct cost in a energy field drilling operation.
- Material cost for merchandising
- Percentage based sales commissions
TERM: Fixed Costs are those costs which do not change as a direct result of cost object activity. ... Facility rental, static salary based payroll, periodic depreciation, etc.
TERM: Relevant Range of Activity... That operational range of cost activity, within which the company should expect to operate, and within which, variable cost relationships and fixed costs remain reasonably stable (constant).
Intuitively we know that the generalized sales/profit equation looks like:
Profit = Sales - Expense
Or:... transposing and restated....
Sales = Profit + Expense
If we further define expense as having both fixed and variable components:
Total Expense = Fixed Expense + Variable Expense
Then....
Sales = Profit + Fixed Expense (cost) + Variable Expense (cost)
Sales = Profit + FC + VC
It follows that at breakeven sales, there will be no profit:
SBE = zero profit + FC + VC
SBE = FC + VC
It is reasonable to assume that sales activity will parallel production (cost) activity if inventory levels and mix remain unchanged. Let's make such an assumption. Deductive reasoning then draws the conclusion that variable costs can be expressed as a direct ratio (percentage, decimal, fraction...) of sales dollars.... Since variable costs change linearly with activity... this is analogous to material used in manufacturing... the same material cost for each unit of the same item produced...
We qualify the breakeven equation as:
SBE= FC+ VC
Where FC is constant (rent), and VC (unit material) can be stated as a direct ratio of sales.
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Douglas Sledge CMA, CPA, CGMA
Executive Officer
Douglas A Sledge Management Accountant
Farmers Branch TX
United States
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Original Message:
Sent: 06-03-2013 03:28 AM
From: Muzahir Agha
Subject: CVP ANALYSIS QUESTIONS
HI GUYS
IN QUESTION 18. WHY THEY ARE TAKING DISTRIBUTION CHARGES 0F 0.75 IN
VARIABLE COST? GENERALLY DISTRIBUTION IS WITH SELLING EXPENSES.
IN QUESTION 19. WHATS MEANT BY THIS "TO INCREASE THE EXISTING PROFIT BY
30000" TO ME IT IS TO INCREASE THE EXISTING PROFIT BY 30000, LIKE IF YOU
HAVE 18000 THEN IT SHOULD BE 48000 PROFIT BUT IN THIS CASE THEY ARE JUST
TAKING PROFIT AFTER TAX 30000 DUE TO THIS BOOK ANSWER IS WRONG, IS IT? GUYS
PLEASE CHECK IT AND LET ME KNOW. CHECK THE ATTACHMENT.
THANKS
--
*Regards
Muzahir*