CVP Analysis - Marginal Costing (Ok Na!)

UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014

Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!
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CHAPTER 4:
CVP Analysis and Marginal Costing
4. Total fixed costs are constant over the
relevant range, but fixed costs per unit vary
☛COST-VOLUME PROFIT ANALYSIS inversely with the cost driver or volume
5. Selling prices per unit and market
 Cost-volume profit analysis is a systematic
conditions remain unchanged
examination of the relationships among
6. Production equals sales, i.e., there is no
costs, cost driver, and profit.
change in inventory
7. If the company sells multiple products, sales
☛ELEMENTS OF CVP ANALYSIS
mix is constant
1. Sales 8. Technology, as well as productive efficiency,
a. Selling Price is constant
b. Units of Volume 9. The time value of money is ignored
2. Total fixed cost
3. Variable cost per unit ☛BASIC ASSUMPTIONS WITHIN THE RELEVANT
4. Sales mix RANGE
☛APPLICATIONS OF CVP ANALYSIS Linearity – the behaviour of sales and costs is linear.
Planning and decision-making, which may involve Behaviour of sales, costs and expenses:
choosing the:
 Sales – it changes directly in relation to the
1. Type of product to produce and sell; level of units sold.
2. Pricing policy to follow;  Fixed costs – total fixed cost is constant
3. Marketing strategy to use; and without regard to the change in the level of
4. Type of productive facilities to acquire units of production and sales; unit fixed
cost changes
☛INHERENT SIMPLIFYING ASSUMPTIONS OF CVP
 Variable costs – total variable costs change
ANALYSIS
in direct proportion with the level of units
1. All costs are classifiable as either variable or produced and sold; unit variable cost is
fixed constant
2. Cost and revenue relationships are
Selling price – assumed to be constant
predictable and linear over a relevant range
of activity and a specified period of time WIP inventory – disregarded, there is no WIP
3. Total variable costs change directly with the
inventory
cost driver, but variable costs per unit are
constant over the relevant range FG inventory – no change in the FG inventory
Products and sales mix:

-There is only one product, or
1 Management Advisory Services (MAS) Committee : Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark
Confidente; Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay
Labasan
Adviser: Mary Queen Ramos, CPA
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-If there are 2 or more products produced
and sold, the sales mix is assumed to be constant
FORMULAS USED IN CVP ANALYSIS
Contribution Margin
Sales – Variable costs
CM = Sales x CMR
CM = Fixed costs + IBIT
CM = Quantity sold x UCM
CMR
CMR = 100% -VCRatio
CMR = UCM / USP
CMR = ∆EBIT / ∆Sales (if FC
remains the same)
CMR = CM / Sales
CMR = NPR / MSR
UCM
UCM = USP – UVC
UCM = FC / BEP (units)
UCM = CM / Quantity sold
Profit
Profit = CM – Fixed costs
Profit = Sales x MSRatio x
CMRatio
Profit = Sales x NPRatio
∆ Profit = ∆CM - ↑ in FC
∆ Profit = ∆CM + ↓ in FC
BEP
BEP (units) = FC / UCMargin
BEP (pesos) = FC / CMRatio
Comp. BEP (units) = FC / Average UCM
Comp. BEP (pesos) = FC / Average CMR
BEP (units) = Actual sales x (1 –
MSRatio)
At BEP: Profit (loss) = 0
Sales = Total cost
CM = Total fixed cost
Fixed Cost
FC = CM (at BEP)
FC = CM= Profit
FC = BEP (units) x UCM
VCRatio
VCRatio = VC / Sales
VCRatio = UVC / USP
VCRatio = 100% -CMR
VCRatio = ∆Costs / ∆Sales
Labasan
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VCRatio = (∆Costs - ↑ in FC) /
∆Sales
VCRatio = (∆Costs + ↓ in FC) /
∆Sales
Multiple-Product/ Service Break-even Calculations
where: BEPP= Break-even Point in Pesos

BEPP= FC/WaCMR
WaCMR = Weighted Average Contribution Margin Ratio
WaCMR= CMR(Product 1) x SMRP CMR= Contribution Margin Ratio per Product

+ CMR(Product 2) x SMRP…
SMRP= Total Sales in Pesos of a Single Product

Total Sales in Pesos SMRP= Peso Sales Mix Ratio
where: BEPU = Break-even Point in Units

BEPU= FC/WaUCM WaUCM= Weighted Average Unit Contribution Margin
WaUCM = UCM(Product 1) x SMRU

UCM= Unit Contribution Margin per Product
+ UCM(Product 2) x SMRU….
SMRU= Total Sales in Units of a Single Product

Total Sales in Units SMRU = Unit Sales mix ratio
RISKS AND UNCERTAINTY:
☛MARGIN OF SAFETY
 indicates the amount by which actual or planned sales may be reduced without incurring a loss. It is the
difference between actual or planned sales volume and break even sales
☛OPERATING LEVERAGE
 a measure of extent to which fixed costs are being used in an organization. The greater the fixed costs in
relation to variable cost, the greater is the operating leverage available and the greater is the sensitivity of
income to changes in sales.
☛DEGREE OF OPERATING LEVERAGE (DOL)
Labasan
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 a measure of the sensitivity of profit changes to changes in sales volume. DOL measures the percentage of
change in profit that results from a percentage of change in sales
Margin of Safety
MS = Actual sales – Actual break- where:
even sales
MS = Budgeted sales – Budgeted MS= margin of Safety
break-even sales MSR= Margin of Safety Ratio
MS = Sales x MSRatio NPR= Net Profit Ratio
MSR = MS / Actual (or Budgeted) CM/R= Contribution Margin/Ratio
sales BE= Break-even
MSR = NPR / CMR
USP= Unit Selling Price
MSR = [1 – (BESales / Actual Sales)]
DOL= Degree of Operating Leverage
NPRatio
NPRatio = Unit Profit Margin / USP EBIT= Earnings Before Interests and
NPRatio = MSR x CMR Taxes
Degree of operating leverage
DOL = CM/ EBIT
DOL = %∆ in EBIT / % ∆in Sales
☛SENSITIVITY ANALYSIS
 a “what-if” technique that examines the impact of changes on an answer. For example,
computer spreadsheets are used to analyze changes in prices, variable costs, and fixed costs on
expected profits.
COMPREHENSIVE PROBLEM: c. Calculate the dollar break-even point in

number of plant stands
Farm Land makes small plant stands that sell for P25 d. Determine Farm Land’s margin of safety in
each. The company’s annual level of production and units, in sales dollars, and as a percentage
sales is 120,000 units. In addition to P430,500 of e. Compute the company’s degree of
fixed manufacturing overhead and P159, 050 of fixed operating leverage. If the sales increase by
administrative expenses, the following per-unit costs 25%, by what percentage will before-tax
have been determined for each plant stand. income increase?
f. How many plant stands must the company
Direct Material P 6.00 sell to earn P999,450 in before income tax?
Direct Labor 3.00 g. If the company wants to earn P675,800
Variable Manufacturing 0.80 after tax and is subject to a 20% tax rate,
Overhead how many units must be sold?
Variable Selling Expense 2.20 h. How many plant stands must be sold to
Total Variable Cost P 12.00
break-even if Farm Land’s fixed
Required:
manufacturing cost increases by P7,865?
a. Calculate the unit CM in dollars and the CM
Solution:
ratio for the plant stand
b. Determine the break-even point in number
a. CM = SP – VC = P25 – P12 = P13 per unit
of plant stands CM% = CM ÷ SP = P13 ÷ P25 = 52%
Labasan
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b. BEP = FC ÷ CM = P589,550 ÷ P13 = 45,350 f. P13X = P589,550 + P996,450
plant stands X = P1,586, 000 ÷ P13
c. BEP = FC ÷ CM% = P589,550 ÷ 0.52 = X = 122, 000 plant stands
P1,133,750 plant stands g. PBT = PAT ÷ (1 – tax rate) = P657, 800 ÷ (1 –
d. MSunits = Current unit Sales – BEP units 0.20) = P657, 800 ÷ 0.80 = P822, 250
sales = 120,000 – 45,350 = 74,650 plant P13X = P589, 550 + P822, 250
X = P1,411,800 ÷ P13
stands
X = 108,600 plant stands
MSPesos = Current sales in pesos – BEP
h. X = Increase in FC ÷ CM
sales in pesos = P3,000,000 – P1,133,750 = X = P7,865 ÷ P13
P1, 866,250 X = 605 units over BEP
MS% = MS in units ÷ Current units sales = New BEP = 45, 350 + 605 = 45, 955 plant
74,650 ÷ 120,000 = 62% stands
e. DOL = Current CM ÷ Current Pre-tax Income
= P1, 560,000 ÷ P970,450 = 1.61
Increase in Income = DOL x % Increase in
Sales = 1.61 x 0.25 = 40.25 percent
Labasan

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UNIVERSITY OF SAINT LOUIS-TUGUEGARAO

School of Business Administration and Accountancy, 2013-2014

Products and sales mix:

Multiple-Product/ Service Break-even Calculations

where: BEPP= Break-even Point in Pesos

WaCMR= CMR(Product 1) x SMRP CMR= Contribution Margin Ratio per Product

SMRP= Total Sales in Pesos of a Single Product

where: BEPU = Break-even Point in Units

WaUCM = UCM(Product 1) x SMRU

SMRU= Total Sales in Units of a Single Product

RISKS AND UNCERTAINTY:

☛DEGREE OF OPERATING LEVERAGE (DOL)

COMPREHENSIVE PROBLEM: c. Calculate the dollar break-even point in

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