Accounting For Managers: Prof. Dr. Mohamed Youssef

Accounting for managers
Prof. Dr. Mohamed Youssef
Chapter 1 Introduction:
x Accounting System
x Cost Concept
x Cost Driver
Chapter 2 Cost Behavior: (L.O 1-2-4-5)

x Variable And Fixed Costs
x Cost Volume Analysis
x Sales Mix
Chapter 5 Relevant Information with Focus on Pricing: (L.O 1-3-4-7-8)

x Special Sales Orders
x Limiting Factor
x Delete Or Continue
x Pricing Discussion (Cost Plus – Target Cost)
Chapter 6 Relevant Information with Focus on Operational: (L.O 3-4)

x Limiting Factor
x Delete Or Continue
Chapter 3 Cost Function: (L.O 2-4)

x Variable Cost
x Fixed Cost
x Mixed Cost
Chapter 7 Master Budget: (L.O All)

x Budgetary Income Statement
x Operating Budget
x Financial Budget (Budgetary Balance Sheet).
Chapter 11 Capital Budget: (L.O All)

x Accounting Rate Of Return
x Payback
x Net Present Value
x Internal Rate Of Return
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Chapter 1 Introduction:
Accounting System:
Financial Accounting Management Accounting
1- Financial Accounting System 2-Cost Accounting System 3-Management Accounting System
External use “stack holders” Internal use “managers” Internal use “managers”
100% actual 96% Actual 100% Estimated
100% total 100% details 100% details
Use GAAP “General Accept
Accounting Principal “
Financial accounting concerning with:

1. Concern with total rather than details.
2. Historical rather than estimated figure.
3. Recording rather than analysis the even.
4. Annually rather than daily or weekly results.
Cost Concept:
1-$
Cost
2-Stander 3- Consumption
1- Monetary measure (EGP, USD, EUR).

2- Direct material, direct labor and overhead (should be used).
3- For reducing specific product according to stander (Kg.,…).
Example1: 1000Kg*6$=6000$ Æ inventory (assets)
Example2: 700Kg*6$=4200$
600Kg*6$=3600$ Ægood (Profit)
100Kg*6$=600$ Æwest (Loss)
@Macro level: Land – lobar – capital.
@Micro level: Direct material – direct labor – overhead.
Cost Driver:
Any factor affecting total cost.
Example: material per unit 4$- F $
Cost driver Cost behavior
Volume Total cost
100 unit 400$
500 unit 2000$
6000 unit 24000$
Activity Total $
Independent variable dependent variable
Volume X
Y=F(X)
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Chapter 2 Cost Behavior: (L.O 1-5)
Variable Cost and Fixed Cost:
Variable Cost (V.C)
Direct Material
Direct Labor
Total variable cost change in direct portion with change in cost drive activity while V.C per unit remain constant
unless there is increase or decrease in cost per unit.
Example:
$
Units Cost Drive Total Variable Cost Variable Cost Per Unit
1 5$ 5$ Total V.C
2 10$ 5$
3 15$ 5$
4 20$ 5$ V.C per unit
5 25$ 5$
100 500$ 5$
0 0 0 Units
Fixed Cost (F.C)

Overhead (Rent, Salary, Dep.,…).
Total F.C unchanged regardless change in cost drive activity while F.C per unit changes as volume change.
Example: rent per month 1000$

Units Cost Drive Total Fixed Cost Variable Cost Per Unit $
1 1000$ 1000$
2 1000$ 500$
3 1000$ 333.31$
4 1000$ 250$ FC
5 1000$ 200$
F.C per unit
1000 1000$ 1$
0 1000$ 1000$ Units
Cost Behavior
Cost Category Total $ Per Unit
Variable Cost - VC Change when unit change *Constant
Fixed Cost - FC *Constant Change when unit change
* We use this figure for estimated and budget

Actual Budget Notes
Year 2014 2015
UNITS 2000 *5000 *MAX Units
DM 5$ 5$
VC
DL 6$ 6$
RENT 7$ 2.8$ Cost Saving
FC
DEP. 4$ 1.6$ Cost Saving
Total cost per unit 22$ 15.6$ Cost Saving
TOTAL RENT @2014 =2000*7$=14000$

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TOTAL Dep. @2014 =2000*4$=8000$

Depreciation vs. Amortization
Tangible assets in-Tangible assets
Cost Behavior
Cost Category Total $ Per Unit
Variable Cost - VC Change when unit change *Constant
Fixed Cost - FC *Constant Change when unit change
* We use this figure for estimated and budget
Example for Relevant Range:

Cost drive
Cost behavior 100 units 2000 units 4000 units (MAX) Notes
TOTAL VC 5000$ ?(5000/100)=5*2000=10000$ ?(5000/100)=5*4000=20000$ Change when unit change
TOTAL FC 4000$ ?4000$ ?4000$ Constant
TOTAL COST ?(5000$+4000)=9000$ ?(10000$+4000$)=14000$ ?(20000$+4000$)=24000$ Change when unit change
VC PER UNIT ?(5000$/100)=5$ ?(10000$/2000)=5$ ?(20000$/4000)=5$ Constant
FC PER UNIT ?(4000$/100)=4$ ?(4000$/2000)=2$ ?(4000$/4000)=1$ Change when unit change
TOTAL COST PER UNIT ?(5$+4$)=9$(MAX) ?(5$+2$)=7$ ?(5$+1$)=6$(MIN) Change when unit change
x Revenue (R)
x Net interest income (NII)
x Net banking income (NBI)
$ Supervisor
Salary $
2 300000 VC
260000
1 260000
130000 130000 FC
1000
Emp. / Bus Numbers of Works Emp. / Salary

0 50 100 0 20 40 60 0
Relevant Range Step cost Mixed Cost
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Break-Even Point:
Absorption Approach
(Cost Functions Analyses)
Use for Discloser
x Manufacturing Cost 380$

Income statement x Marketing Cost 120$
Sales 1000$ x Admin Cost 100$
Less All cost (700$)
Operating Income (OI) 300$ x Fixed Cost 300$
x Variable Cost 400$
Contribution Approach
(Cost Behavior Analysis)
Use for planning or budgeting
Absorption Approach
Gross Profit – Income Statement
Sales (Q*USP)(800 unit *120$) 96000$ You have this information:
Less MCOGS?? (48000$) x Production unit 1000 unit.
_____________________________ _______ x Sale Unit 800 unit.
Gross Profit (GP)?? 48000$ x Unit Selling Price 120$.
Less All operating cost x Manufacturing Cost 60000$.
x Market Cost 25000$ x Market Cost 25000$.
x Admin Cost 15000$ (40000$) x Admin Cost 15000$.
_____________________________ _______ *Q= Sale Unit
Target Operating Income (TOI)?? 8000$ **USP = Unit Selling Price
============================= ======== ***MCOGS = Manufacturing Cost Of Goods Sold
x End inventory unit = production unit – sale unit Æ(1000-800) =200 unit.
x Manufacturing cost per unit = Manufacturing Cost / Production unit Æ (60000$/1000unit) =60$.
x Manufacturing Cost of Goods Sold (MCOGS) = Manufacturing cost per unit* Sale Unit Æ(60$*800UNIT)
=48000$. (Income Statement).
x Cost of ending inventory= End inventory unit* Manufacturing cost per unit Æ(200unit*60$) =1200$. (Balance
sheet).
x Gross profit(GP) =Sales - Manufacturing Cost Of Goods SoldÆ(96000$-48000$)=48000$
x Operating Income (OI) = Gross profit - All operating cost Æ (48000$-40000$) =8000$.
NOTE:
Profit = margin = income = earning
EBIT =Earnings Before interest and tax
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Contribution Margin – Income Statement
Æ (500unit *20$)??
Sales (3-Q??* Unit Selling Price)Æ 10000$ You have this information:
Less All Variable Cost of sales x Unit Selling Price (USP) 20$.
x Manufacturing Cost 9$ x Manufacturing Cost per unit sales 9$.
x Marketing and admin Cost 3$ (6000$) x Marketing and admin cost per unit sales 3$
1-Unit Variable Cost (UVC)Æ Æ (9$+3$)=12$ x Market Cost 2500$.
2-Unit Contribution Margin (UCM) Æ(20$-12$)=8$ x Admin Cost 1500$.
________________________________________________ ______
4-Contribution Margin (CM)Æ Æ(Q* U CM) 500unit *8$(UCM)?? 4000$
Less All Fixed cost
x Market Cost 2500$
x Admin Cost 1500$
________________________________________________ (4000$)
5-Operating Income (OI)?? ZERO
================================================ =======
Sales – Total Cost = ZERO

(Unit* Unit Selling Price) - (Variable cost +Fixed Cost) =ZERO
(Q* Unit Selling Price (USP)) – ((Q* Unit Variable Cost (UVC)) + Total Fixed Cost) = ZERO
(Q*20$) – ((Q*(3$+9$)) + (2500+1500) =ZERO
Q = 500 unit.
OR
We can calculate the unit using this formula
Q = Fixed Cost (FC)/ Unit Contribution Margin (UCM)
Q=4000$/(20$-12$)=500unit
In this case it called Brake Even Point (BEP) which is mean by using this number of units no profit or loss .
MAX C – Best Case Scenario

CAP
o nt
oin
nt (B
Brake Even Point ((BEP)
BEP)) = FFixed Cost (FC)/ Unit Contribution Margin (UCM)
MIN F
FLOOR – Worst Case Scenario
Example:
Brake Even Point (BEP) = Fixed Cost (FC)/ Unit Contribution Margin (UCM)
You have this information:
= Fixed Cost (FC)/( Unit Selling Price (USP)- Unit Variable Cost (UVC))
x Unit Selling Price (USP) 10$.
=9000$/ (10$-7$) x Unit Variable Cost (UVC)7$.
=3000 unit. -- Brake Even Point x Fixed cost 9000$
If increase 20% in Unit Selling Price (USP) and fixed cost 1000$. Calculate how many units we can reach
=9000$+1000$/ ((10$+2%)-7$) the Brake Even Point (BEP)?? And what if
increase 20% in Unit Selling Price (USP)
=5000 unit. -- Best case scenario
and fixed cost 1000$.
Brake Even Point roles:

x @ Brake Even Point (BEP) ÆContribution Margin (CM) is Variable = Fixed Cost (FC) is Constant
x @ Brake Even Point (BEP) ÆUnit Contribution Margin (UCM) is Constant=Unit Fixed Cost (UFC) is Variable
x Above the level of Brake Even Point (BEP) Æ Contribution Margin (CM) = Operating Income (OI)
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Brake Even Point $:
UVC%=12$/20$=60% UCM%=8$/20$=40%
Per 1$ of Sales
100%
Unit Sales Price

(USP)
20$
Per Unit
UVC=12$ UCM=8$
x Unit Contribution Margin (UCM)=Unit Sales Price (USP)-Unit Variable Cost (UVC)
x Contribution Margin (UCM %) = Unit Contribution Margin (UCM)/Unit Sales Price(USP) .
x Brake Even Point (BEP) = Fixed Cost (FC)/ Unit Contribution Margin (UCM)
x Brake Even Point $(BEP$) = Fixed Cost (FC)/ Contribution Margin (UCM%)
x =4000$/40%=1000$
A=SALES
B=FIXED COST
C=VARIABLE COST
D=BREAK EVEN POINT
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Cost volume profit (CVP) analysis:
Study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit).
Per Unit % of Sales

Unit selling price (USP) $1.50 100%
Less Unit Variable cost (UVC) 1.20 80%
Unit Contribution Margin (UCM) $ .30 (UCM %) 20%
Monthly fixed expenses:
Rent $3,000
Wages for replenishing and
Servicing 13,500
Other fixed expenses 1,500
Total fixed expenses per month $18,000
x Unit Contribution Margin (UCM)=Unit Sales Price (USP)-Unit Variable Cost (UVC)
x Contribution Margin (UCM %) = Unit Contribution Margin (UCM)/Unit Sales Price(USP) .
x Brake Even Point (BEP) = Fixed Cost (FC)/ Unit Contribution Margin (UCM)
x Brake Even Point $(BEP$) = Fixed Cost (FC)/ Contribution Margin (UCM%)
Brake Even Point (BEP) = Fixed Cost (FC)/ Unit Contribution Margin (UCM)
BEP=18000$/,30$=60000UNIT .
Brake Even Point $(BEP$) = Fixed Cost (FC)/ Unit Contribution Margin% (UCM%)
BEP$=18000$/.20=90000$
OR
Brake Even Point $(BEP$) = Brake Even Point (BEP) * Unit selling price(USP)
BEP$=60000UNIT*1.5$=90000$
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Target Operating Income:
Target Net Income (TNI) =Target Sales –Variable Cost – Fixed Cost
Unites Target Sales (UTS) = ( Fixed Cost + Target net income (TNI))/Unit Contribution Margin (UCM)
Example 1:
Æ (500unit *20$)
Sales (Q* Unit Selling Price)Æ 10000$ You have this information:
x Marketing and admin Cost 3$ (6000$) x Marketing and admin cost per unit sales 3$
Unit Variable Cost (UVC)Æ Æ (9$+3$)=12$ x Market Cost 2500$.
Unit Contribution Margin (UCM) Æ(20$-12$)=8$ x Admin Cost 1500$.
Contribution Margin (CM)Æ Æ(Q* Unit Contribution x TAX 20%
Margin) 500unit *8$(UCM) 4000$ Calculate the target operating income and
Less All Fixed cost target net income.
x Market Cost 2500$
x Admin Cost 1500$ (4000$)
_____________________________ _______
Target Operating Income (TOI) ZERO
Less TAX 20% ZERO
_____________________________ _______
Target Net Income (TNI) ZERO
========================================== =======
Example 2:
500 unit 200 unit
Æ (500unit *20$)
Sales (Q* Unit Selling Price)Æ 10000$ Zero You have this information:
x Marketing and admin Cost 3$ (6000$) Zero x Marketing and admin cost per unit
Unit Variable Cost (UVC)Æ Æ (9$+3$)=12$ sales 3$
Unit Contribution Margin (UCM) Æ(20$-12$)=8$ x Market Cost 2500$.
_____________________________ _______ _______ x Admin Cost 1500$.
Contribution Margin (CM)Æ Æ(Q* UCM) 500unit *8$ 4000$ 1600$ x TAX 20%
Less All Fixed cost If the unit increase to 700 unit
x Market Cost 2500$ calculate the (TNI)
x Admin Cost 1500$ (4000$) Zero
_____________________________ _______ _______
Target Operating Income (TOI)= (200)*8$ Zero 1600$
Less TAX 20%=1600$*.20 Zero (320$)
_____________________________ _______ _______
Target Net Income (TNI) Zero 1280$
========================================== ======= =======
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Example 3:
If we need to know how many units we need to achieve target operating income:
Target Operating Income (TOI) = Target Net Income (TNI) / (1-Tax %)

TOI=1280$/ (1-.2) =1600$
Target Operating Income per Units (Q) = (All Fixed cost + Target Operating Income (TOI))/ Unit Contribution Margin
(UCM)
Target Operating Income per Units (Q) = (4000$+1600$)/8$=700unit
Unit Contribution Margin %(UCM%)= Unit Contribution Margin (UCM)/Unit sales price (USP)
Unit Contribution Margin %(UCM%)=8$/20$=40%
Target Operating Income per $=(All Fixed cost + Target Operating Income (TOI))/ Contribution Margin% (CM%)
Target Operating Income per $=(4000$+1600$)/.4
Target Operating Income per $=14000$
Type of taxes:
x Corporate income tax
x Personal income tax
x Sales tax
x Salary tax
x Federal income tax
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Non Profit Applications:
Budget = Variable cost + Fixed Cost
Budget = (Units (Q)*Unit Variable Cost (UVC)) +Fixed Cost (FC)
Example:
If a city has a 100000$ budget - variable cost per 400$ per patient – fixed cost 60000$ in relevant range of 50 to
150 patients.
Relevant range
50 100 150
1- How much numbers of patients you can serve??

Budget = (units*Unit Variable Cost) +fixed cost
100000$=(Q*400$)+60000$
Q=(100000$-60000$)/400$
Q=100Patiens
2- Total cost per patient??

Total cost per patient= budget/Q
=100000$/100=1000$
3- How much budget if we need to support 150 patients ??

Budget= (150-100)*400$+100000$
Budget =120000$
Cost per patient =120000$/150=800$
4- If we cut the budget 10% how many patients can it serve ??

100000$-10000$=(Q*400$)+60000$
Q=30000$/400$
Q=75patient
Cost per patient =90000$/75=1200$
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Operating leverage:
Firm ration of fixed cost to variable cost
Highly leverage firms have high fixed costs and low variable costs . a small change in sales volume = a large change
in net income .
Example 1:
Company X Company Y
Monthly salary 10000$ 10000$
Less monthly expenses
Fixed cost (6000$) (2000$)
Variable cost (1000$) (5000$)
Monthly saving cash 3000$ 3000$
600% 40%
Operating leverage (FC/VC)
High Risk Low Risk
Example 2:
Good year Poor year
Company A Company B Company A Company B
Sales(100*10$) 1000$ 1000$ Sales(80*10$) 800$ 800$
Less variable cost Less variable cost
Variable Cost for A 3$ (300$) Variable Cost for A 3$ (300$)
Variable Cost for B 6$ (600$) Variable Cost for B 6$ (600$)
Less Fixed cost Less Fixed cost
Fixed Cost for A 6$ (600$) Fixed Cost for A 6$ (600$)
Fixed Cost for B 3$ (300$) Fixed Cost for B 3$ (300$)
Operating Income (OI) 100$ 100$ Operating Income (OI) (40$) 20$
200% 50%
Operating leverage (OL) Operating leverage (OL)
High Risk Low Risk High Risk Low Risk
Operating Risk:
Risk High Low
Operating leverage (OL) + - (MIN)
Margin Of Safety (MOS) - + (MAX)
Margin Of Safety (MOS) =Unit sales – break even sales
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Contribution Margin and Gross Margin:
The Gross Margin (GM) uses the division on the production or acquisition cost versus selling and administrative
cost dimension.
The Contribution Margin (CM) uses the division based on the variable-cost versus fixed-cost dimension.
Example 1:
Æ (500unit *20$)??
Sales (3-Q??* Unit Selling Price)Æ 10000$
Less All Variable Cost of sales
x Marketing and admin Cost 3$ (6000$)
x Unit Selling Price (USP) 20$.
1-Unit Variable Cost (UVC)Æ Æ (9$+3$)=12$
2-Unit Contribution Margin (UCM) Æ(20$-12$)=8$ x Manufacturing Cost per unit sales 9$.
______ x Marketing and admin cost per unit sales 3$
________________________________________________
x Market Cost 2500$.
4-Contribution Margin (CM)Æ Æ(Q* U CM) 500unit *8$(UCM)?? 4000$
x Admin Cost 1500$.
Less All Fixed cost
x Market Cost 2500$
x Admin Cost 1500$
________________________________________________ (4000$)
5-Operating Income (OI)?? ZERO
================================================ =======
Gross Margin (GM) OR Gross Profit (GP) = Sales Price (SP) - Cost of Goods Sold (COGS)
= Sales Price (SP) – (Variable Cost + Fixed Cost)=
= Sales Price (SP) – ((Manufacturing Cost *unit Sold)+ Market Cost))
Gross Margin (GM) OR Gross Profit (GP) = 10000$-(9$*500unit+2500$)=3000$
Contribution Margin (CM) = Sales Price (SP) –Variable Cost (VC)

=10000$-((9$*500unit)+(3$*500unit))
Contribution Margin (CM) =10000$-6000$=4000$
Example 2:
Unit Unit
Contribution Gross
Margin Margin
Sales 1.5$ 1.50$
Less Total Variable Cost
Cost Of Unit Sold (1.20$) (1.20$)
Unit Contribution Margin .30$
Unit Gross Margin .30$
Example 3:
Unit Unit
Contribution Gross
Margin Margin
Sales 1.5$ 1.50$
Less Total Variable Cost
Cost Of Unit Sold (1.20$) (1.20$)
Variable Cost (.12$)
Unit Contribution Margin .18$
13
Unit Gross Margin .30$

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Sales Mix Analysis:
Sales mix is the relative proportions or combinations of quantities of products that comprise total sales.
If the proportions of the mix change, the cost-volume-profit relationships also change.
Example:
Product A B
Quantity 2unit 8unit x Fixed Cost 64000$
Unit Sales Price (USP) 20$ 15$
Less Unit Variable Cost(UVC) (12$) (15$)
Unit Contribution Margin(UCM) 8$ 3$
Contribution Margin Per MIX (CMPM)= Unit Contribution Margin(UCM)* Quantity for A and B
=(8$*2UNIT)+(3$*8UNIT)=32$
Selling Price per MIX (SPPM) = Unit Sales Price (USP)* Quantity for A and B
=(20$*2unit)+(15$*8unit)=160$
Break-Even Point in Package (BEPP) =Fixed Cost (FC)/ Contribution Margin Per MIX (CMPM)
=64000$/32$=2000Person
Total Unit in Package = Break-Even Point Package (BEPP)* Quantity for A and B
=(2unit*2000)+(8unit*2000)=20000unit
Average Contribution Margin (ACM)= Contribution Margin Per MIX (CMPM)/ Quantity MIX
=32$/ (2+8) =3.2$
Break-Even Point Unit (BEPU)=Fixed Cost(FC)/ Average Contribution Margin(ACM)

=64000$/3.2$=20000unit Product A (2/10)*20000UNIT =4000UNIT
Product B (8/10)*20000UNIT =16000UNIT
Weighted Average Contribution Margin% (WACM %) = Contribution Margin per MIX (CMPM)/ Selling Price per MIX
(SPPM)
=32$/160$=20%
Break-even point $= Break-Even Point Unit (BEPU)* Unit Sales Price (USP) for A and B
= (4000*20$) + (16000*15$) =320000$
OR
Break-even point $= Fixed Cost (FC)/ Weighted Average Contribution Margin% (WACM %)
=64000$/20%=320000$
Example1:
How to use our profitability using this sales mix??
Product A Product B
Units(Q) 8 2
Unit Sales Price(USP) 20$ 15$
Less Unit Variable Cost(UVC) (12$) (13$)
Unit Contribution Margin (UCM) 8$ 2$
Contribution Margin Per MIX (CMPM)= ((A.Q)*(A.UCM))+((B.Q)*(B.UCM)) 68Unit 64Unit 4Unit
Break-Even Point in Package (BEPP) =Fixed Cost (FC)/ Contribution Margin per MIX (CMPM)
14
=64000$/68unit =942unit
Note: any unit above this unit will gain profit.
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Example2:
Which line of this sales mix high profit mix??
Product A Product B Product C Product D Product E
Unit Price 3$ 2$ 9$ 5$ 4$
Sales Mix A 1 2 1 3 3
Sales Mix B 2 5 0 2 1
Sales Mix C 1 0 9 0 0
Sales Mix D 2 5 1 0 2
Sales Mix E 1 3 2 1 3
Total Sales MIX 7 15 13 6 9
Profit MIX 21 30 117 30 36
Example3:
Break-even point for a constant sales mix of 4 units of W for every unit of K.
Need Total unit in package and what if company sells only key cases or sells only wallets??
Product Wallets (W) Key Cases (K) Total
Sales in units 300,000 75,000 375,000
Sales @ $8 and $5 $2,400,000 $375,000 $2,775,000
Less Variable expenses@ $7 and $3 ($2,100,000) ($225,000) ($2,325,000)
Contribution margins @ $1 and $2 $ 300,000 $150,000 $ 450,000
Less Fixed expenses ($ 180,000)
Net income $ 270,000
Product W Product K
Q 300000/75000=4 75000/75000=1
UCM 300000/300000=1 300000/150000=2
CMPM=6$ 4*1=4$ 1*2=2$
BEPP=FC/ CMPM=180000$/6$=30000unit
Product W Product K
=4*30000=120000 =1*30000=30000
Total unit in package =120000+30000=150000 unit
Or
Break-even point for a constant sales mix of 4 units of W for every unit of K.
Sales – variable expense – fixed expenses = zero net income
[$8(4K) + $5(K)] – [$7(4K) + $3(K)] – $180,000 = 0 Î32K + 5K - 28K - 3K - 180,000 = 0
6K = 180,000 Î K = 30,000 and W = 4K = 120,000
Total unit in package = 30,000K + 120,000W = 150,000 total units (K + W).
If the company sells only key cases:

Break-even point = fixed expenses/contribution margin per unit =$180,000 / $2 = 90,000 key cases
If the company sells only wallets:
Break-even point = fixed expenses/contribution margin per unit =$180,000 / $1 = 180,000 wallets
Example4:
Suppose total sales were equal to the budget of 375,000 units. However, Ramos sold only 50,000 key cases And
325,000 wallets. What is net income?
Product Wallets (W) Key Cases (K) Total
Sales in units 325,000 50,000 375,000
15
Sales @ $8 and $5 $2,600,000 $250,000 $2,850,000

Less Variable expenses@ $7 and $3 ($2,275,000) ($150,000) ($2,425,000)
Contribution margins@ $1 and $2 $325,000 $100,000 $425,000
Page
Less Fixed expenses ($180,000)

Net income $245,000
Impact of Income Taxes:
Income taxes do not affect the break-even point. There is no income tax at a level of zero income.
Income taxes affect the calculation of the volume required to achieve a specified after-tax target profit.
Target Operating Income (TOI) = TNI/ (1-TAX RATE)

Target Net Income (TNI) = TOI*(1-TAX RATE)
Example:
500 unit 200 unit
Æ (500unit *20$)
Sales (Q* Unit Selling Price)Æ 10000$ Zero You have this information:
x Marketing and admin Cost 3$ (6000$) Zero x Marketing and admin cost per unit
Unit Variable Cost (UVC)Æ Æ (9$+3$)=12$ sales 3$
Unit Contribution Margin (UCM) Æ(20$-12$)=8$ x Market Cost 2500$.
_____________________________ _______ _______ x Admin Cost 1500$.
Contribution Margin (CM)Æ Æ(Q* UCM) 500unit *8$ 4000$ 1600$ x TAX 20%
Less All Fixed cost If the unit increase to 700 unit
x Market Cost 2500$ calculate the (TNI)
x Admin Cost 1500$ (4000$) Zero
_____________________________ _______ _______
Target Operating Income (TOI)= (200)*8$ Zero 1600$
Less TAX 20%=1600$*.20 Zero (320$)
_____________________________ _______ _______
Target Net Income (TNI) Zero 1280$
========================================== ======= =======
Example 2:
If we need to know how many units we need to achieve target operating income:
Target Operating Income (TOI) = Target Net Income (TNI) / (1-Tax %)

TOI=1280$/ (1-.2) =1600$
Target Operating Income per Units (Q) = (All Fixed cost + Target Operating Income (TOI))/ Unit Contribution Margin
(UCM)
Target Operating Income per Units (Q) = (4000$+1600$)/8$=700unit
Unit Contribution Margin %(UCM%)= Unit Contribution Margin (UCM)/Unit sales price (USP)
Unit Contribution Margin %(UCM%)=8$/20$=40%
Target Operating Income per $=(All Fixed cost + Target Operating Income (TOI))/ Contribution Margin% (CM%)
Target Operating Income per $=(4000$+1600$)/.4
Target Operating Income per $=14000$
16 Page
Chapter 5 - Relevant Information with Focus on Pricing: (L.O 1-3-4-7-8)
Relevant Information for Decision making:
Income statement 1 Income statement 2 Income statement 3

Normal case 200% 300%
Relevant Sales 1000 Sales 2000 Sales 3000
Relevant Less Variable Cost (300) Less Variable Cost (600) Less Variable Cost (900)
Constant Less Fixed Cost (400) Less Fixed Cost (400) Less Fixed Cost (400)
Operating income 300 Operating income 1000 Operating income 1750
**marketing as variable cost can be in-relevant “constant “selling for consumer.
Example:
Selling 40M
Manufacturing cost 30M FC 6M VC 24M DM 14M – DL 6M – OH 4M
Marketing Cost 6M FC 4M VC 2M Operating Cost
Admin Cost 2M FC 1.8M VC 0.2M
Using this information we need to calculate the operating income using Contribution Approach and Absorption
Approach.
Absorption Approach Contribution Approach
Sales 40 Sales 40
Less MCOS (30) Less All Variable Cost (24M+2M+0.2M) (26.2)
Gross profit 10 Contribution Margin 13.8
Less Operating Cost (6M+2M) (8) Less All Fixed Cost (6M+4M+1.8M) (11.8)
Operating Income 2 Operating Income 2
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Spesial Sales Order Work: You have this information:
The special sales order work only when use: x Unit Selling Price (USP) 20$.
1-Total variable cost x Manufacturing Cost per unit sales 9$.
2-manafactoring cost x Marketing and admin cost per unit sales 3$
x Market Cost 1500$.
x Admin Cost 1500$.
Example 1: IF special sales order for 1000 unit @ 15$ did we accept or
Contribution Margin – Income Statement JUN2014
500 1000
Sales (3-Q??* Unit Selling Price)ÆÆ (500unit *20$)?? 10000$ 15000$ 25000$
Less All Variable Cost of sales
x Marketing and admin Cost 3$ (6000$) (12000$) (18000$)
1-Unit Variable Cost (UVC)Æ Æ @500 (9$+3$)=12$
2-Unit Contribution Margin (UCM) Æ
@500(20$-12$)=8$@1000(15$-12$)=3$
_______________________________________________ ______ ______ ______
4-Contribution Margin (CM)Æ Æ(Q* U CM) 4000$ 3000$ 7000$
@500unit *8$ @1000unit *3$
Less All Fixed cost
x Market Cost 1500$
x Admin Cost 1500$
________________________________________________ (3000$) Zero (3000$)
5-Operating Income (OI)?? 1000 3000 4000
================================================ ======= ======= =======
1- If the special sales price greater than or equal the UVC then we accept.
2- Change on OI or change on CM (15-12)*1000=3000$.
3- New OI 1000+3000=4000$
Example 2: You have this information:

1- If the special sales price 10.5$ (greater than or equal ) x Assume the special order sales order price 10.5$
the UVC 9$ then we accept. this dissection has no effect on Marketing &
admin variable cost
2- Change on OI or change on CM (10.5-9)*1000=1500$.
IF special sales order for 1000 unit @ 10.5$ did we accept
3- New OI 1000+1500=2250$
or not??
Example 3: You have this information:

1- If the special sales price 9$ (greater than or equal ) x Assume the special order sales order price 9$
IF special sales order for 1000 unit @ 9$ did we accept or
the UVC 12$ then we reject .
not??
Deletion and addation:
Example:
Product A Product B
Sales 5000 7000 If CM greater than or equal the Avoidable Cost then continue.
Less VC
Le (3000) (4000) And If CM less the Avoidable Cost then delete.
CM 2000 3000
Less FC
Le If we to delete product A. So the Unavoidable Cost
18
x Avoidable Cost (1500) (1000) Will Cary up for product B.

x Unavoidable Cost (1000) (500)
Page
OI (500) 1500 1000

Limiting Factor:
Machine
Macro Level
el capacity 1000 Micro Level
M
Hour.
Demand
mand
and
d Side Supply
ply
p y SSide
Demand
ma
and Limited
d Unlimited Demand L Supply Limit
Limited
700 unit 200unit 500 unit
Example:
Product A Product B
Demand type Limited Unlimited
Demand unit 200 unit 1000 unit
UCM 20$ 5$
Time per unit 2 hour=120 minute 5 Minute
Unit per hour .5 unit 12 unit
Calculate the limited and unlimited demand max profit
CM per hour .5*20=10$ 12*5$=60$
Limited demand max profit =200*10$=2000$
Unlimited demand max profit=1000unit*60$=60000$
Example:
Time 1 Hour 3 Minute 10 Minute 20 Minute 30 Minute
Product A B C D E
UCM 3$ 2$ 10$ 5$ 4$
Which product is limited demand and which is unlimited demand?? Product C
19
Page
Pricing Discussion (Cost plus – Target Cost) :
Contribution Margin – Income Statement JUN2014
Cost plus pricing Target costing
Sales 1000$ *P=**C+MARKUP%.C **P=*C%+PROFIT%
Less All Variable Cost We have 4 method for C : Total cost 900$
x Manufacturing Cost 400$ 1-Manufacturing Variable Cost 400$
x Marketing and admin Cost 200$ 2-Total Variable Cost 600$
3-Total Manufacturing Cost 680$
__________________________________ _(600$)_ 4-Total cost 900$
Contribution Margin (CM) 400$
Less All Fixed cost
x Market Cost 180$
x Admin Cost 120$
__________________________________ (300$)
Operating Income (OI) 100
================================== =======
*Calculated
**Given
MARKUP%=(sales-C)/C
20
Page
Chapter 3 Cost Function: (L.O 2 & L.O 4)
Variable Cost, Fixed Cost, Mixed Cost and other Costs:
Cost Types
Sami Variable Cost Sami Fixed Cost
5% FC & 95% VC 7% VC & 93%FC
Variable Cost Mixed Cost Fixed Cost

100% VC 50% FC & 50% VC 100% FC
Rep. Salary
x Basic Salary 1000$
x Commissions on sales 5%.
x Sales units 500000 unit.
Basic Salary
Calculate total cost / mixed cost 1000
Total costs or mixed Cost = FC +VC Sales

Total costs or mixed Cost =Fixed Cost + (SALES*Commissions %)
Total costs or mixed Cost =1000+(500000*5%) =26000 $
Liner cost (Constant) Nun-Liner cost (Variable)

Y Y
X X
Static formula like profit calculation ÆYt=F (Xt)
Consider X sales and t year
OR
Dynamic formula like Return on Investments Æ YT=F (Xt-3)

21
Consider X investment and t year

Page
Cost Functions :
We will use cost functions often as a planning and control tool. A few reasons why cost functions are important are
listed here:
1. Planning and controlling the activities of an organization require useful and accurate estimates of future fixed
and variable costs.
2. Understanding relationships between costs and their cost drivers allows managers in all types of organizations—
profit seeking, nonprofit, and government—to make better operating, marketing, and production decisions; to
plan and evaluate actions; and to determine appropriate costs for short-run and long-run decisions.
Cost measurement involves estimating or predicting costs as a function of appropriate cost drivers.
Example:
1- Total Variable Cost (DM and DL)=Unit variable cost * units You have this information:
Y=β*X x Unit variable cost 9$.
x Unit sales 2000 unit
Y=9$*2000=18000$ x Rent 12000$
Calculate the flowing:
2- Total Fixed Cost =Rent or Salary or dep. 1- Total Variable cost.
2- Total Fixed cost
Y=α 3- Total Mixed cost.
Y=12000$ 4- Total costs.
3- Total Mixed Cost = Total Fixed Cost+ Total Variable Cost

Y= α+ (β*X) -- α & β called technical Co-affection
Y=12000$+18000$=30000$
4- Total Cost = Total Mixed Cost +Total Fixed Cost+ Total Variable Cost
Y=30000$+12000$+18000$=60000$
2014 2015
Planning Controlling
Budget (Estimated) Compare Actual Vs. Budget (Estimated)
After comparing we get variance
Small Variance Large Variance
Less 5% Higher than 5%
Accepted Not Accepted
Y = Total cost
F = Fixed cost
V = Variable cost per unit
X = Cost-driver activity in number of units
The mixed-cost function is called a linear-cost function
22
Mixed-cost function: Y = F + VX
Page
Developing Cost Functions:
Plausibility: The cost function must be believable
Reliability: A cost function’s estimates of costs at actual levels of activity must reliably conform to
actually observed costs.
Methods of Measuring Cost Functions

1. Engineering analysis
2. Account analysis
3. High-low analysis – we will use only this method
4. Visual-fit analysis
5. Least-squares regression analysis
Example:
Month Maintenance Cost Y Maintenance Hour X 1-Establish the Mixed cost function
Jan 4800$ 1800H
2- Calculate Mixed Cost for May if Maintenance
Feb 4500$ 1500H
Hour 8000H.
March 7700$ 2700H
April 7500$ 3000H
Y
Step 1: Choose lowest and highest cost drive X—Feb and April.
2β
Step 2: Determining the Variable cost per hour (β) α
Level Maintenance Cost Y Maintenance Hour X
3
The Highest 7500$ 3000H
Less The Lowest (4500$) (1500H) X
L 1 H
Change of ∆ 3000$ 1500H
Then Variable Cost per Unit
β = ∆ Maintenance Cost / ∆ Maintenance Hour
β =3000$/1500H=2$ PER HOUR
Step 3: Determining the fixed cost (α)

Using Highest Level Using Lowest Level
Y= α+ (β*X) Y= α+ (β*X)
7500= α+(2*3000) 4500= α+(2*1500)
α =1500$ α =1500$
Step 4: Establish the Mixed cost function

Y= 1500+ (2*X)
Step 5: Mixed Cost for May if Maintenance Hour 8000H.

Y= 1500+ (2*X)
Y= 1500+ (2*8000)
23
Y= 17500$
Page
Chapter 7 Master Budget: (L.O All)
Absorption Approach
Gross Profit – Budget income statement 2015 You have this information:
x Production unit 600 unit.
Sales (Q*USP)(500 unit *20$) -1 10000$
x Sale Unit 500 unit.
Less MCOGS??- 2,3,4,5,6,7 (7500$)
x Unit Selling Price 20$.
_____________________________ _______ x Direct material cost 3600$
Gross Profit (GP)?? 2500$ x Direct labor cost 3000$
Less All operating cost x Overhead cost 2400$
x Market Cost 1300$ -8 x Marketing Cost 1300$.
x Admin Cost 800$ -9 (2100$) x Admin Cost 800$.
_____________________________ _______
Target Operating Income (TOI)?? - 10 400$ *Q= Sale Unit
============================= ======== **USP = Unit Selling Price
***MCOGS = Manufacturing Cost Of Goods Sold
x Total Manufacturing Cost=DM+DL+OH Æ3600$+3000$+2400$=9000$

x Manufacturing cost per unit = Total Manufacturing Cost / Production unit Æ (9000$/600unit) =15$.
x Manufacturing Cost of Goods Sold (MCOGS) = Manufacturing cost per unit* Sale Unit Æ(15$*500UNIT) =7500$.
(Income Statement).
x End inventory unit = production unit – sale unit Æ(600-500) =100 unit.
x Cost of ending inventory= End inventory unit* Manufacturing cost per unit Æ(100unit*15$) =1200$. (Balance
sheet).
24
x Gross profit(GP) =Sales - Manufacturing Cost Of Goods SoldÆ(10000$-7500$)=2500$

x Operating Income (OI) = Gross profit - All operating cost Æ (2500$-2100$) =400$.
Page
Example for Sales Budget:
Chico company estimates that unit sales will be :
10000 units in quarter 1 , 12000 units in quarter 2 , 14000 units n quarter 3 , 15000 units in quarter 4 and
using a sales price of 50$ per unit .
Prepare the sales budget by quarters, for the year ending December 31
Answer:
Quarter Year
Q1 Q2 Q3 Q4 TOTAL
Expected Unit Sales 10000 12000 14000 15000 51000
Unit Selling Price 50$ 50$ 50$ 50$
Total Sales 500000$ 600000$ 700000$ 750000$ 2550000$
Example for Production Budget :

Sales budget data for the Chico company are given in the above example .
Management desire to have an ending finished goods inventory equal 20% of the next quarters expected
unit sales .
Prepare a production budget by quarter for the first 6 months.
Answer :
Begin Inventory + Production = Sales +Ending inventory ÆB+P=S+E
For first 6 months

Q1 Q2 TOTAL
Expected Unit Sales 10000 12000 22000
Add : desired ending finished goods (20% of
12000*20%=2400 14000*20%=2800
next quarters expected unit sales)
Total required units 12400 14800
Less : beginning finished goods inventory
10000*20%=(2000) 12000*20%=(2400)
(20% from each quarters)
Required production units 10400 12400
25
Page
Example for Direct Martial Budget :
Chico company has 1200 pounds of row martials inn December 31 Ending inventory .
required production for January and February as 4000 and 5000 units , respectively three pounds of row
materials as needed for each unit the estimated cost per pound in 5$.
Management desires an ending inventory equal to 10% of next month’s martial requirements .
Prepare the direct materials budget for January .
Answer :
DM Begin Inventory + DM Purchases = DM required for production + DM Ending inventory
JAN FEB
Unit to be Produced 4000 UNIT 5000 UNIT
Direct materials per unit 3P 3P
DM required for production 12000P 15000P
Direct Material Budget

For the month ending January 31
Unit to be Produced 4000 Unit
Direct materials per unit 3P
DM required for production 12000P
Add :Ending Direct material inventory from Feb. (10%*15000P) 1500
Total DM required 13500P
Less : Begging Direct material inventory from Dec. (1200P)
DM purchases 12300P
Cost per pound 5$
Cost of Direct materials purchases 61500$
Example for Direct Labor Budget:

Chico company , units to be produce are 5000 in quarter1 and 6000 in quarter2 . it takes 1.5 hours to
make a finished unit , and the expected hourly wage rate is 10$ per hour .
Prepare a direct labor budget by quarters for the 6 months ending June 30.
Answer :
For first 6 months
Q1 Q2 Total
Unit to be Produced 5000 6000 11000
Direct Labor per unit 1.5H 1.5H 1.5H
Total required DM hours 7500H 9000H 16500H
Direct Labor cost per hour 10$ 10$ 10$
Total Direct Labor cost 75000$ 90000$ 165000$
Note : you can calculate Direct Labor cost by two way :
26
1- Wage rate per hour * Direct Labor hour

Page
2- Wage rate per unit *product unit

Relation between budgetary income statement and cash
budget:
April 2014 April 2014

budgetary income statement Cash budget
Sales 10000
00 Begging cash balance
Be 5000
Less COGS (7000)
0
00) Add
Ad d Cash Receipts 17000
Gross Profit 3000
0 Less cash Payment
LLes (19000)
Less all operating costs End cash balance
EEn 3000
(market cost + admin cost) (2000)
00)
Operating income 10000
Less TAX 20% (200)
Net profit 800
Note :
Cash receipts = Cash in-flow = cash collection
And Cash payment = cash out-flow = cash discernment
27
Page
Example 1:
10000 15000 20000 10000 You have this information:
Sales
JAN FEB MAR APR Payment terms as flow: 40% - 30% - 20% - 10%
JAN 4000 3000 2000 1000 For April we need to know:
FEB 0 6000 6000 2000 1- total collection cash from receivables
MAR 0 0 8000 3000 2- total cash collected
APR 0 0 0 4000 3- cash sales of month
1- total collection cash from receivables=(1000+2000+3000)=6000$

2- total cash collected =(1000+2000+3000+4000)=10000$
3- cash sales of month=4000$
Example 2 :
Month Sa
Sales Notes You have this information:
JAN 10000
10 x Payment terms as flow : 40% - 30% - 20% - 10%
FEB 15000
15 x End of May account receivable 50000$
MAR 20000
20 We need to know :
1- How much total cash collection receipts?
APR 10000 40% cash and 60% non-cash
10
2- How much April cash sales ?
40%
% - 30% - 20% - 10%
3- How much Collection of account receivable
related to previous months ( credit sales)?
4- How much account receivable at end of April ?
5- How much ending balance account receivable at
end of April?
1- How much total cash collection receipts?
6- Assume *markup%=25% and management
=(10000*40%)+(20000*30%)+(15000*20%)+(10000*10%)
desire to have end finished goods inventory 20%
=4000+6000+3000+1000=14000$. of next month expected as sales.
Calculate cost of ending inventory at end of
2- How much April cash sales ? march?
=10000*40%=4000$ *profit calculated as percentage of sales.
3- How much Collection of account receivable related to previous months ( credit sales)?
=(20000*30%)+(15000*20%)+(10000*10%)
=10000$
4- How much new account receivable for April ?

=10000*60%=6000$
5- How much ending balance account receivable at end of April ?

= Begging balance +new account receivable – collection receipts
=50000+6000-10000=46000$
6- Calculate cost of ending inventory at end of march ?

=20%*April cost of goods sold *cost of goods sold per $
28
=20%*10000*(1-.25)=1500$
Page
Example 3 :
Month Cash Sales Credit sales
C You have this information:
May 2000 5000 x Payment terms as flow : 50% - 40% - 5%
June 4000 3000 we need to know :
July 3000 2000 1- How much July total collection ?
2- How much cash sales as end of July ?
50
50%
0% - 40% - 5%
3- How much collection of account receivable at
end of July ?
4- How much uncollected balance of account
receivable at end of July ?
1- How much July total collection ?
=3000+(2000*50%)+(3000*40%)+(5000*5%)
=3000+1000+1200+250=5450$
2- How much cash sales as end of July ?

=3000+(2000*50%)
=3000+1000=4000$
3- How much collection of account receivable at end of July ?

=(3000*40%)+(5000*5%)
=1200+250=1450$
4- How much uncollected balance of account receivable at end of July ?

May = zero
June =300(10%*3000)
July = 1000(50%*2000)
=1300$
Example 4:
April 2014 April 2014
budgetary income statement Cash budget
Sales 10000 Begging cash balance 0
Less COGS (9000) Add Cash Receipts CR 11000
Gross Profit 1000 Less Cash Payment CP (13000)
Less all operating costs End cash balance (2000)
(market cost + admin cost) (2000)
Operating income 1000 In case CR Less CP then this
Less interest expense10% (200) means Financial GAP cover by
Operating income after interest 800 bank loan with interest 10%.
Less TAX 20% (160)
Net profit 640
29 Page
Relationship between Net Cash Available and Ending Cash
Balance and how it contral by Disier cash:
Case 1:
April Cash Budget
Begging cash balance B 5000 1- TCA=B+CR
Add Cash Receipts CR 17000 2- NCA=TCA-CP
Total cash available TCA 22000 3- E=NCA + Barrowing - Payments
Less cash Payment CP (19000)
Net Cash Available NCA 3000 The minimum desire ending cash required by management Î D =2500$
Ending Cash Balance E 3000
If NCA greater than D then no need for financing
So E=NCA=3000
Available cash balance =B-DÎ Î5000-2500=2500$
Cash needed = CP+DÎ19000+2500=21500$
Case 2:
April Cash Budget
Add Borrowing 4400
If NCA Less than D then we have finance GAP and need for financing from bank
So Financing GAP=NCA-D Î3000-7400= (4400)
In this case Financing GAP= Borrowing=4400 loan from bank
So E=NCA+ Borrowing Æ3000+4400=7400
Case3:
April Cash Budget
Add Borrowing 10000 And there is Repayment =5600$
Less repayment (5600)
If NCA Less than D then we have finance GAP and need for financing from bank plus Repayment
So Financing GAP=NCA-D Î3000-7400= (4400).
Borrowing = Financing GAP+ RepaymentÎ4400+5600=10000$
30
So E=NCA+ Borrowing - Repayment Æ3000+10000-5600=7400

Page
Page
31
Year Cash inflow Cash outflow Net cash Depreciation Operating
flow NCF income
(sales expected)
investment 0 Zero (4500$) (4500$) Today cash Zero Zero
balance outflow
sheet
Operation 1 9000$ (7000$) 2000$ 7500$ (1500$) 500$
And balance 2 11000$ (8500$) 2500$ future cash (1500$) 1000$
sheet 3 14000$ (11000$) 3000$ flow from (1500$) 1500$
operation
Source Marketing study Technical study *3000$ **3000$
*TOTAL Net cash flow at the end of project life / annual cash saving / cash inflow from operation
** TOTAL operating income at end of project time.
It must the total net cash flow = total operating income.
Year 1 income statement

Sales 9000$ Cash in (!)
Less all expense
x Cash expense (7000$) Cash out(2) (!) – (2) = NCF
x Non-cash expense Depreciation (1500$) Dep.
Operating income 500$ OI
OI=TNCF-Dep.
TNCF=OI + Dep.
Accounting Rate-of-Return Model:

Return on investment (annually) = profit / investment
**Accounting Rate of Return (ARR) =Average annual operating income / investment (initial investment
for year zero)
=3000$/3/4500$ =22%
** From this formula If the ARR is greater than or equal the discount rate then the project accepted.
We have 3 ways to get Average Annual Operating Income

Average annual operating income Average annual operating income Average annual operating income
= TOTAL Operating = TOTAL Net Cash Flow at the = (TOTAL Net Cash Flow at the
Income/number of years end of project life / number of end of project life- Depreciation)
years / number of years
32
Page
EXAMPLE:
Assume the following:
x Investment is $5,827.
x Useful life is four years.
x Estimated disposal value is zero.
x Expected annual cash inflow from operations is $2,000.
Calculate Accounting Rate-of-Return
OI=NCF-DEP.
=2000-(5827/4)
=2000-1457
=543
ARR= OI/investment
=543/ 5827=9.3%
33
Page

Accounting For Managers: Prof. Dr. Mohamed Youssef

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Accounting For Managers: Prof. Dr. Mohamed Youssef

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Accounting for managers

Chapter 2 Cost Behavior: (L.O 1-2-4-5)

Chapter 5 Relevant Information with Focus on Pricing: (L.O 1-3-4-7-8)

Chapter 6 Relevant Information with Focus on Operational: (L.O 3-4)

Chapter 3 Cost Function: (L.O 2-4)

Chapter 7 Master Budget: (L.O All)

Chapter 11 Capital Budget: (L.O All)

Financial accounting concerning with:

1- Monetary measure (EGP, USD, EUR).

Fixed Cost (F.C)

Example: rent per month 1000$

* We use this figure for estimated and budget

TOTAL RENT @2014 =2000*7$=14000$

TOTAL Dep. @2014 =2000*4$=8000$

Tangible assets in-Tangible assets

Example for Relevant Range:

Emp. / Bus Numbers of Works Emp. / Salary

Relevant Range Step cost Mixed Cost

x Manufacturing Cost 380$

Sales – Total Cost = ZERO

MAX C – Best Case Scenario

Brake Even Point roles:

Unit Sales Price

Per Unit % of Sales

Target Operating Income (TOI) = Target Net Income (TNI) / (1-Tax %)

1- How much numbers of patients you can serve??

2- Total cost per patient??

3- How much budget if we need to support 150 patients ??

4- If we cut the budget 10% how many patients can it serve ??

Margin Of Safety (MOS) =Unit sales – break even sales

Contribution Margin (CM) = Sales Price (SP) –Variable Cost (VC)

Unit Gross Margin .30$

Break-Even Point Unit (BEPU)=Fixed Cost(FC)/ Average Contribution Margin(ACM)

If the company sells only key cases:

Sales @ $8 and $5 $2,600,000 $250,000 $2,850,000

Less Fixed expenses ($180,000)

Target Operating Income (TOI) = TNI/ (1-TAX RATE)

Target Operating Income (TOI) = Target Net Income (TNI) / (1-Tax %)

Income statement 1 Income statement 2 Income statement 3

Example 2: You have this information:

Example 3: You have this information:

x Avoidable Cost (1500) (1000) Will Cary up for product B.

OI (500) 1500 1000

Variable Cost Mixed Cost Fixed Cost

Total costs or mixed Cost = FC +VC Sales

Liner cost (Constant) Nun-Liner cost (Variable)

Static formula like profit calculation ÆYt=F (Xt)

Consider X sales and t year

Dynamic formula like Return on Investments Æ YT=F (Xt-3)

Consider X investment and t year

3- Total Mixed Cost = Total Fixed Cost+ Total Variable Cost

Methods of Measuring Cost Functions

Step 3: Determining the fixed cost (α)

Step 4: Establish the Mixed cost function

Step 5: Mixed Cost for May if Maintenance Hour 8000H.

x Total Manufacturing Cost=DM+DL+OH Æ3600$+3000$+2400$=9000$

x Gross profit(GP) =Sales - Manufacturing Cost Of Goods SoldÆ(10000$-7500$)=2500$

Example for Production Budget :

For first 6 months

Direct Material Budget

Example for Direct Labor Budget:

1- Wage rate per hour * Direct Labor hour

2- Wage rate per unit *product unit