« »

Kamis, 06 Oktober 2011

Cost-Volume-Profit Analysis: A Managerial Planning Tool

Cost-Volume-Profit Analysis:
A Managerial Planning Tool
1. INTRODUCTION
Cost volume profit analysis is a powerful tool for planning and decision making. Cost-Volume-Profit Analysis (CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.
Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are: The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
The components of Cost-Volume-Profit Analysis are:
  • Level or volume of activity
  • Unit Selling Prices
  • Variable cost per unit
  • Total fixed costs
  • Profit
Managerial uses of CVP analysis to :
1. To determine the BEP(break even point)
2. To determine the targeted profit before tax and after tax
3. Engineering the CVP analysis
2. BREAK EVEN POINT IN UNITS
The break even point is the point where total revenue equal total cost, the point of zero point. To find the BEP in units, we focus o operating income. The firms initial decisions in implementing a unit sold approach to CVP analysis is the determination of just what are you need is. A second decisions center on the separation of costs into fixed and variable components. CVP analysis focuses on the factor that effect a change in the components of profit.
USING OPERATING IN CVP ANALYSIS
THE METHOD OF BEP DETERMINATION:
a.Equation method
b.Short cut method
-Contribution margin
-CM ratio method
c.Graph method
a. Equation Method
The income statement is useful tool for organizing the firm’s costs into fixed and variable categories. The income statement can be expressed as a narrative equation:.
Operating income= sales revenues-variable expenses-
fixed expenses
Operating income includes only revenues and expenses from the firm’s normal operations.We will use the term net income to mean operating income minus income taxes.With these expressions, the operating income equations becomes :
Operating income = (Price x number of units)- (variable cost
per unit x number of units)-total fixed cost
Example :
PT.MINANG JAYA sales television. The price per unit is $400. And the variable cost per unit is $ 325, and fixed cost is $45.000 per year. How many units of television must be sold to reach BEP?
Sollution:
BEP : 0=($400 x units)-($325 x units)-$45.000
0= $75 x units- $45.000
$75 x units= $45.000
Units = 600
Therefore, MINANG JAYA Company must sell 600 units of televise to just cover all fixed and variable expenses. A good way to check this answer is to formulate an income statement based on 600 units sold.
Sales (600 units @ $400) $240.000
Less : variable expenses $195.000
Contribution Margin $ 45.000
Less fixed expenses $ 45.000
Operating income $ 0
Indeed, selling 600 units thus yield a zero profit.
b.SHORT CUT METHOD
1)CONTRIBUTION MARGIN
We can more quickly calculate break event unit by focusing o the contribution margin. The contribution margin is sales revenue minus total variable cost. At break event, the contribution margin equals the fixed expenses.
Number of units= fixed cost/unit contribution margin
Example :
Using MINANG JAYA Company as an example,
Number of Units= $45.000/($400-$325)
= $45.000/$75.000
= 600 unit
Of course, the anwer is identical to that computed using the income statement.
Other problem -unit sales needed to achieve targeted profit :
a. Targeted income as a dollar amount
Assume that Minang Jaya Co. wants to earn operating income of $60.000. So the solution:

b. Targeted income as a Percent of Sales Revenue
Assume that Minang Jaya Co. wants to know the number of television must be sold in order to earn a profit equal to 15% of sales revenue :
0.15($400)(units) = ($400 X units) – ($325 X units) - $45.000
$60 X units = ($75 X units) - $45.000
$15 X units =$45.000
Units = 3.000
c. After – Tax Profit Targets
we can use this Formula :
Net Income = Operating Income- Taxes
= Operating Income –(tax rate X operating income)
= Operating Income(1 –Tax Rate)
Operating Income=Net Income / ( 1 –Tax Rate)
2).CM RATIO METHOD
CM RATIO is proportion for each dollar sales which available to cover fixed cost and to earn profit. Variable cost ratio is proportion for each dollar sales which available to cover variable cost. CMR IS USED TO FIND BEP IN DOLLAR
Dollars Percent of sale
Sales $400,000 100.00%
Less: Variable expenses 325,000 81.25%
Contribution margin $ 75,000 18.75%
Less: Fixed exp. 45,000
Operating income $ 30,000
Operating income = Sales – Variable costs – Fixed costs
$0 = Sales – (Variable costs ratio x Sales) – $45,000
$0 = Sales (1 – 0.8125) – $45,000
Sales (0.1875) = $45,000
Sales = $240,000
*$75/$400=$0,1875
“Relationship among contribution margin, fixed cost and profit”
1.Fixed Cost = Contribution Margin
2.Fixed Cost < Contribution Margin

3.Fixed Cost= Contribution Margin
3.Graphical representation of cvp relationships
It may further our understanding of CVP relationship to see them portrayed visually. A graphical representation can help managers see the difference between variable cost and revenue.
The Profit-Volume Graph
The profit-volume graph portrays the relationship between profits and sales volume.
The profit volume graph is the graph of the operating income equation.
Example:
The Minang Jaya Company produces a single product with the following cost and price data:
Total fixed costs $100
Variable costs per unit 5
Selling price per unit 10
Using these data, operating income can be expressed as
Operating Income = ($10 x units)-($5 x Units) - $100
= ($5 x Units) - $100
In linier equation :
Operating income (5X-100)
Profit-Volume Graph(Exhibit 1-a)

The graph in exhibit 1-a can be used to asses Minang Jaya profit (or loss) at any level of sales activity. For example, the profit associated with the sales of 40 units is $100. The profit volume graph, while easy to interprate, Fails to reveal how costs change as sales volume changes.
The cost-volume-profit graph
The cost-volume-profit graph depicts the relationship among costs, volume, and profits.
To obtain the more detailed relationship, it is necessary to graph two separate lines:
The total revenue line and total costs line. The formula is
Revenue = Price x Units
Total Cost = (Units variable cost x units) + Fixed asset
Using the Minang jaya company example, the revenue and cost equations are:
Revenue = $10 x Units
Total cost =($5 x Units) + $100
This equation can be interpretated in exhibit 1-b

Exhibit 1-b
To break even Minang Jaya must sell 20 units and, thus receive $200.000. Nonetheless, because of the greater information content, managers are likely to find the CVP graph a more usefull tool.
Assumptions of cost volume profit analysis
1.The analysis assumes a linear revenue function and a linear cost function.
2.The analysis assumes that price, total fixed costs, and unit variable costs can be
accurately identified and remain constant over the relevant range.
3.The analysis assumes that what is produced is sold.
4.For multiple-product analysis, the sales mix is assumed to be known.
5.The selling price and costs are assumed to be known with certainty.
4.MULTIPLE-PRODUCT ANALYSIS
Cost-volume-profit analysis is fairly simple in the single-product setting. However, most firms produce and sell a number of products or services. Eventhough the conceptual complexity of CVP analysis does increase with multiple products, the operation is reasonably straightforward. Let’s see how we can adapt the formulas used in a single-product setting to the multiple product setting by expanding the Minang Jaya Company for example.
Minang Jaya Company has decided to offer two kinds of product: an analog watch to sell for $400 and a digital watch to sell for 800. The marketing department is convinced that 1,200 analog watch and 800 digital watch can be sold during the coming year. The controller has prepared the following projected income statement based on the sales forecast:
Analog Digital Total watch watch
Sales $480,000 $640,000 $1,120,000
Less:Variable Expenses 390,000 480,000 870,000
Contribution Margin $ 90,000 $160,000 $ 250,000
Less: Direct fixed expenses 30,000 40,000 70,000
Product Margin 60,000 120,000 $ 180,000
Less:Common fixed expenses 26,250
Operating Income 153,750
Note that the controller has separated direct fixed expenses from common fixed expenses. The direct fixed expenses are those fixed costs that can be traced to each segment and would be avoided if the segment did not exist. The common fixed expenses are the fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated.
Break-Even Point in Units
The Owner of Minang Jaya is somewhat apprehensive about adding a new product line and wants to know how many of each model must be sold to break even. If you were given the responsibility of answering this question, how would you respond?
One possible response is to use the equation we developed earlier in which fixed cost were divided by contribution margin. This equation presents some immediate problems , however. It was developed for a single- product analysis. For two products , there are two unit contribution margins. The analog watch has a contribution margin per unit of $75 ($400-$325), and the wallet has one of $200 ($800-$600).
One possible sollution is to apply the analysis separately to each product line. It is possible to obtain individual break-even points when income is defined as product margin . Break-even for the analog watch is as follows:
Analog watch break-even units = fixed cost /(price-unit variable cost)
= $30,000/$75
=400 units
Break-even for the digital watch can be computed as well :
Digital watch break-even units = fixed cost /(price-unit variable cost)
= $40,000/$200
= 200 units
Thus,400 analog watch and 200 digital watch must be sold to achieve a break-even product margin. But, break-even product margin covers only direct fixed costs; the common fixed costs remain to be covered. Selling these numbers of the products would result in a loss equal to the common fixed costs . No break-even point for the firm as a whole has yet been identified. Somehow the common fixed costs must be factored into the analysis.
Allocating the common fixed costs to each product line before computing a break-even point may resolve this difficulty. The problem with this approach is that allocation of the common fixed costs is arbitrary. Thus, no meaningful break-even point volume is readily apparent.
Another possible sollution is to convert the multiple-product problem into a single-product problem. If this can be done, then all of the single product CVP methodology can be applied directly. The key to this conversion is to identify the expected sales mix, in units, of the products being marketed. Sales mix is the relative combination of products being sold by a firm.
Determining the sales Mix.
The sales mix can be measured in units sold or in proportion of revenue. For example, If Minang Jaya plans on selling 1,200 analog watch and 800 digital watch , then the sales mix in units is 1,200:800. Usually, the sales mix is reduced to the smallest possible whole numbers. Thus, the relative mix, 1,200:800 can be reduced to 12:8 and further to 3:2. That is, for every three analog watch sold, two digital watch are sold.
Alternatively, the sales mix can be represented by the percent of total revenue contributed by each product. In that case, the analog watch revenue is $480,000($400x1,200), and the digital watch revenue is $640,000($800x800). The analog watch accounts for 42.86 percent of total revenue, and the digital watch accounts for the remaining 57.14 percent. It may seem as though the two sales mixes are different. The sales mix in units is 3:2;that is, of every five products sold, 60 percent are analog watch and 40 percent are digital watch. However, the revenue- based sales mix is 42.86 percent for analog watch. What is the difference?. The sales mix in the revenue takes the sales mix in units and weights it by price. Therefore, eventhough the underlying proportion of products sold remains 3:2, the lower-priced analog watch are weights less heavily when price is factored in. For CVP analysis, we must use the sales mix expressed in units.
A number of different sales mix can be used to define the break-even volume. For example, a sales mix of 2:1 will define a break-even point of 550 analog watch and 275 digital watch. The total contribution margin produced by the mix is $96,250([$75x550]+[$200x275]). Similarly, if 350 analog watch and 350 digital watch are sold (corresponding to a 1:1 sales mix), the total contribution margin is also $96,250([$75x350]+[$200x350]). Sice total fixed costs are $96,250, both sales mix define break-even points. Fortunately, every sales mix need not be considered. Can Minang Jaya really expect a sales mix of 2:1 or 1:1? For every two analog watch sold, does Minang Jaya expect to sell a digital watch? Or for every analog watch, can Minang Jayareally sell one wallet?
According to Minang Jaya’s marketing study, a sales mix of 3:2 can be expected. That is the ratio that should be used; others can be ignored. The sales mix that is expected to prevail should be used for CVP analysis.
Sales Mix and CVP Analysis
Defining a particular sales mix allows us to convert a multiple-product problem into a single-product CVP format. Since Minang Jaya expects to sell three analog watch for every two digital watch , it can be define the single-product it sell as a package containing three analog watch and two digital watch. By defining the product as a package, the multiple-product problem is converted into a single-product one. To use the approach of break-even point in units, the package selling price and variable cost per package must be known.. to compute these package values, the sales mix, the individual product prices, and the individual variable coats are needed. Given the individual product data found in the projected income statement, the package values can be computed as follows:
Product Price Unit Unit Sales Package Unit
Variable Contribution Mix Contribution
Cost Margin Margin
________________________________________________________________________
analog watch $400 $325 $75 3 $225 (a)
Digital watch 800 600 200 2 400 (b)
Package total 625
(a) This is found by multiplying the number of units in the package(3) by unit contribution margin($75)
(b) This is found by multiplying the number of units in the package(2) by unit contribution margin($200)
Given the package contribution margin, the fundamental break-even equation can be used to determine the number of packages that need to be sold to break even. From Neco’s projected income statement , we know that the total fixed costs for the company are$96,250. Thus, the break-even point is :
Break-even packages = fixed cost/package contribution margin
= $96,250/$625
= 154 packages
Minang Jaya must sell 462 analog watch (3x154) and 308 digital watch (2x154) to break even. An income statement verifying this sollution is presented below:
analog watch digital watch Total
­­­________________________________________________________________________
Sales $184,800 $246,400 $ 431,200
Less:Variable Expenses 150,150 184,800 834,950
Contribution Margin $ 34,650 $ 61,600 $ 96,250
Less: Direct fixed expenses 30,000 40,000 70,000
Segment Margin $ 4,650 $ 21,600 $ 26,250
Less:Common fixed expenses 26,250
Operating Income $ 0
For a given sales mix, CVP analysis can be used as if the firm were selling a single-product. However, actions that change the prices of individual products can affect the sales mix because the consumers may buy relatively more or less of the product. Keep in mind that a new sales mix will affect the units of each product that need to be sold in order to achieve a desired profit target. If the sales mix for the coming period in uncertain, it may be necessary to look at several different mixes. In this way, a manager can gain some insight into the possible outcomes facing the firm.
The complexity of the approach of break-even point in units increases dramatically as the number of the products increases. Imagine performing this analysis for a firm with several hundred products. This observation seems more overwhelming than it actually is. Computers can easily handle a problem with so much data. Further more, many firms simplify the problem by analyzing product groups rather than individual products. Another way to handle the increased complexity is to switch from the units-sold to sales revenue approach. This approach can accomplish a multiple-product CVP analysis using only the summary data found in an organization’s income statement. The computational requirements are much simpler.
Sales Dollars Approach
To illustrate the break-even point in sales dollars, the same examples will be used. However, the only information needed is the projected income statement for Minang jaya Company as a whole.
Sales $1,120,000
Less:variable costs 870,000
Contribution margin $ 250,000
Less:fixed costs 96,250
Operating income $ 153,750
Notice that this income statement corresponds to the total column of the more detailed income statement examined previously . The projected income statement rests on the assumption that 1,200 analog watch and 800 digital watch will be sold (a 3:2 sales mix). The break-even point in sales revenue also rests on the expected sales mix. (As with the units-sold approach, a different sales mix will produce different results).
With the income statement the usual CVP questions can be addressed. For example, how much sales revenue must be earned to break-even? To answer this question, we divide the total fixed costs of $96,250 by the contribution margin ratio of 0.2232($250,000/$1,120,000).
Break-even sales = Fixed cost/Contribution margin ratio
= $96,250/0.2232
= $431,228
The braek-even point in sales dollars implicity uses the assumed sales mix but avoids the requirement of building a package contribution margin. No knowledge of individual product data is needed. The computational effort is similar to that used in the single-product setting. Moreover, the answer is still expressed in sales revenue. Unlike the break-even point in units, the answer to CVP questions using sales dollars is still expressed in a single summary measure. The sales revenue approach, however ,does sacrifice information concerning individual product performance.
5.CHANGES IN THE CVP VARIABLES
Because firms operate in a dynamic world, they must be aware of changes in prices, variable cost, and fixed cost. They must also account for the effect of risk and uncertainty.
Suppose that Minang Jaya Company recently conducted a market study of the product than revealed three different alternatives:
1. Alternative 1: if advertising expenditures increase by $8.000 sales will increase from 1.600 units to 1.725 units.
2. Alternative 2: a price decrease from $400 to $375 per lawn mower will increase sales from 1.600 units to 1.900 units.
3. Alternative 3: decreasing price to $375 and increasing advertising expenditures by $8.000 will increase sales from 1.600 units to 2.600 units
Should Minang Jaya maintains its current price and advertising policies, or should it select one of three alternatives described by the marketing study?
Minang Jaya should consider its choice in the context of risk and uncertainty. Risk include that prices and costs can’t be predicted with certainty. Risk assumes that the distribution of the variable in question are known (i.e, we know how sales will react in response to changes in price or cost). Under uncertainty, these distribution.
Solution


Of the three alternatives identified by the marketing study, the one that promises the most benefit is the third. It increases total profits by $2000. The first alternative increase profits by only $1.375, and the secod actually decrease profits by $25.000.These example are all based on a unit-sold approach. However, we could just as easily have applied a sale revenue approach. The answer would be the same.
6.CVP Analysis And Activity-Based Costing
Conventional CVP analisys assumes that all costs of the firm can be devided into two categories:
1. Variable costs
2. Fixed costs
Further, costs are assumed to be a linear function of sales volume. However, many companies now realize that this fixed versus variable distinction is too simplistic.
In an activity-based costing system, costs are devided into unit and nonunit-based categories. Activity-based costing admit that some costs vary with units produced and some costs do not.In fact, CVP becomes more usefull since it provides more accurate insight concerning cost behavior. This insight produce better decisions
ABC costs equation by three variable
Total cost = Fixed cost + (Unit variable costs x number of units) + (Unit cost x number of setups) + (Engineering costs x number of engineering hours)
Operating income = Total revenue – [fixed costs + (unit variable costs x number of units) + (Setup costs x number of setups) + (engineering costs x number of engineering hours)]
Contribution margin approach to calculate the break even point in units.
Break even Units = [(Fixed cost + (setup cost x number of setups) + (Engineering cost x number of engineering hours)] / (Price – unit variable cost)
A comparison of the ABC break event point with the conventional break event point reveals two significant differences. First, the fixed costs differ. Second, the numerator of the ABC break even equation has two nonunit-variable cost term: one for batch-related activities and one for product-sustaining activities.
Example :
Assume the following
Sales price per unit $15
Variable cost 5
Fixed costs (conventional) $180,000
Fixed costs (ABC) $100,000 with $80,000 subject to ABC analysis
Other Data:
Activity Driver Unit Variable Costs Level of Activity Driver
Setups $500 100
Inspections 50 600
1. What is the BEP under conventional analysis?
BEP = $180,000 ÷ $10
= 18,000 units
2. What is the BEP under ABC analysis?
BEP = [$100,000 + (100 x $500) + (600 x $50)]/$10
= 18,000 units
3. What is the BEP if setup cost could be reduced to $450 and inspection cost reduced to $40?
BEP = [$100,000 + (100 x $450) + (600 x $40)]/$10
= 16,900 units
CVP analisys and JIT
If a firm has adopted JIT, the variable cost per unit sold is reduced and fixed cost are increased. The Equation is:
Total cost = Fixed cost + (Unit variable cost x number of units) + (Engineering cost x number of engineering hours)

Reference
Don.R.Hansen & Maryanne M. Mowen, Cost Management, Accounting and Control,
Vol 6.shouth western college Publishing, Cinciatti,Ohio
Lecture Note Mr. Riwayadi M.BA
www.google.com

0 komentar:

Posting Komentar

 
Design by Free WordPress Themes | Bloggerized by Lasantha - Premium Blogger Themes | Best Buy Coupons