CIMA C1

CIMA C1Fundamentals Of Management AccountingCost Volume Profit AnalysisCIMA C1Fundamentals Of Management AccountingClass Slides Ian WilsonDuring this session you will be expected to:Explain the concept of Contribution & its use in cost-volume-profit analysisCalculate the Break-Even point, Profit Target, Margin of Safety & P/V Ratio for a single product or servicePrepare Break-Even Charts & P/V Graphs for a single product or service

Learning Aims (CIMA)CIMA students will be expected to familiar with:ContributionBreakeven dataMargin of SafetyC/S RatioProfit Volume Charts

IntroductionWhat is CVP analysis?the study of the effects on future profit of changes in the fixed cost, variable cost, sales price, quantity and mix.The Break-Even PointThe Level of Activity at which we have no profit or LossYou assume that Selling Prices & Variable Costs remain constant per unit & Fixed Costs remain exactly that - FixedDefinitionsContribution:What is it?.This is the amount of revenue left over after the variable costs have been met, therefore, this remaining amount contributes towards fixed costs and what is left over, after fixed costs, is profit.Contribution = Sales Price Variable CostTotal Contribution = Unit Contribution X VolumeDefinitionsContribution = Sales Price Variable CostTotal Contribution = Unit Contribution X VolumeAt the Break-Even Point, profit is Zero (0)Total Contribution = Fixed Cost + 0Breakeven = Fixed Costs Unit Contribution

Formula:Breakeven:What is it?.Breakeven is the point at which there is neither profit nor loss. At this point the contribution will equal fixed costs.

Breakeven = Fixed Costs Unit Contribution

DefinitionsThis will test us on Break-Even, Units & Revenue.Formula:Breakeven = Fixed Costs Unit Contribution

Break-Even Sales RevenueBreak-Even Units X Selling Price Exercise 1Apart from a Break-Even situation, a Company may want to make a Target Profit.This is called a Contribution TargetContribution Target = Fixed Costs + Target ProfitVolume Target = Contribution Target Unit ContributionTarget ProfitsBreaking Even & Reaching a Target Profit:The Company wishes to make a 15000 Profit & has Fixed Costs of 35000Answer:Sell to Break-Even = 7000 UnitsSales to reach Target Profit = 10000 UnitsExercise 2Margin of SafetyWhat is it?.This is the difference between the budgeted sales(projected sales) and the Break-Even sales. The figure can be financial/volume or % in its presentation.MoS = Budgeted Sales- Breakeven Sales Budgeted SalesExpressed as a % most often, multiply by 100%DefinitionsTry the Margin of Safety question, Question 3:Try the Quick Exercises 1 to 4:Exercise 3 & Quick ExercisesContribution/Sales Ratio (C/S Ratio)What is it?.This is a measure of how much contribution is earned from $1 of salesC/S Ratio = Contribution Sales This can be used to calculate the Breakeven point. Fixed Costs C/S RatioDefinitionsThe C/S Ratio can also be calculated in TOTAL:

C/S Ratio = Total Contribution Total salesC/S Ratio:With this exercise you have 4 answers to calculate.Exercise 4This is a much more complex question.Read it carefullyThere are 4 parts:Calculate BEP & MoSAssume 20000 pairs of shoes sold, calculate profitAdd a Sales Commission & Calculate Target ProfitBEP with increase in Advertising & Sales Price increase of 12%Exercise 5 hard question!First, you CANNOT be asked to draw a diagram, it is possible you will have to interpret one though.To do this you must study the next 2 diagrams closely.They are pages 116/117 in your notes.They are:Breakeven ChartProfit Volume ChartDrawing diagrams

MoSBudgetSalesActivityBreak-Even Chart:

BEPFixed Costs = Total LossProfit/Volume Chart