Cost Accounting and Control
Cost Volume Profit Analysis – The process of managing Budgeted Sales xx
cists and sales volume as they impact on profit. In this BEPpeso xx
model, costs are classified as fixed or variable. Margin of Safety xx
1. Contribution Margin Format Illustration: the contribution margin, breakeven point,
Sales ₱xx margin of safety, profit setting, sales mix, and degree of
Less: variable costs and expenses xx operating leverage
Contribution Margin xx
Less: fixed costs ₱xx Ayeesha Company establishes the following information
Profit xx for its planning activities:
Unit sales price ₱ 200 Total Fixed Costs ₱400,000
*sales volume means units sold Unit var. costs 120 Units Sold 8,000 units
The higher the CM, the higher the profit
Solutions/Discussions:
2. Assumptions Units Unit Amount %
Basic Assumptions prices
Sales 8,000 ₱ 200 ₱1,600,000 100 Sales%
Sales Volume Changes VC 8,000 120 960,000 60 VC%
Unit Sales price Constant CM 8,000 80 640,000 40 CM%
Unit Variable costs Constant FC 400,000
Total Fixed costs Constant
Profit ₱240,000
Sales mix Constant
1. Unit contribution margin is ₱80, ie, 200-120
Only sales volume changes, because it is affected by Contribution margin rate is 40%, ie 80 ÷ 200
competition, and other market variability. Variable costs rate is 60%, ie 120 ÷ 200
Different Formulas to get Contribution margin (CM) 2. Breakeven point in units and in pesos
CM = Sales – Variable costs
CM = Fixed costs + income Applying the formulas in our problem, we have:
CM = Unit sold x CMu BEP (units) = ₱400,000 ÷ 80 = 5,000 units
CM = Sales x CMR BEP (pesos) = ₱400,000 ÷ 40% = 1,000,000
Likewise, you have observed the following important To prove,
relationships Sales (5,000 units x ₱200) ₱1,000,000
Operating income = CM-Fixed Costs Less: VC 600,000
Variable costs Rate = Variable costs ÷ sales (or) Contribution Margin 400,000
= Variable costs per unit ÷ sales price per unit Less: FC 400,000
CM Rate = Contribution Margin ÷ Sales Profit(loss) ₱ 0
= CMu ÷ Sales per unit
= 100% - Var. Cost Ratio Or to prove:
CM (5,000 units x ₱80) ₱400,000
Break Even point Less: Fixed Costs 400,000
- Is where total sales equal total costs. At this point of Profit(loss) ₱ 0
sales, there is no profit or loss. Also, contribution
margin equals total fixed costs It should be observed that at Breakeven point, contribution
margin equals total fixed costs.
BEP formulas:
BEP (units) = Total fixed costs ÷ CMu 3. Margin of safety in units and in pesos, and the
From this, we could say: margin of safety rate.
Total Fixed costs = BEPu x CMu
Units Amount %
CMu = Total Fixed Costs ÷ BEPu
Budgete 8,000 ₱1,600,00 100 Budgeted
*Quantity sold or QS d Sales 0 sales rate
Total Sales = Total Costs
Less: 5,000 1,000,000 62.5 BEP peso
Total Sales = Fixed costs + Variable costs
BEPpeso rate
QS (SPu) = FC + QS (VCu)
QS (SPu) – QS (VCu) = FC Margin 3,000 600,000 37.5 MoS rate
Quantity sold = FC ÷ SPu-VCu of Safety
Quantity sold = FC ÷ CMu
The presence of margin of safety indicates profit. Since,
Margin of Safety (MoS)is the difference between margin of safety is the amount of sales in excess of
budgeted sales and breakeven sales. It is the maximum breakeven point, it means that every peso in margin of
amount of reduction in sales before a loss is incurred. The safety there is a profit. And profit is the incremental
margin of safety computations are as follows: contribution margin after the breakeven point because all
fixed costs are already covered by the contribution margin
by then.
Therefore,
Profit = Margin of safety x CMRate Average CMR or composite CMR is computed as follows:
Applying it, we have:
Profit = 600,000 x 40% = 240,000 Average CMR = ∑ (CMR x Sales Mix Ratio in Pesos)
It also means that: Product CMR SMRatio in Peso Average CMR
Profit Ratio = MoSRate x CMRate X 75% 200,000/520,000 28.85%
Therefore, Y 41.67% 180,000/520,000 14.42%
MoSRate = Profit Ratio ÷ CMRate Z 28.57% 140,000/520,000 7.69%
CMRate = Profit Ratio ÷ MoSRate 50.96%
Multi-product sales The CMR may also be computed as follows:
If there are two or more products considered, the Average CMr = Ave CMu ÷ Ave. SP per unit
composite BEP is computed. Using the same BEP
formula, except that in multi-product sales, the Average SP per unit = ∑ (SPu x SMR)
denominator is the average contribution margin.
Average contribution margin is the sum of the individual Product SPu SMRatio Average SPu
product CMu times their sales mix ratio based in units. X ₱ 400 500/1000 ₱ 200
Sales mixed ratio is assumed to be constant. Y 600 300/1000 180
Z 700 200/1000 140
Sample: Composite Breakeven point analysis
Average SPu 520
D-Joy Corporation produces and sells three products and
Therefore, the Ave. CMR = Ave. CMu ÷ Ave. SPu
has provided you the following operating data:
Thus, 265 ÷ 520 = 50.96%
Products
x y Z total
sales price ₱ 400 ₱ 600 ₱ 700 Thirdly, the average CMR may also be computed as
per unit follows:
VC per ₱ 100 ₱ 350 ₱ 500 X Y Z Ratio
unit SP ₱200,000 ₱180,000 ₱140,000 ₱520,000 100%
Budgeted 500 units 300 units 200 units 1000 VC 50,000 105,000 100,000 255,000
sales in units CM ₱150,000 ₱75,000 ₱40,000 ₱265,000 50.96%
units
Budgeted ₱200,000 ₱180,000 ₱140,000 ₱520,000 Ave. CMR = 265,000 ÷ 520,000 = 50.96%
sales in
pesos What is asked?
Total ₱795,000 [Link] BEPunits = ₱795,000 ÷ ₱265 = 3,000 units
fixed
costs 2. Composite BEPpeso= ₱795,000 ÷ 50.96% =
₱1,560,000
Solution:
Per unit X Y Z [Link] CBEP units = CBEP x Sales Mix Ratio in
Sales ₱400 ₱600 ₱700 units
VC 100 350 500 CBEPunits SMRatio Allocation
CM ₱300 ₱250 ₱200 X 3,000 units 50% 1500 units
Sales Mix x 50% x 30% x 20% Y 3,000 units 30% 900 units
ratio Z 3,000 units 20% 600 units
Average/ ₱150 ₱75 ₱40 CBEP 3,000 units
Composite ₱265 (150+75+40)
CMu Degree of Operating Leverage (DOL)
DOL = Contribution margin ÷ Operating Income; or
The given sales mix 5:3:2 is derived based on the DOL = % change in operating income ÷ % change in
relationships of the budgeted sales in units, i.e, 500, 300, sales
and 200 for products X, Y, and Z, respectively.
The contribution margin of the products are *Note that the operating above is income is before any
Product X = ₱300 deduction of tax
Product Y = 250
Product Z = 200 We can also say that,
The Average CMu = ∑ (CMR x Sales Mix Ratio in % change in operating income = DOL x % change in
units) sales