Management Accounting

COMAB2-44
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students are expected to consult and prepare for assessments.
 Eduvos and the Flipped Classroom

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3
Review:
Module information
Lesson 1 - Cost - volume
Notes/Questions profit analysis
for Discussion
(Introduction)
Module Guide: Assessments Self assessments, Pre-assessment Quizzes, Online Tests

The cost price of a product is R200. The mark-up is 25%. Calculate the selling
price, profit, and gross profit percentage.
Lesson 1 The selling price of a product is R360. The mark-up is 20%. Calculate the cost
price, profit, and gross profit percentage.

Learning outcomes Post Why is this important?

assessment
 Week 1: Cost - volume profit
analysis
Learning outcome
In this lesson, you will learn how to:
• Describe the importance of cost-volume-profit analysis (CVP).
• Explain how a marginal statement of profit or loss provides CVP information.
• Explain basic cost concepts like ‘fixed costs’, ‘variable costs’, ‘semi variable costs’, 'prime costs’, ‘marginal income’, and
‘net income’.
• Calculate the selling price, mark-up, cost price, and gross profit percentage.
• Calculate gross profit, net profit, break-even points, margin of safety, marginal income/cost ratio, and change-over
point and profit estimations.
• Calculate and evaluate changes in cost, sales volume, and sales mix.
• Construct break-even graphs.

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What will be covered in the rest of today’s session?

Introduction

Structure/Layout of income
statement suitable for decision-
making

Revision: Cost behaviour & High

low method

CVP Concepts/Formulae

Break-even analysis & Change-

over point/Cross-over point
 Basic application of CVP

How can CVP assist a manager in the making the following decisions:

• How many units must be sold?

• Impact on profit if the selling price decreases and the no. of units sold increases

• What sales volumes is needed to meet a particular set of profit or cover additional fixed costs?

• Should we pay our sales people on the basis of a salary only, on the basis of a commission only or by
a combination of the two?

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 Introduction
1. CVP analysis is used to determine how changes in costs and volume affect a company's operating income and net
income.

2. Is based on determining the break-even point of cost and volume of goods.

3. OR a management technique that analyses the impact on profitability that a change in cost or volume would have
during a particular period. Cost in this instance includes sales, manufacturing costs and commercial costs.

4. Cost-volume-profit analysis is a technique that is used to assist management in short-term planning.

5. The relationship implies that a change in any of the elements will have an influence on the remaining elements.
There is a causal relationship between the change which is brought about in one element and the effect of its
influence on another element.

6. In order to perform managerial tasks (planning, control, and decision-making), information on fixed and variable
cost is necessary and therefore we use the marginal income statement for C-VP analysis and not the traditional
absorption costing method. 8
 Income statement layout
1. Use marginal income approach also known as Direct costing method.
2. It is important in CVP analysis to distinguish between FC and VC

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 Media
Cipla Durban Factory Tour, Nov 18, 2021

[Link]
 Cost behaviour

Variable costs Fixed Costs Semi - variable costs

Do I still
need to
know
these?

11
Revision: Cost behaviour

Variable costs
Fixed costs
• Also called marginal costs.
• Remains constant for a
• Variable costs change in
given period when capacity Semi-variable costs
direct proportion to changes
utilisation remains between • Contains fixed and variable
in volume.
0% and elements.
• Variable costs remain
100%, regardless of the • You have to be able to split
constant per unit.
degree of capacity utilisation the costs between the fixed
• When one is required to do
during that period. and variable elements. The
adjustments in a question, it
• Cost per unit increases best methods
is normally easier to convert
when capacity utilisation for this are:
the
decreases and vice versa. ➢Least squares method. (to
variable costs to unit costs
• Do not use fixed costs per be discussed with regression
and then do the
unit in calculations when analysis)
adjustments.
there is a change in volume. ➢High-low method
1 cake = 2kg (R30)
It is better to use total fixed
2 cakes = 4kg (R30 x 2 = R60)
costs in calculations.
3 cakes = 6kg (R30 x 3 = R90)
 High – low method
• Choose highest and lowest number of units (or volume) with their relating amounts

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Activity 1
At 100% capacity utilisation, 25 000 units will be produced. At
75% utilisation, the fixed cost per unit is R3.50.

Required:
Calculate the total fixed costs and the fixed costs per unit at
the following capacity utilisation levels (if needed, round to the
closest cent):

(a) 90%
(b) 55%
(c) 80%
Activity 2
The total variable costs at a capacity utilisation of 70% amount
to R130 200.
At 75% capacity utilisation, the factory can produce 30 000
units.

Required:
Calculate the total variable cost and the variable cost per unit at
a capacity utilisation of:

(a) 45%
(b) 85%
(c) 100%
Activity 3
The following information was extracted from ABC Manufacturers for the last

four months:

Required:

Calculate the variable cost per unit and the total fixed cost for months 3 and 4
 CVP Concepts/Formulae
1. Marginal Income = Selling price less all variable costs (manufacturing, selling and administrative)
2. Net Income = Marginal income less all fixed costs (manufacturing, selling and administrative)
3. The following formula can also be used to solve cost-volume-profit questions: S = VC + FC + P. Which means:
Sales = Variable cost + Fixed cost + Profit. Which is calculated as; (SP/u x units) = (VC/u x units) + FC + Profit

4. P = S – VC – FC
5. P + VC + FC = S
6. Marginal Income Ratio (MIR) = Marginal Income/Sales OR Marginal Income per Unit/Selling Price per unit

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Activity 4
 Break-even analysis
1. The break-even point is the point at which the fixed costs are covered by the marginal income.
2. The break-even point can be expressed in terms of the sales volume (number of units) or sales value.
3. Break-even point (units) = Fixed Costs/Marginal income per unit
4. Break-even point (sales value) = Fixed Costs/Marginal Income Ratio
5. When you need to calculate the break-even point where 2 or more products are involved, you need to
calculate a weighted average marginal income per unit or ratio.

6. Break-even analysis formula can be altered to perform calculates when a specific amount of profit is to be
achieved:

7. Break even units at a set profit level = (Fixed costs + Profit)/Marginal income per unit
8. Sales value at a set profit level = (Fixed costs + Profit)/Marginal income ratio
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 Margin of safety ratio
1. This is the margin by which actual sales exceed the break-even sales, expressed as a percentage of sales.
2. It indicates the extent by which the actual sales can drop before a loss will be suffered.
3. Margin of safety ratio = (Actual sales value – Break-even sales value)/Actual sales value
4. OR (Actual sales volume - Break-even sales volume)/Actual sales volume

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Activity 5
Activity 6
Activity 7
Activity 8
Activity 8 continued
Activity 9
Activity 10
Activity 11
 Eduvos and the Flipped Classroom

1 2 3
Before this lecturer-led session During this lecturer-led session After this lecturer-led session

At home, in your self-study time, you During your lecturer-led session(s), you will Depending on how difficult this lecturer-led
worked through myLMS content to prepare engage with your peers and lecturer in session is, your lecturer may recommend
you for this lecturer-led session. You have active learning. I.e. you will have an some concepts to revise for this week's
completed any practice activities and opportunity to ask your questions, to learning opportunities. Then you will focus
prepared any questions you may still have debate topics, and to practice working on the following learning opportunities on
on the content. The lecturer-led session will through the technical aspects of what you myLMS in your self-study time to prepare
not be a traditional lecture. learnt at home. You will be exposed to for the next lecturer-led session(s).
higher-order thinking activities. Your
lecturer will guide you on what to prepare
before attending your next session.
 What Happens Next?
• To be completed before the next lecturer-
led session (self-directed learning and
assessments):
• Lesson 1 & 2 (CVP): Notes, Practice Quiz and Practice Activities
• Lesson 3 (Learning curves): Notes, Practice Quiz and Practice Activities

• What will be covered in the next lecturer-

led session:
• Learning curves
Bibliography

de Wet, S. R., 2023. Fundamentals of Cost and Management Accounting. 9th ed. LexisNexis.

Print ISBN: 9780639009742

Chapter 4, pp. 107–142.