MODULE 2 – TECHNIQUES FOR COST PLANNING AND CONTROL
COST VOLUME PROFIT ANALYSIS
- A short run model that focus on relationships among selling price, variable costs,
fixed costs, volume and profit.
- A useful planning tool that can [provide information about the impact on profits
when changes are made on the cost structure or in sales level.
If there is an increase in: Then profit will:
Selling Price Increase
Unit variable cost Decrease
Fixed cost Decrease
Unit Sales (volume) Increase
FORMULA:
Selling price: XXX
Less: Variable Cost XXX
Total Contribution Margin XXX
Less: Fixed Cost XXX
Net Income: XXX
** Contribution Margin – the difference between sales and variable cost. It is
otherwise known as marginal income, profit contribution, contribution to fixed cost
or incremental contribution
**Contribution Margin Ratio:
FORMULA:
Contribution margin/Sales Revenue
BREAKEVEN POINT IN UNIT SALES AND PESO SALES
- Level of activity in units or in pesos, at which total revenues equal total costs. At
the breakeven point, there is neither a profit nor a loss.
FORMULA:
Break-even point (units) = Fixed Costs/Contribution margin per unit
Break-even point (peso) = Fixed Costs/Contribution margin ratio
REQUIRED SELLING PRICE, UNIT AND PESO SALES TO ACHIEVE A TARGET
PROFIT
FORMULA:
Sales (units) for a target profit = (fixed costs + desired profit) / Contribution margin per
unit
Sales (php) for a target profit = (fixed costs + desired profit) / Contribution margin ratio
Sales (php) with target return on sales (%)
= fixed costs / (contribution margin ratio-return on sales)
MARGING OF SAFETY AND DEGREE OF OPERATING LEVERAGE
Margin of Safety – the difference between actual or budgeted sales and break-even
sales. It indicates the maximum amount by which sales could decline without incurring
loss.
FORMULA:
Margin of Safety = Sales – Breakeven Sales
Margin of Safety Ratio = Margin of safety / Sales
Degree of Operating Leverage – measures how a percentage change in sales will affect
company profits. It indicates how sensitive the company is to sales volume increase and
decreases.
FORMULA:
DOL = Contribution Margin / Profit before tax