Notesale: Turn your study into money

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HULT International Business School
Managerial Accounting (ACC220)
Outline of the Required Book

Chapter 3 - Cost - Volume - Profit analysis
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Different types of costs
➔ Fixed costs: the amount of fixed cost (distance 0F) remains the same irrespective of the volume of
activity
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- fixed costs varies with time but not the level of output !
- constitutes the bulk of total costs
- stepped fixed costs
➔ Variable costs:​ costs varies with the volume of activity (ie
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- it is assumed that variable costs are varying ​constantly/consistently with the level of
output
➔ Semi-fixed/Semi-variable costs​ have elements of both
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- In this method, an assumption is made that the difference between the 2 quarterly figures
is caused entirely by the VC
➔ Line of best fit​ uses the ​least squares regression​; the slope of the line gives the VC

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Total revenues = Total costs
Total sales revenue = FC + VC
BEP = FC / (Sales revenue per unit - VC per unit)
BEP point * Sales revenues = BEP in revenues

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➔ Contribution margin ratio:​ the contribution of an activity expressed as a percentage of sales
CMR = Contribution / Sales revenue
CMR% = (Sales revenue per unit - VC per unit) / Sales revenue * 100

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➔ the higher the MoS, the more protected, the less vulnerable the business is regarding the business
environment
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Target Profit
Total sales revenue = FC + VC + Target Profit
Required number of output = (FC + Target profit) / Contribution

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➔ An activity with high fixed cost compared to its total variable costs at its normal level of activity, is
said to have a high operating gearing
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High operating profit implies a vulnerability to the
business environment
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Profit-Volume Charts
➔ PV chart is a slight variant of the BEP chart, obtained by plotting loss or profit against the volume of
activity
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➔ Do not show anything that has not been shown by the break even chart
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➔ The PV chart combines the total sales revenue and the total variable cost lines, which means that
the profit (or loss) is directly readable
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Economist view on BE chart
➔ Economies of scale:​ cost savings arising from an increase in the volume of activity
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If high usage of a particular raw material leads to shortages, the price of the RM become
higher with scarcity
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The ​curvilinear representation leads to
the existence of multiple BEP
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For a short
range, the graph becomes linear
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The problem of BE
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➔ Business cycles​: the contraction and expansion of a n activity arising within an economy over time
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➔ Stepped fixed costs: most fixed cost are not really fixed over the whole range of activity, but tend to
be stepped
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➔ Multi-product business: identifying the FC associated with a particular product can be difficult
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Marginal analysis
➔ In Marginal Analysis, only cost and revenues that vary with the decision are considered (FC usually
ignored)
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- the business may see in this as a way of breaking into a different market
(something that may be impossible if the business charges an usual price)
- determining the most efficient use of scarce resources
- the output of a business is determined by a customer demand for the particular
good/service
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- The most profitable combination of products will occur when the ​contribution per
unit of the scarce factor is maximized
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- closing or continuation decisions
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