Management accounting


Contribution margin

CM= Sales - Total variable costs

Unit contribution margin = sales price per unit - variable cost per unit

Contribution margin ratio = unit contribution margin/ unir sale price 

                                        =contribution margin - sales

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Income statement


- Variable cost

=Contribution margin

-Fixed cost


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Break-even point

For Units:

Break-even point = Fixed cost / ( price per unit - cariable cost per unit)

Break-even point= Fixed cost/ Unit contribution margin 

For Sales in pounds;  

Break-even point= Fixed costs/ Contribution margin ratio 

Units to be sold to achieve target profit :

Break-even point to target profit= (Fixed cost + Target profit)/ unit contribution margin 

BEP- critical output level at which neither a loss or a profit will occur.

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Margin of safety

Indicates how much sales can decrease before a loss occur.

The margin of safety = (Sales units - Break-even points of units)/Sales units *100

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Ratio of fixed costs to variable costs

Ratio = Fixed costs/ Variable costs

If ratio is high => more sensitive to changes in sales (units)

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Assumptions of CVP analysis

-All other variables are constant 

-Costs and revenue are linear functions 


-costs are divided into their fixed and variable elements

-sales units are the same as the produces units

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Variable and fixed costs

Variable cost vary in direct proportion to the volume of activity, total variable cost is linear, however, unit variable cost is constant 

Fixed cost remain constant over a wide range of activity for a specific period of time. They are not affected by changes in activity (volume changes). Total fixed costs are constant for all units of activity, however, unit fixed cost decrease proportionally with the level of activity.

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Step-fixed cost and semi-variable cost

Step-fixed cost- Within a given time period they are fixed within specific activity levels. but they eventually increase or decrease by a constant amount at various critical activity levels.

Semi-variable cost - include both fixed and variable components. 

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CVP analysis

-Based on the relationship between volume and sales revenue, costs and profit in the short run.

-Can be used for decisions that result in outcomes within the relevant range 

-Greater risk in the situation with high fixed costs and lower variable cost 

-In situation with high variable costs and lower fixed costs - lower risk in the hard times 

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Operating leverage

Measure of the sensitivity of profit to changes in sales. The greater the degree of operating leverage. the more that changes in sales activity will affect profits. 

Degree of operating leverage= CM/Profit 

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Sensitivity analysis

Approach for coping with changes in the values of variables. How the results will be changed if the original estimates change. 

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Limiting factors

Scarce resources are known as limiting factors. (example: shortage in skilled labour)

In this case we should calculate contribution per limited factor. (contribution per unit ) and then to rank the goods in order of profitability. 

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