Marginal Costing And CVP Analysis Flashcards
What is Break-even point?
When total contribution is exactly equal to fixed cost and hence sales revenue is exactly equal to variable cost + fixed cost
Formulae for volume required to break-even
Fixed cost/contribution per unit = break-even units
Formulae for sales revenue required to break-even
Fixed cost x unit selling point/contribution per unit = break-even revenue
What is Margin of Safety?
The amount of sales The business can afford to lose and still not make a loss. It can be expressed in units/products or € sales or as a percentage
Formulae for Margin of Safety (units)
Budgeted sales volume - Break-even volume = margin of safety volume
Formulae for margin of safety (revenue)
Budgeted sales revenue - break-even revenue = margin of safety revenue
Formulae for Margin of safety (percentage)
Forecast sales – break-even sales x 100/Forecast sales = Margin of safety revenue
What is FC? Give an example
Fixed costs
Examples: Rent, rates, advertising
What is VC? Give example
Variable cost
Examples: food, drinks
What is SVC? Give example
Semi variable costs(has both fixed and variable elements)
Examples: phone Bill, light and heat
What is relevant range? Give example
Range of sales activity. If sales activity increases beyond the relevant range, then the fixed costs may increase
Example: if a restaurant increase their floor space making rent more expensive
How do you workout contribution in a marginal profit statement?
Sales - variable costs
What happens when sales volume changes?
Total sales, variable costs and contribution are expected to change, however fixed costs is expected to remain the same
Advantages of marginal costing?
Marginal costing is preferred for decision-making, as contribution is the most reliable criteria upon which to base our decision
It avoids arbitrary apportionment of fixed costs and the under or over absorption of overheads
It gives a more accurate picture of her and organisations cash flows and profits are affected by sales and volume
In manufacturing organisations, it avoids the manipulation of profit through increased production volumes
Disadvantages of marginal costing?
A marginal costing system identifies the contribution each item earns. It does not establish the fixed cost per item, so there is a danger that items will be sold on an ongoing basis at the price which fails to cover fixed costs.
Marginal costing does not conform to the principles required by the accounting standards for stock valuation, which requires that stock is valued based on the total cost incurred in bringing the product to its present condition and location. This is because no element of fixed costs is included in the stock valuation provided by marginal costing. Therefore, year and adjustments are necessary before the preparation of the financial statements for reporting purposes.
