Bus. 313 Managerial Accounting
Dr. Ahiarah
Marginal/Variable Costing Models for Fixed and Variable Costs
Benefits of the Marginal/Variable Costing as contrasted from the Full (Absorption)
Cost/Traditional I/S
Fixed and variable cost concepts are important because most managerial decision
models/aides/analytics have been designed based on the dichotomous cost behavior patterns. The
first decision model we will review for its benefits in managerial decision making is Marginal or
Variable Costing and associated I/S. Here are some of those benefits:
Marginal/Variable Costing & I/S
Provides Cont. Margin (CM) information. CM is used
in CVP analysis; profit accumulates at the rate of the
CM after the Break Even Point.
CM = Revenue - Variable Costs, where Var. Costs
include both Product & Period Var.Costs (Var. Prdn,
Mktg, & Admin. Costs).
Facilitates CVP analysis leading to answers to several
"What if...?" questions. Also leads to better forecast
Does not facilitate profit manipulation by managers
Better for evaluating multi-product decision cases
Facilitates the computation of MOS and DOL.
Full (Absorption) Costing & I/S
Does not provide Cont. Margin info., rather provides
Gross Margin info.
GM = Revenue - COGS, where COGS includes only
Product (both Fixed and Variable Prdn.) costs but no
Period costs
Does not facilitate CVP analysis because it does not
provide CM information; can lead to an incorrect
forecast of net income
Can allow managers to manipulate profit by
producing more units than can be sold and
inventorying them
Not useful for evaluating multiple-product decisions
Not useful in computing MOS and DOL
CVP or Break Even Analysis: Exploration of the relationship among costs, activity levels
(measured in sales or physical volume), price and profit.
Why do CVP Analysis?
1) To determine at what point an organization is breaking even, because past the BEP, the org. begins to make
profit, or so as to know when to expect profit.
2) To learn about the Contribution Margins from various product or business lines
3) To determine the Margin of Safety -- how far the present sales or budget level is from loss -- how much cushion
the org. has from loss.
4) To determine the Degree of Operating Leverage--that is, how changes in sales volume will change Net Income.
5) To answer several, "What if?..." questions during planning and decision making. What if...changes in cost, price,
volume...how would profit be impacted?
What if we want to increase profit by X%, what price shall we charge?
What if we increased advertising costs by $10,000, how will that affect profit?
What if we granted the Labor Union's demand for $5/hr. wage increase, how will that impact our profit?
6) To facilitate GO/No Go decision(s)
We are interested in introducing Product X into the market. Customer surveys show market
Capacity is 100,000 units. Our Accountants' BEP analysis shows that we need to sell 120,000
units to break even. Should we go with the new product X’s introduction? Why or why not?
7) To facilitate control of operations.
Which product(s)/business(es) contribute most/least to profit, and which managers should receive
extra reward or more coaching or even warning?
Manager A
Candies
$100
75
25
25%
12.2%
Product Type
Sales
Variable Cost
Contribution Margin
Dept. Cont. Margin %
Mgr. CM% to Total CM
Manager B
Greeting Cards
$120
80
40
33.33%
19.5%
Manager C
Photo Process
$140
100
40
28.57%
19.5%
Manager D
Periodicals
$200
100
100
50%
48.78%
Gen. Mgr
Total
$560
325
205
36.61%
100%
* Assumptions in CVP Analysis
* Graphical approach to CVP
* Equation/mathematical approach to CVP: Based on the Profit Equation or the Marginal I/S equation:
SP(x) - VC(x) - TFC = Profit
Single Product scenario
$ales and Units to earn a target profit
Units formula: TFC/$CM per unit; $Sales formula: TFC/CM%; where CM% = CM ratio
Units to earn a Target (EBIT) profit: (TFC + TP)/$CM per unit;
$Sales to earn a Target (EBIT) Profit: (TFC + TP)/CM%
Units to earn X % Return on Sales: TFC/(SCM per unit + ROS per unit)
$Sales to earn X % Return on Sales: TFC/(CM% - X% ROS)
* Margin of Safety
* BEP in Multiple Product cases
(You will need Sales-Mix percentages and Cont. Margin percentages), where Sales Mix is a term used to
describe the composition of a firm's sales or the constituent make-up of its total sales. It is the proportional
breakdown of a firm's total sales from its major product or service offerings).
C-V-P FORMULAS
Single Product
Multiple Product
Unit Sales to achieve BEP
$Dollar Sales to achieve
BEP
Unit Sales to earn a
Target Profit (TP)
$Dollar Sales to earn a
Target Profit (TP)
Unit Sales to earn a
Target Profit (TP) after
taxes
$Dollar Sales to earn a
Target Profit (TP) after
taxes
Unit Sales to earn X%
Return on Sales
$ales dollar to earn X
ROS
TFC/$CM per unit
TFC/Average $CM per unit
TFC/CM%
TFC/Average CM%
(TFC+TP)/$CM per unit
(TFC+TP)/Average $CM per unit
(TFC+TP)/CM%
(TFC+TP)/Average CM%
(TFC+[NI/1-Tax Rate])/$CM
per unit
(TFC+[NI/1-Tax Rate])/Average $CM
per unit
(TFC+[NI/1-Tax Rate])/CM%
(TFC+[NI/1-Tax Rate])/Average CM%
TFC/($CM per unit – X%ROS
per unit)
TFC/(CM%-X%ROS)