Week 5- CVP Analysis and Budgeting

Question 1

What is cost information used to do?

Answer 1

• Determine the contribution of units to products
• Levels of production to achieve a target profit
• Determine break even points
• Set selling prices
• Set different selling prices for different marketing strategies
• Distinguish between different marketing strategies
• Decide on a make in house or buy in strategy
• Maximise short term profits when resources are scarce

Question 2

Describe contribution

Answer 2

• The surplus that arises from the production and sale of one unit of product or service
• Selling price less the variable costs of production
• Contributes to meeting an entity’s fixed costs

Question 3

Describe break even point

Answer 3

• The number of units of production and sales that will cover all the business’ costs both fixed and variable
• The point at which revenue from sales = all the costs of the business both fixed and variable

Question 4

How do you calculate the break even point?

Answer 4

= Fixed cost / ( Selling price per unit - Variable cost per unit )

Question 5

How do you calculate contributions?

Answer 5

Selling price per unit - Variable cost per unit

Question 6

How do you calculate margin of safety?

Answer 6

= Sales - Break even

Question 7

How do you calculate sales units?

Answer 7

= ( Target profit / Contribution per unit ) + Break even sales units

Question 8

Describe margin of safety

Answer 8

An indicator of how much sales may decrease before a loss occurs

Question 9

Describe CVP analysis

Answer 9

• A way of making presenting financial information for decision making
• A systematic method of examining the relationship between changes in activity (i.e. output) and changes in total sales revenue, expenses and net profit
• Studies the relationship between costs (both fixed and variable), sales levels, and profit

Question 10

How do you calculate profit?

Answer 10

Profit = ( Unit selling price x Units sold ) - ( [Unit variable cost x Units sold] + Total fixed costs )

Question 11

What are some assumptions of CVP analysis?

Answer 11

• All variables other than the particular under consideration remain constant
• A single product or constant sales mix is assumed
• Total costs and total revenues are linear functions of output
• Costs can be accurately divided into their fixed and variable elements
• The analysis applies only to a short term horizon

Question 12

What are the 5 stages of the planning proccess?

Answer 12

• Identify objectives
• Search for alternative courses of action
• Gather data about alternatives
• Select alternative courses of action
• Implement the decisions

Question 13

What are the 2 stages of the control process?

Answer 13

• Compare actual and planned outcomes
• Respond to divergences from plan

Question 14

Describe budgets

Answer 14

• The expression of a plan in quantitative (often monetary) terms

Question 15

Name 6 objectives of budgets

Answer 15

• Planning
• Communication
• Coordination and integration
• Control
• Responsibility
  -Motivation

Question 16

What are the 9 steps of the budgeting process?

Answer 16

• Setting the strategy and deciding on selling prices
• The sales budget
• Calculating the direct costs of budgeting sales
• Setting the budgets for fixed costs
• Drawing up the budgeted monthly statement of profit and loss
• Calculating cash receipts from sales
• Calculating cash payments to direct material suppliers and direct labour
• Drawing up the monthly cash budget
• Drawing up the budgeted statement of financial position

Question 17

How may entities control operations?

Answer 17

By a comparison of actual results against budgeted results

Question 18

How can corrective and enhancement action help a business?

Answer 18

Corrective
- can be taken to eliminate unfavourable divergences from the plan

Enhancement
- can be taken to build upon favourable divergences from the plan