ACCT1101 Lecture Two

"An evolving report that describes a compaies goals and its current plans for acheiving those goals"

• Internal users - management (build and use)
• Some external users - eg bank

• company description
• marketing plan
• description of operations
• financial plan

• reduces uncertainty by defining goals (decrease risk of failure)
• helps identify scope of operations and interrelate sections of the business (departments can cooperate and share resources)
• serves as a benchmark (evaluate business performance)
• used to obtain financing (bank loans, government grants)
• evaluate and identify risk and potential return

• how the business is organised
• location
• objectives
• products/services
• target customers - current and potential

• evidence of demand
• market research
• strategy

• how will the business develop and enhance products
• relationships with suppliers and customers

• identify capital requirements
• sources of capital
• projected financial performance
• support with CVP analysis

• It shows how profit is affected by:
• changes in sales volume (activity level)
• selling prices of products
• various costs of the company (fixed and variable)

"To help managers predict the outcomes of decisions they make on profit" (good/bad? how to maintain or improve profit)

• All costs can be divided into fixed costs and variable costs
• Fixed costs remain the same regardless of activity levels
• Variable costs can vary with activity level, but are constant per unit of output
• Efficiency and productivity remain the same

"The behaviour of cost in response to specified drivers (eg volume of sales) for a time period"

• - TFC remains constant with changes in sales volume
• - Unit cost changes

eg. TFC = $1million if only sell one unit, unit cost = $1million if sell 2 units, unit cost = $500,000 etc

• - VC changes in propertion to sales volume change
• - Unit cost reamains constant

• eg. variable cost per unit = $1 if 10 units sold, V = $10 if 20 units sold, V = $20
• (V = total variable cost, vc = variable cost per unit)

Sum of the fixed costs and variable costs at the same volume

TC = FC + V = FC + (vc*n)

• cost behaviours are specific to the situation (could be fixed or variable depending)
• estimation = inaccuracies
• need to remember relevant range
• prices change for inputs and outputs
• advancement of technology - adapt
• cost drivers change
• need to predict using info sytems to avoid human error
• enhance reliability by using large observations/data

Net Profit = Revenues - Expenses

"How much of the selling price will contribute towards covering fixed costs"

TCM = R - V

UCM = p - vc

CMR = TCM / Sales

OR

CMR = UCM / p

• where there is no profit and no loss
• when the company earns back what it has initially paid
• when total sales = total costs (R = TC)

• R = TC = FC + V
• R - TC = $0
• CM = FC

• Graphical (Profit graph and CVP graph)
• (Profit) Equation Method
• Contribution Margin Method

• 1. FC line
• 2. V line
• 3. TC line
• 4. Sales line (rate x volume)

• 1. FC line
• 2. CM line

q(BEP) = FC / (p - vc)

• explanation:
• q = (FC + Profit) / (p - vc)
• at BEP, Profit =0

units: BEP(q) = FC / UCM where UCM = p - vc

sales: BEP($) FC / CMR where CMR = TCM / sales or UCM / p

target profit: target(q) = (FC + target Profit) / UCM

"The amount by which sales can fall before incurring a loss and can therefore measure the risk associated with business operations"

MOS = sales ($) - BEP($)

MOS ratio = MOS ($) / Total Sales ($)

"A measure of the realtionship between profit and cost behaviour"

"The use of FC to increase profit as sales increase"

(higher operating leverage = higher risk and higher potential profits)

Operating leverage = FC / TC