CVP Notes
CVP Notes
CVP Notes
Margin of Safety
If the target income is expected is expressed in terms of percentage of sales (example, 12 % of sales ),
the formula would be:
CVP Chart
NB// The decision whether a cost is fixed and variable, sometimes causes problems. Do not confuse
by title or name but look at the units given. If costs are per unit or per number made or sold then
the cost concerned is variable. If the cost are per unit time, example, per year then the cost are fixed
costs.
CVP
Sales
-Variable Cost
= Contribution Margin
-Fixed Cost
=Income before Tax
X Income Taxes (Percentage) of Income before tax
=Net Income
OR
Sales
-Variable Cost
= Contribution Margin
-Fixed Cost
=Net Income
CAPITAL BUGET NOTES
ARR
An initial investment of $130,000 is expected to generate annual cash inflow of $32,000 for
6 years. Depreciation is allowed on the straight line basis. It is estimated that the project
will generate scrap value of $10,500 at end of the 6th year. Calculate its accounting rate of
return assuming that there are no other expenses on the project.
Solution
Annual Depreciation = (Initial Investment − Scrap Value) ÷ Useful Life in Years
Annual Depreciation = ($130,000 − $10,500) ÷ 6 ≈ $19,917
Average Accounting Income = $32,000 − $19,917 = $12,083
Accounting Rate of Return = $12,083 ÷ $130,000 ≈ 9.3%
Profitability Index
IRR
Payback
NPV
Cost of Capital
Independent
Mutually exclusive
Explain the four (4) core ethical responsibilities of a management accountant. (6 marks)
b. Explain how sensitivity analysis can benefit management’s decision making when
using
cost-volume-profit techniques. (5 marks)
c. Outline three (3) benefits of budgeting. (6 marks)
d. Sketch and fully label a traditional break-even chart. (8 marks)
(Total 25 marks)
Question 1
If two projects are mutually exclusive and the cost of capital is 10% and requires an
investment
of $50m. The following cash flows are expected from the investment
Year Project A Project B
1 10 40
2 20 20
3 30 16
4 40 12
a. What is the payback period for each of the projects? (5 marks)
b. If the two projects are independent and the cost of capital is 5%, which projector
projects
should the firm undertake? (10 marks)
c. If the two projects are mutually exclusive and the cost of capital is 10%, which project
should the firm undertake? (10 marks)
(Total 25 marks)
State five assumptions of the Breakeven / Cost Volume profit analysis
SP (STANDARD PRICE)
AP (ACTUAL PRICE)
AQ (ACTUAL QUANTITY)
SQ (STANADARD QUANTITY)
MATERIAL USAGE VARIANCE = SP (SQ (STANDARD QUANTITY FOR ACTUAL OUTPUT) - AQ)
TOTAL LABOUR COST VARIANCE = (STANDARD RATE X STANDARD HOURS) - (ACTUAL RATE X ACTUAL
HOURS)
VARIABLE OVERHEAD RATE VARIANCE (expressed in terms of the number of machine hours
or labor hours) = (ACTUAL VARIABLE OVERHEAD RATE (ACTUAL HOURS X ACTUAL VARIABLE
OVERHEAD RATE) - STANDARD VARIABLE OVERHEAD RATE (ACTUAL HOURS X STANDARD VARIABLE
OVERHEAD RATE)) X ACTUAL LABOUR HOURS
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