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Anthony Williams - 0 views

    • Anthony Williams
      Important point : Link between accounting & economics
Anthony Williams

Chapter 3 - Breakeven Analysis - 0 views

    • Anthony Williams
      Very Important Point: Profit Structure and factors affecting it
  • Profit depends on a large number of factors, most important of which are the cost of manufacturing and the volume of sales. Both these factors are interdependent. Volume of sales depends upon the volume of production and market forces which in turn is related to costs. Management has no control over market. In order to achieve certain level of profitability, it has to exercise control and management of costs, mainly variable cost. This is because fixed cost is a non-controllable cost. But then, cost is based on the following factors:

    • Volume of production
    • Product mix
    • Internal efficiency and the productivity of the factors of production
    • Methods of production and technology
    • Size of batches
    • Size of plant
    Thus, one can say that cost-volume-profit analysis furnishes the complete picture of the profit structure. This enables management to distinguish among the effect of sales, fluctuations in volume and the results of changes in price of product/services.
  • In other words, CVP is a management accounting tool
  • ...19 more annotations...
  • Cost-volume- profit analysis can answer a number of analytical questions. Some of the questions are as follows:

    1. What is the breakeven revenue of an organization?
    2. How much revenue does an organization need to achieve a budgeted profit?
    3. What level of price change affects the achievement of budgeted profit?
      • What is the effect of cost changes on the profitability of an operation?
  • Objectives of Cost-Volume-Profit Analysis
    1. In order to forecast profits accurately, it is essential to ascertain the relationship between cost and profit on one hand and volume on the other.
    2. Cost-volume-profit analysis is helpful in setting up flexible budget which indicates cost at various levels of activities.
    3. Cost-volume-profit analysis assist in evaluating performance for the purpose of control.
      • Such analysis may assist management in formulating pricing policies by projecting the effect of different price structures on cost and profit.
  • Assumptions and Terminology
  • The number of output (units) to be sold is the only revenue and cost driver.
  • Total costs can be divided into a fixed component and a component that is variable with respect to the level of output.
  • There is linear relationship between revenue and cost.
  • When put in a graph,
  • Y = mx + C
  • The unit selling price, unit variable costs and fixed costs are constant.
  • The theory of CVP is based upon the production of a single product.
  • The analysis either covers a single product or assumes that the sales mix sold in case of multiple products will remain constant as the level of total units sold changes.
  • All revenue and cost can be added and compared without taking into account the time value of money.
  • The theory of CVP is based on the technology that remains constant.
  • The theory of price elasticity is not taken into consideration.
  • It is assumed that the production facilities anticipated for the purpose of cost-volume-profit analysis do not undergo any change.
  • In case where a variety of products with varying margins of profit are manufactured, it is difficult to forecast with reasonable accuracy the volume of sales mix which would optimize the profit.
  • The analysis will be correct only if input price and selling price remain fairly constant which in reality is difficulty to find.
  • It is assumed that the changes in opening and closing inventories are not significant, though sometimes they may be significant.
  • Inventories are valued at variable cost and fixed cost is treated as period cost.
Anthony Williams

Accenture Academy - Home - 0 views

    My Account
Anthony Williams

Lecture 5 Corporate Finance - 0 views

    A good risk and return model, CAPM
Anthony Williams

Corporate Finance notes 1 - 0 views

    Slides to be read with corporate finance lectures
Anthony Williams

Corporate Finance Lecture 4 - 0 views

    Alternatives to stock price maximization
    Why I would stick with market based mechnisms
    Closing thoughts on objectives
    First steps on risk
Anthony Williams

Corporate Finance lecture 3 - 0 views

    What objective should finance purse ? Managerial vs Stockholder
Anthony Williams

Basics of Financial Management - 0 views

    power point slides of the book
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