Accounting in Organisations and Society

School: Royal Melbourne Institute of Technology - Course: ACCOUNTING ECON1010 - Subject: Accounting

Accounting in Organisations and Society Topic 4: Cost-Volume-Profit and Break-Even Analysis Introducing Accounting Terminology relationships and decisions that impact profit Note: these concepts will be covered through the entire semester Sales of revenue? 'Sales and 'Revenue' - in accounting have the same meaning • The dollar amount generated from a sale of goods or provision of services (or any other use of capital or assets) associated with the main operations of an organisation • Measured before any costs or expenses are deducted. • Revenue (Sales) is shown usually as the top item in an income statement. o All charges, costs, and expenses are then subtracted to arrive at net profit (or net income) before taxes are paid. 'Profit' Profit is the positive gain remaining for a business after costs incurred to earn revenue have been deducted from revenue • Profit can be measured for many factors. For example, o an individual product or service o A group of products or services o A business as a whole • The key point is that : Profit = Revenue less costs incurred to earn that revenue The cost object and analysis Cost Object: refers to the object or item for which costs are collected A cost object can be virtually anything • As soon as you want to know the cost of something, that 'something' becomes the cost object o What is the cost of a movie ticket? - the ticket is the cost object o What is the cost of making a pizza? - the pizza is the cost object

Cost Volume Profit (CVP) Analysis CVP Analysis is a method of management accounting that examines the impact of different levels of costs and sales volume on operating profit. • CVP Analysis can be used for many purposes o Breaking costs into fixed and variable, managers can understand profitability of products or services o CVP is used to make informed decisions about products and/or services • We are going to examine how to use CVP analysis to set targetsfor cost expenditures and sales levels CVP analysis - some preliminary concepts o Contribution Margin o Breakeven Point o Target Profit Contribution Margin Total contribution margin (CM) Contribution margin per unit (CMU) Contribution margin measures the amount of sales revenue left over AFTER variable costs have been deducted to contribute to 1. Paying for fixed costs and then