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Business and Its Environment Chapter 5 Accounting Introduction to management and financial accounting Differences between management and financial accounting Cost-volume-profit analysis Definition of accounting The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. The users of accounting information • Internal parties within the organisation; • External parties such as shareholders, creditors and regulatory agencies, outside the organization. Management accounting • Management accounting is concerned with the provision of information to people within the organisation to help them make better decisions and improve the efficiency and effectiveness of existing operations. Financial accounting • Financial accounting is concerned with the provision of information to external parties outside the organisation. Differences between management accounting and financial accounting • Legal requirements • Focus on individual parts or segments of the business • Generally accepted accounting principles • Time dimension • Report frequency ACCA and CPA • ACCA (The Association of Chartered Certified Accountants) • CPA (Certified Public Accountant) • 财务报表编制（Preparing Financial Statements） • 财务信息与管理（Financial Information for Management） • 人力资源管理（Managing People） • …… 四大国际会计师事务所 在国际上，是指（2009年数据）： • 普华永道（PWC），收入281.8亿美元，从业人 员116935人。 • 德勤（DTT），收入274亿美元，从业人员 124000人。 • 安永（Ernest & Young），收入245.2亿美元， 从业人员99203人。 • 毕马威（KPMG），收入226.9亿美元，从业人员 93000人。 • 排名第五的德豪国际收入为51.45亿美元，与四大 的差距非常大。 Variable costs • Short-term variable costs vary in direct proportion to the volume of activity; • Total variable costs are linear and unit variable cost is constant. Variable costs • Short-term variable manufacturing costs include piecework labour, direct materials and energy to operate the machines. • No-manufacturing variable costs include sales commissions and petrol. Fixed costs • Fixed costs remain constant over wide ranges of activity for a specified time period. • Examples of fixed costs include depreciation of the factory building, supervisors’ salaries and leasing charges for cars used by the salesforce. Fixed costs Units produced Fixed cost per unit (£) 1 5000 10 500 100 50 1000 5 Cost-volume-profit analysis • How many units must be sold to break- even? • What would be the effect on profits if we reduce our selling price and sell more units? • What sales volume is required to meet the additional fixed charges arising from an advertising campaign? • Should we pay our sales people on the basis of a salary only, or on the basis of a commission only, or by a combination of the two? A mathematical formula net profit = (units sold × unit selling price) - [(units sold × unit variable cost) + total fixed costs] NP = net profit X = units sold P = selling price b = unit variable cost a = total fixed costs NP = Px – (a + bx) Norvik Enterprises operate in the leisure and entertainment industry and one of its activities is to promote concerts at locations throughout Europe. The company is examining the viability of a concert in Stockholm. Estimated fixed costs are £ 60 000. These include the fees paid to performers, the hire of the venue and advertising costs. Variable costs consist of the cost of a pre- packed buffet which will be provided by a firm of caterers at a price, which is currently being negotiated, but it is likely to be in the region of £10 per ticket sold. The proposed price for the sale of a ticket is £20. The managements of Norvik have requested the following information: 1. The number of tickets that must be sold to break-even (that is, the point at which there is neither a profit or loss). 2. How many tickets must be sold to earn £30 000 target profit? 3. What profit would result if 8000 tickets were sold? 4. What selling price would have to be charged to give a profit of £30 000 on sales of 8000 tickets, fixed costs of £60 000 and variable costs of £10 per ticket? 5. How many additional tickets must be sold to cover the extra cost of television advertising of £8000? 1. BREAK-EVEN POINT IN UNITS (I.E. NUMBER OF TICKETS SOLD) 60 000 + 10x = 20x – 0 x = 6 000 • Contribution margin is equal to sales (Px) minus variable expenses (bx). Break-even point in units = fixed costs ÷ contribution per unit x = a ÷ (P – b) and so x = £60 000 ÷ £10 2. UNITS TO BE SOLD TO OBTAIN A £ 30000 TARGET PROFIT £30 000 = £20x – (£60 000 + £10x) £90 000 = £10x and so x = 9000 tickets Contribution margin approach units sold for desired profit = (fixed costs + target profits) ÷ contribution per unit x = (a + NP) ÷ (P – b) and so x = £90 000 ÷ £10 3. PROFIT FROM THE SALE OF 8000 TICKETS NP = £20 × 8000 - (£60 000 + £10 × 8000) = £160 000 – (£60 000 + £80 000) and so NP = £20 000 4. SELLING PRICE TO BE CHARGED TO SHOW A PROFIT OF £30 000 ON SALES OF 8000 UNITS £30 000 = 8000P – (£60 000 + (£10× 8000 )) = 8000P- £140 000 giving 8000P = £170 000 and P = £21.25 (i.e. an increase of £1.25 per ticket) 5. ADDITIONAL SALES VOLUME TO MEET £8000 ADDITIONAL FIXED ADVERTISING CHARGES The contribution per unit is £10 and fixed costs will increase by £8000. Therefore an extra 800 tickets must be sold to cover the additional fixed costs of £8000. THE PROFIT-VOLUME RATIO （PV ratio） The profit-volume ratio (also known as the contribution margin ratio) is the contribution divided by sales. It represents the proportion of each £1 sale available to cover fixed costs and provide for profit. NP = (Sales revenue × PV ratio) - Fixed costs NP + Fixed cost = Sales revenue × PV ratio Therefore the break-even sales revenue (where NP = 0) = Fixed costs/PV ratio RELEVANT RANGE Let us assume that the caterers will charge a higher price up to 4000 tickets sold but reductions will apply for sales volumes in excess of 12 000 tickets. Thus, the £10 variable cost relates only to a sales volume within a range of 4000 - 12 000 tickets. Margin of safety The margin of safety indicates by how much sales may decrease before a loss occurs. percentage margin of safety = (expected sales – break-even sales) ÷ expected sales = (£160 000 - £120 000) ÷£160 000 = 25% A Limited has fixed costs of £60000 per annum. It manufactures a single product which it sells for £20 per unit. Its contribution to sales ratio is 40%. A Limited’s breakeven point in unit is . Z plc makes a single product which it sells for £16 per unit. Fixed costs are £76 800 per month and the product has a contribution to sales ratio of 40%. In a period when actual sales were £224 000, Z plc’s margin of safety, in units, was . The following monthly data are available for the Boarder, Inc. and its only product: Unit sales price = $36, Unit variable expenses = $28, Total fixed expenses = $50,000. Actual sales for the month of May = 7,000 units. The margin of safety for the company for May was: . Keller Co. sells a single product for $28 per unit. If variable costs are 65% of sales and fixed costs total $9,800, the break-even point will be (rounded): . The contribution margin ratio is 30% for the Spice Co. and the breakeven point in sales is $150,000. If the company desires a target net income of $60,000, sales would have to be: .