Lesson 1

Introduction - Facilitator

Course Leader Loong Yik Yan aka Simson

Experience 16 years of teaching Management
Accounting, Finance and Accounting related subjects
Academic Credentials Diploma in Commerce
(Management Accounting), ACMA, CGMA, MSc(UWE)
Position held:
Former Head of Professional Accountancy Division
Programme Supervisor (AFA1)
Acting Programme Supervisor (DAC3)
Management Accounting Subject Committee
Chairman
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Consultation Hours
Consultation Hours
Time:
Tues 10am-11am, 2pm-3pm
Wed 8.30am-9.30am
Thurs 8.30am-11.30am
Venue: R207
Examination Format (3 hours)
Section A 2 compulsory questions (50 marks)
Section B Any 2 out of 3 questions (25 marks
each question)
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Learning Outcomes
Objectives:
To provide students with knowledge of various
decision making tools, models and approach.
To equip students with the ability to evaluate
alternatives and advise on the potentials of each
alternatives taking into consideration of the risk and
reward.
To provide an appreciation of inter-company
transactions in particular with the evaluation of the
divisional performance and the impacts of transfer
pricing on motivation, divisional performance and the
overall company as a whole.
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Introduction Subject Content

Separated into the followings:1. Short-term Decision Making
2. Investment Appraisal
3. Pricing Decisions
4. Decision Making under Risk and
Uncertainty
5. Transfer Pricing
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Lesson 1 - Revision
Definition of Costs
Cost centre - a production or service
location, function, activity or item of
equipment for which costs are
accumulated.
Cost units - a unit of product or service in
relation to which costs are ascertained.

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Example of Cost Units

Airlines

Electricity
Professional Services
Education
Hotel

Hospital
Online News
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Cost classification
Cost classification the arrangement of items
into logical groups having regards to their nature
or purpose.
Example:
Nature Elements of cost
Purpose Direct vs Indirect
Function Marketing, production, administration
etc
Controllability Controllable vs Non-controllable
Decision making Relevant vs Irrelevant

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Cost classification

1.
2.

3.

Based on behaviour
Most cost in reality is semi-variable in nature
and may need to be separated into its
elements.
Basically there are 3 methods:High Low method
Scattergraph method
Least squares method of regression analysis

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Cost-volume-profit analysis
Formulas;
Breakeven point (units) = Fixed Costs/ Unit
Contribution
Breakeven point (RM) = Fixed Costs/ CS
Ratio
Margin of Safety (units or RM) = Expected
sales Breakeven Sales

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Cost-volume-profit analysis
Multi product breakeven analysis
One of the assumptions to perform breakeven analysis
in a multi-product organization is the companys
product sales mix is constant.
This is necessary in order to allow us to calculate a
weighted average contribution per mix, the weighting
being on the basis of the quantities of each product in the
constant mix.
The only situation when the mix of products does not
affect the analysis is when all of the products have the
same ratio of contribution to sales.

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Cost-volume-profit analysis
Example 1:
Monster Inc manufactures and sells three
products, the beta, the gamma and the delta.
Relevant unit information is as follows:
Alpha Beta
Gamma
Selling price
135.00 165.00 220.00
Variable cost
73.50 58.90 146.20

Total fixed costs are $950000. An analysis of

past trading patterns indicates that the products
are sold in the ratio of 3:4:5
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Cost-volume-profit analysis
Required:
Calculate the followings in relation to
Monster Inc:
a)
b)
c)

Average weighted contribution

Breakeven point in units
Quantity to be sold for each product in
order to achieve a targeted profit of
$93,300.

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Cost-volume-profit analysis
Solution:
a)
Contr per unit
Weightage
Weighted cont

Alpha Beta
Gamma
61.50 106.10 73.80
3
4
5
184.50 424.40 369.00

Average weighted contribution = Total weighted contribution / Total

weightage
= 977.9/12 = 81.49

b) Breakeven point (units) = Fixed costs / Weighted average

contribution per unit
= 950000/81.49 = 11657.87
Alpha = 11657.87X3/12 = 2914
Beta = 11657.87X4/12 = 3886
Gamma = 11657.87X5/12 = 4857
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Cost-volume-profit analysis
c) Quantity to be sold to achieve the targeted profit of $98,300
= (Fixed costs + Targeted profit) / Weighted average
contribution

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Cost-volume-profit analysis
Example 2:
Bolehland Sdn Bhd produces and sells two
products, the BN and the PR. The organization
expects to sell 1 BN for every 2 PRs and have a
monthly sales revenue of RM150,000. The BN
has a C/S ratio of 20% whereas the PR has a
C/S ratio of 40%. Budgeted monthly fixed costs
are RM30,000. Calculate the budgeted
breakeven sales revenue.

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Cost-volume-profit analysis
Solution:-

Points to ponder:
How would profit and breakeven point in units be affected
under these 3 different scenarios?
If the mix shifts towards products with lower contribution
margins without corresponding increase in revenue.
If the mix shifts towards product with higher contribution
margins without corresponding increase in revenue.
If sales are at the specified level but not in the specified mix.
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Cost-volume-profit analysis
Example 5 (Sales mix decision):
JM makes and sells two products, J and M. The
budgeted selling price of the J is RM60 and that of the M,
RM72. Variable costs associated with producing and
selling the J are RM30 and, with the M, RM60. Annual
fixed production and selling costs of JM are
RM3,369,600.
JM has two production/sales options. The J and M can
be sold either in the ratio of two Js to three Ms or in the
ratio of one J to two Ms.
Determine which is sales mix should be adopted by JM.

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Cost-volume-profit analysis
Solution

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Cost-volume-profit analysis
Multi product breakeven charts
Multi product breakeven charts are quite similar
to single product breakeven charts. There are
basically 3 approaches to constructing multi
product breakeven charts:

Output in RM sales and constant product mix

Products in sequence
Output in terms of % of forecast sales and a
constant product mix.

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Cost-volume-profit analysis
Multi-product PV Chart
A multi product PV Chart can be drawn using an
average contribution per unit of CS ratio assuming
constant sales mix for all total quantities.
Example:
Budgeted data:
Product

Sales (RM)

Contribution (RM)

10,000

2,000

14,000

7,000

8,000

2,400

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Cost-volume-profit analysis
Total fixed costs is RM8,000pa.
Construct the multi-product profit-volume chart on the
basis of products are sold in descending order of
contribution sales ratio.
Solution:
Step 1: Calculate CS ratio for each product.
Step 2: Prepare the table that shows the cummulative
profit figures on descending order.
Step 3: Construct the PV chart.

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Cost-volume-profit analysis
Solution

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Cost-volume-profit analysis
Sensitivity Analysis
Sensitivity analysis is an analysis that shows the
vulnerabilities of changes in a given variable on a
particular decision.
For example, this analysis would be able to assist
management to assess how changes in the sales mix
from the original predicted affects the companys
profitability.
It can highlight the risks that an existing cost
structure poses for an organization, and hence may
lead managers to consider alternative cost structures.

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Cost-volume-profit analysis
Sensitivity analysis and breakeven charts
Example
How would an increase in selling price affects
companys profitability and breakeven point
assuming that sales unit will fall?
How an increased in fixed cost would affect
the companys profitability and breakeven
point?
How would a reduction in variable cost per unit
due to bulk discount from material purchased
affects companys breakeven point?
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Cost-volume-profit analysis

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