Chapter 9 planning and control9-1 cost-volume-profit analysisRelevant Glossary(1)cost-volume-profit(CVP)analysis 本量利分析(2)contribution margin 边际贡献(3)variable expense 变动成本(4)fixed expense 固定成本(5)contribution margin ratio(CM ratio) 边际贡献率(6)equation method 等式法(7)break-even point 盈亏平衡点(8)contribution margin method 贡献毛益法(9)margin of safety 安全边际(10)m argin of safety percentage 安全边际率(11)operating leverage 经营杠杆(12)S ales mix 混合销售Cost-volume-profit (CVP) analysis is one of the most powerful tools that managershave at their command. It helps them understands the interrelationship between cost,volume and profit in an organization by focusing on interactions between thefollowing five elements:(1)Price of products(2)V olume or level of activity(3)Per unit variable costs(4)Total fixed costs(5)Mix of products soldContribution margin is the amount remaining from sales revenue after variableexpenses have been deducted. Thus ,it is the amount available to cover fixedexpenses and then to provide profits for the period. Notice the sequence here——contribution margin is used first to cover the fixed expenses, and then whateverremains goes toward profit . if the contribution margin is not sufficient to cover thefixed expenses, then a loss of occurs for the period.The percentage of contribution margin to total sales is referred to as the contribution margin ratio(cm ratio). This ratio is computed as follows:CM ratio =CM/salesCVP analysis is sometimes referred to simply as break-even analysis. This is unfortunate because break-even analysis is only one elements of CVP analysis. Breaking-even analysis can be approached in two ways——fist, by the equation method; and second, by the contribution margin method. The equation method centers in the contribution approach to the income statement. The format of this statement can be expressed in equation from as follows:Sales——(variable expense +fixed expenses)=profitsRearranging this equation slightly yields the following equation, which is widely used in CVP analysis:Sales=variable expense + profitsAt the breaking-even point, profits will be zero. Therefore, the breaking-even point can becomputed by finding that point where sales just equal the total of the variable expenses plus the fixed expenses.The contribution margin method is actually just a variation of the equation method already described. The approach centers on the idea discussed earlier that each unit sold provides a certain amount of contribution margin that goes toward the covering of fixed costs. To find how many units must be sold to break even, one must divide the total fixed costs by the contribution margin being generated by each unit sold:There are several assumptions underlying the simplest form of CVP analysis——such as the breaking-even formulas. The major assumption as follows:(1)selling price is constant throughout the entire relevant range. The price of a product or servicewill not change as volume changes.(2)Cost are linear throughout the entire relevant range. and they can be accurately divided intovariable and fixed elements. The variable element is constant per unit, and the fixed element is constant in total over the entire relevant range.(3)In multiproduct companies, the sales mix is constant.(4)In manufacturing companies, inventories do not change. The number of units producedequals the number of units sold.There is a variation of this method that uses the CM ratio instead of the unit contribution margin. The result is the break-even in total sales dollars rather than in total units sold.Fixed expense / CM ratio =break-even point in total sales dollarsThis approach to break-even point analysis is particularly useful in those situations where a company has multiple product lines and wishes to compute a single break-even point for the company as a whole.CVP formulas can be used to determine the sales volume needed to achieve a target net profit figure. And a second approach would be to expand the contribution margin formula to include the target profit.This approach is simpler and more direct than using the CVP equation. In addition, it shows clearly that once the fixed costs are covered, the unit contribution margin is fully available for meeting profit requirements.The margin of safety is the excess of budgeted (or actual ) sales over the break-even volume sales. It states the amount by which sales can drop before losses begin to be incurred. The formula for its calculation is as follows:Total sales——break-even sales=margin of safety percentageThe margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in dollar terms by total sales:Margin of safety in dollar / total sales =margin of safety percentageTo the scientist, leverage explains how one is able to move a large object with a small force. To the manager, leverage explains how one is able to achieve a large increase in profits with only a small increase in sales and/or assets. One type of leverage that manager uses to do this is known as operating leverage.Operating leverage is a measure of the extent to which fixed costs are being used in an organization. It is great in companies that have a high proportion of fixed costs in relation to variable costs. Conversely, operating leverage is low in companies that have a low proportion of fixed costs in relation to variable cost. If a company has high operating leverage (that is, a highproportion of fixed costs in relation to variable costs), then profits will be very sensitive to changes in sales. Just a small percentage increase (or decrease) in profits.The degree of operating leverage at a given level of sales is computed by the following formula:Contribute margin / net income =degree of operating leverageThe degree of operating leverage is a measure, at a given level of sales, of how a percentage change in the sales, of how a percentage change in sales volume will affect profits.The preceding section have given us some insights into the principles involved in CVP analysis, as well as some selected examples of how these principle are used of CVP concepts in analyzing sales mix.The term sales mix means the relative combination in which a company’s products are sold. Managers are try to achieve the combination, or mix, that will yield the greatest amount of profits. Most companies have several products and often these products are not equally profitable. Whereas this is true, profits will depend to some extent on the sales mix that the company is able to achieve. profits will be greater if high-margin items make up a relatively large proportion of total sales than if sales consist mostly of low-margin items.Changes in the sales mix can cause interesting (and sometimes confusing) variations in a company’s profits. A shift in the sales mix from high margin items can causes the reverse effect——total profits may increase even though total sales decrease. Given the possibility of these types of variations in profits, one measure of the effectiveness of a company’s sales force is the sales mix that it is able to generate. It is one thing to achieve a particular sales volume; it is quite a different thing to sell the most profitable mix of products.The analysis of CVP relationships is one of management’s most significant responsibilities. Basically, it involves finding the most favorable combination of variable costs, fixed costs, selling price, sales volume, and mix of products sold. We have the trade-offs between variable costs and fixed costs, and between selling price and sales volume. Sometimes these trade-offs are desirable, and sometimes they are not. CVP analysis provides the manager with a powerful tool for identifying those courses of action that will improve profitability.9-2 budgeting: profit planning and control system(1) Budget n. 预算(2) Responsibility accounting 责任会计(3) Master budget 全面预算(4) Operation budgets 经营预算(5) Continuous or perpetual budget 滚动预算(6) Self-imposed budget 自愿预算(7) Production budget 产品预算(8) Capital budgeting 资本预算A budget is a detailed plan for the acquisition and use of financial and other resources over a specified period. It represents a plan for the future expressed in formal quantitative terms. The act of preparing a budget is called budgeting. The use of budgets to control a firm’s activities is known as budgetary control.The master budget is a summary of all phases of a company’s plans and goals for the future. It set specific targets for sales, production, distribution, and financing activities, and it generally culminates in a projected statement of net income and a projected statement of cashflows. In short, it represents a comprehensive expression of management’s plans for the future and how these plans are to be accomplished.The budgets of a business firm serve much the same function as the budgets prepared informally by individuals. Business budgets tend to be prepared informally by individuals. Business budgets tend to be more detailed and to involve more work, but they are similar to the budgets prepared informally by individuals in most other respects. Like personal budgets, they assist in planning and controlling expenditures; they also assist in predicting operating results and financial condition in future periods.The basic idea behind responsibility accounting is that each manager’s performance should be judged by how well he or she manages those items——and only those items——under his or her control. Each manager is then held responsibility for deviations between budgeted goals and actual results. In effect, responsibility accounting personalizes accounting information by looking at costs from a personal control standpoint. This concept is central to any effective profit planning and control system. Someone must be held responsible, or the cost will inevitably grow out of control.Budgets covering acquisition of land, buildings, and other items of capital equipment (often called capital budgets ) generally have time horizons that extend many years into the future. The later years covered by such budgets may be quite indefinite, but the lengthy time horizon is needed to assist management in its planning and to ensure that funds will be available when purchases of equipment become necessary. As time passes, capital equipment are needed, but find that no funds are available to make the purchases.Operation budgets are ordinarily set to cover a one-year period. The one-year period should correspond to the company’s fiscal year so that the budget figures can be compared with the actual results. Many companies divide their budget year into four quarters. The first quarter is then subdivided into months, and monthly budget figures are established. Theses near-term figures can usually be established with considerable accuracy. The last three quarters are carried in the budget at quarterly totals only. As the year progresses, the figures for the second quarter are broken down into monthly amounts, then the third quarter figures are broken down, and so forth. This approach has the advantage of requiring periodic review and reappraisal of budget data throughout the year.Continuous or perpetual budgets are used by a significant number of organizations. A continuous or perpetual budget is a 12-mouth budget that rolls forward one mouth (or quarter) as the current month (or quarter) is completed. In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. This approach keeps managers focused on the future at least one year ahead. Advocates of continuous budgets believe that managers using this approach to budgeting have less danger of becoming to focused on short-term results as the year progresses.Once self-imposed budgets are prepared, are they subject to any kind of review? The answer is yes. Even though individual preparation of budget estimates is usually critical to a successful budgeting program, such budget estimates cannot necessarily be accepted without being questioned by higher levels of management. If no system of checks and balances is present, the danger exists that self-imposed budgets will be too loose and will allow too much slack. The result will be inefficiency and waste. Therefore, before budgets are accepted, they must be carefully reviewed by immediate superiors. If changes from the original budget seem desirable, the items in question are discussed, and compromises are reached that are acceptable to all concerned.In essence, all levels of an organization should work together to produce the budget since top management is generally unfamiliar with detailed, day-to-day operations, it should rely on subordinates to provide detailed budget information. On the other hand, top management has a perspective on the company as a whole that is vital in making broad policy decisions in budget preparation. Each level of responsibility in an organization should contribute in the way that it best can in a cooperative effort to develop an integrated budget document.The master budget is a network consisting of many separate but interdependent budgets, this network is illustrated in exhibit 9-1Exhibit 9-1The sales budget is usually based on a sales forecast. A sales forecast generally encompasses potential sales for the entire industry, as well as potential sales for the firm preparing the forecast. Factors that are considered in making a sales forecast include the following:1.The company’s past sales volume.2.Unfilled back orders3.The company’s pricing policy for the budget period.4.The company’s marketing plans for the budget period.5.The company’s market share.6.Economic conditions in the industry.7.General economic conditions.Sales results from prior years are commonly used as a starting point in preparing a sales forecast. Forecasters examine sales data in relation to various factors, includingprices, competitive conditions, availability of supplies, and general economic conditions.Projections ate then made into the future based in those factors that the forecasters feelwill be significant over the budget period. In-depth discussions generally characterizedthe gathering and interpretation of all data going into the sales forecast. Thesediscussions, held at all levels of the organization, develop perspective and assost inassessing the significance and usefulness of data.Statistical tools such as regression analysis, trend and cycle projection, and correlation analysis may be used in sales forecasting, in addition, some firms have foundit useful to build econometric models of their industry or of the nation to assist inforecasting problems. Such models hold great promise for improving the overall qualityof budget data.The sales budget is the starting point in preparing the master budget. As shown earlier in exhibit 9-1 nearly all other items in the master budget, including production,purchases, inventories, and expenses, depend on it in some way. The sales budget isconstructed by multiplying the expected sales in units by the selling price. After thesales budget has been prepared, the production re requirements for the forthcomingbudget period can be determined and organized in the form of a production budget .afterthe production requirements have been computed, a direct material budget can beprepared. The direct materials budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. Preparing a budget of this kind is one step in a company’s overall material requirements planning (MRP).MRP is an operations management tool that uses a computer to assist the manager in overall materials and inventory planning. The objective of MRP is to ensure that the right materials are on hand, in the right quantities, and at the right time to support the production budget. The direct labor budget is also developed from the production budget. Direct labor requirements must be computed so that the company will know whether sufficient labor time is available to meet production needs. To compute direct labor requirements, the number of nits of finished product to be produced each period (month, quarter, and so on) is multiplied by the number of direct labor-hours required to produce a single unit. Many different types of labot may be involved. If so, then computations should be by type of labor needed. The direct labor requirements can then be translated into expected direct labor costs. How this is done will depend on the labor policy of the firm. However, many companies have employment polic ies or contracts that prevent them from laying off and rehiring workers as needed. The manufacturing overhead budget provides a schedule of all costs of production other than direct materials and direct labor. These cost should be broken down by cost behavior for budgeting purposes and a predetermined overhead rate developed. This rate will be used to apply manufacturing overhead to units of product throughout the budget period. A computation showing budgeted cash disbursements for manufacturing overhead should be made for use in developing the cash budget. Since some of the overhead costs do not represent cash outflows, the total budgeted manufacturing overhead costs must be adjusted to determine the cash disbursements for manufacturing overhead. The selling and administrative expense budget lists the budgeted expenses for areas other than manufacturing. In large organizations, this budget should be a compilation of many smaller, individual budgets submitted by department heads and other persons responsible for selling and administrative expenses. As illustrated in exhibit 9-1, the cash budget pulls together much of the data developed in the preceding steps. It is a good idea to restudy exhibit 9-1 to get the big picture firmly in mind before moving on.The cash budget is composed of four major sections: the receipts section, the disbursements section, the cash excess or deficiency section and the financing section.the receipts section consists of a listing of all of the cash inflows, except for financing, expected during the budget period. Generally, the major source of receipts will be from sales. The disbursements section consists of all cash payments that are planned for the budget period. These payments will include raw materials purchases, direct labor payments, manufacturing overhead costs, and so on, as contained in their respective budgets. In addition, other cash disbursements such as equipment purchases, dividends, and other cash withdrawals by owners are listed. The cash excess or deficiency section is computed as follows:Cash balance, beginning………………………………………………×××Add receipts ……………………………………………………×××Total cash available before financing………………………×××Less disbursements ………………………………………………×××Excess (deficiency of cash available over disbursements)……………………×××the financing section provides a detailed account of the borrowings and repayments projected to take place during the budget period. It also includes a detail of interest payments that will be due on money borrowed.。
