1. Cost-Volume-Profit (CVP) Analysis 📊

CVP Analysis is one of the most important tools for decision-making. Master this!

A. Key Concepts and Formulas

Concept	Formula	Meaning
Contribution Margin (CM)	Sales - Variable Costs	Amount available to cover fixed costs and profit
CM per Unit	Selling Price - Variable Cost per Unit	CM contributed by each unit sold
CM Ratio	CM / Sales	Percentage of each peso that covers fixed costs
Break-even (units)	Fixed Costs / CM per Unit	Units to sell to have zero profit
Break-even (pesos)	Fixed Costs / CM Ratio	Sales needed to have zero profit
Target Profit (units)	(FC + Target Profit) / CM per Unit	Units to sell to achieve desired profit
Margin of Safety	Actual Sales - Break-even Sales	Cushion before incurring loss
Degree of Operating Leverage	CM / Net Operating Income	Sensitivity of profit to sales changes

💡 BOARD EXAM TIP:

When there's a target profit after tax:

Target Profit Before Tax = Target Profit After Tax / (1 - Tax Rate)

B. Multi-Product CVP Analysis

Weighted Average CM = Σ (CM per Unit × Sales Mix %)

Then use the weighted average CM in break-even formula.

2. Standard Costing & Variance Analysis 🎯

Variance analysis helps identify where actual performance deviates from standards:

A. Direct Materials Variances

Variance	Formula	Who is Responsible?
Materials Price Variance (MPV)	(AP - SP) × AQ Purchased	Purchasing Department
Materials Quantity Variance (MQV)	(AQ Used - SQ) × SP	Production Department

B. Direct Labor Variances

Variance	Formula	Who is Responsible?
Labor Rate Variance (LRV)	(AR - SR) × AH	HR / Personnel
Labor Efficiency Variance (LEV)	(AH - SH) × SR	Production Supervisor

C. Variable Overhead Variances

Variance	Formula
VOH Spending Variance	Actual VOH - (AH × Standard VOH Rate)
VOH Efficiency Variance	(AH - SH) × Standard VOH Rate

D. Fixed Overhead Variances

Variance	Formula
FOH Budget Variance	Actual FOH - Budgeted FOH
FOH Volume Variance	Budgeted FOH - Applied FOH

📝 Legend:

AP = Actual Price | SP = Standard Price | AQ = Actual Quantity | SQ = Standard Quantity

AR = Actual Rate | SR = Standard Rate | AH = Actual Hours | SH = Standard Hours

Favorable: Actual < Standard (saves money)

Unfavorable: Actual > Standard (costs more)

3. Relevant Costing & Decision Making 🔧

Focus on costs that MATTER for the decision at hand:

A. Types of Costs

Cost Type	Definition	Relevant?
Relevant Cost	Future cost that differs between alternatives	YES
Sunk Cost	Already incurred, cannot be changed	NO
Opportunity Cost	Benefit foregone from next best alternative	YES
Differential Cost	Difference in cost between alternatives	YES
Allocated Fixed Costs	Fixed costs that remain regardless of decision	NO

B. Common Decision Types

Make or Buy Decision

Make if: Total relevant cost to make < Purchase price

Consider: Variable manufacturing costs + Avoidable fixed costs + Opportunity cost

Special Order Decision

Accept if: Special price > Relevant costs

Conditions: Excess capacity, no effect on regular sales

Keep or Drop Decision

Keep if: Segment CM > Avoidable fixed costs

Warning: Don't drop just because of allocated overhead!

Sell or Process Further

Process if: Incremental revenue > Incremental cost

Joint costs are irrelevant (sunk cost)

C. Scarce Resource Allocation

When resources are limited:

Rank products by: CM per unit of scarce resource

Example: If machine hours are limited, prioritize products with highest CM per machine hour

4. Budgeting 📋

Budgeting is planning in financial terms. Know the sequence!

A. Master Budget Components (Sequence)

Sales Budget - Starting point! (Units × Price)
Production Budget - Units to produce (Sales + Ending Inv - Beginning Inv)
Direct Materials Budget - Materials needed + purchases
Direct Labor Budget - Labor hours and cost
Manufacturing Overhead Budget - Variable + Fixed overhead
Selling & Admin Budget
Cash Budget - Cash inflows and outflows
Budgeted Income Statement
Budgeted Balance Sheet

B. Flexible Budget

Static Budget

Prepared for ONE activity level only

Does NOT adjust for actual volume

Flexible Budget

Adjusts for actual activity level achieved

Better for performance evaluation

5. Performance Measurement 📈

A. Responsibility Centers

Center Type	Manager Controls	Performance Measure
Cost Center	Costs only	Cost variance, efficiency
Revenue Center	Revenues only	Sales variance
Profit Center	Revenues and costs	Segment margin, profit
Investment Center	Revenues, costs, AND assets	ROI, Residual Income, EVA

B. Investment Center Metrics

Metric	Formula	Advantage
ROI	Net Operating Income / Average Operating Assets	Easy comparison between divisions
Residual Income (RI)	NOI - (Operating Assets × Required Rate)	Encourages profitable investments
EVA	NOPAT - (Capital × WACC)	Considers cost of all capital

⚠️ ROI Problem:

Managers may reject profitable projects if it lowers their current ROI (even if ROI > cost of capital)

Solution: Use Residual Income instead!

6. Strategic Management Tools 🎯

A. Balanced Scorecard (4 Perspectives)

Perspective	Focus	Sample Measures
Financial	How do we look to shareholders?	ROI, EVA, Revenue growth
Customer	How do customers see us?	Satisfaction, retention, market share
Internal Business Process	What must we excel at?	Quality, cycle time, defect rates
Learning & Growth	Can we continue to improve?	Employee training, innovation, IT

B. Capital Budgeting Methods

Method	Formula/Concept	Decision Rule
NPV	PV of inflows - PV of outflows	Accept if NPV > 0
IRR	Rate that makes NPV = 0	Accept if IRR > Required Rate
Payback Period	Investment / Annual Cash Flow	Accept if ≤ Target period
Profitability Index	PV of Inflows / Initial Investment	Accept if PI > 1

7. Practice Questions - Test Yourself! 📝

MAS Practice Problems (Click to expand)

1. Fixed costs are ₱100,000 and CM per unit is ₱20. Break-even units is:

A) 2,000 units

B) 5,000 units

C) 10,000 units

D) 20,000 units

Answer: B - Break-even = ₱100,000 / ₱20 = 5,000 units

2. Materials Price Variance = (AP - SP) × AQ. This variance is the responsibility of:

A) Production Department

B) Purchasing Department

C) Sales Department

D) HR Department

Answer: B - Purchasing Department is responsible for the price paid for materials.

3. Which cost is RELEVANT in decision making?

A) Sunk cost

B) Allocated fixed overhead

C) Opportunity cost

D) Book value of old equipment

Answer: C - Opportunity cost is always relevant as it represents foregone benefits.

4. The starting point of a master budget is:

A) Production budget

B) Cash budget

C) Sales budget

D) Direct materials budget

Answer: C - Sales budget is always the starting point; all other budgets flow from it.

5. An Investment Center manager is evaluated using:

A) Cost variance only

B) Revenue only

C) ROI and Residual Income

D) Sales volume only

Answer: C - Investment centers are evaluated on ROI and Residual Income as they control revenues, costs, and assets.

6. Accept a project if NPV is:

A) Less than zero

B) Equal to zero

C) Greater than zero

D) None of the above

Answer: C - A positive NPV indicates the project returns more than the required rate of return.

🎯 MAS Board Exam Tips!

Master CVP formulas - break-even, target profit, margin of safety
Know variance analysis - who is responsible for each variance
Understand relevant costs - sunk costs are NEVER relevant!
Remember budget sequence - Sales → Production → Materials...
Know responsibility centers - Cost, Revenue, Profit, Investment
ROI vs RI - RI encourages accepting profitable projects
Capital budgeting - NPV is the gold standard!

MAS is about thinking like a business consultant - make decisions that add value! Kaya mo yan, future CPA! 💪

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