Management Advisory Services (MAS)
Part 5 of 6 - Cost Accounting, CVP Analysis & Budgeting
📊Cost Classifications
By Behavior
Variable Costs
Changes proportionally with activity level
Ex: Direct materials, direct labor (piece-rate)
Fixed Costs
Remains constant regardless of activity
Ex: Rent, depreciation (SL), insurance
Mixed Costs
Has both fixed and variable components
Ex: Utilities, maintenance
By Function
Product Costs (Inventoriable)
DM + DL + Manufacturing Overhead
Capitalized as inventory until sold
Period Costs (Non-inventoriable)
Selling & Administrative expenses
Expensed when incurred
High-Low Method (Mixed Cost Separation)
Variable Cost/Unit: (High Cost - Low Cost) / (High Activity - Low Activity)
Fixed Cost: Total Cost - (Variable Cost/Unit × Activity)
📈Cost-Volume-Profit (CVP) Analysis
Key Formulas
Contribution Margin
CM = Sales - Variable Costs
CM per Unit = Selling Price - Variable Cost per Unit
CM Ratio = CM / Sales = (SP - VC) / SP
Break-Even Point (BEP)
BEP (units) = Fixed Costs / CM per Unit
BEP (pesos) = Fixed Costs / CM Ratio
Target Profit
Units = (FC + Target Profit) / CM per Unit
Sales = (FC + Target Profit) / CM Ratio
Margin of Safety
MOS = Actual Sales - BEP Sales
MOS Ratio = MOS / Actual Sales
Operating Leverage
Degree of Operating Leverage = CM / Operating Income
Higher DOL = Higher sensitivity of profits to sales changes
📋Budgeting
Master Budget Components
- 1Sales Budget - Starting point; drives all other budgets
- 2Production Budget - Units to produce = Sales + Ending Inv - Beginning Inv
- 3Direct Materials Budget - Materials to purchase
- 4Direct Labor Budget - Labor hours and cost
- 5Manufacturing Overhead Budget - Fixed + Variable OH
- 6Selling & Admin Budget - Operating expenses
- 7Cash Budget - Cash receipts and disbursements
- 8Budgeted Financial Statements - Pro forma IS, BS
💰Capital Budgeting
Net Present Value (NPV)
NPV = PV of Cash Inflows - Initial Investment
Decision: Accept if NPV > 0
Internal Rate of Return (IRR)
Rate where NPV = 0 (discount rate that equates PV inflows to outflows)
Decision: Accept if IRR > Required Rate
Payback Period
Payback = Initial Investment / Annual Cash Inflows
Time to recover initial investment (ignores time value of money)
Accounting Rate of Return (ARR)
ARR = Average Net Income / Average Investment
Based on accounting income, not cash flows
Profitability Index (PI)
PI = PV of Cash Inflows / Initial Investment
Decision: Accept if PI > 1
📉Financial Ratios
Liquidity Ratios
Current Ratio = CA / CL
Quick Ratio = (CA - Inventory) / CL
Profitability Ratios
ROA = Net Income / Total Assets
ROE = Net Income / Stockholders' Equity
Activity Ratios
AR Turnover = Net Sales / Avg AR
Inventory Turnover = COGS / Avg Inventory
Solvency Ratios
Debt Ratio = Total Liabilities / Total Assets
Debt to Equity = Total Liabilities / Equity