In: Accounting
21.How to calculate Break even: & definition of break even
22. Calculate marginal safety:
23. CVP income statement is & how to calculate it :
24. What a Master budget is:
Why we use budgets & why its useful
Solution. An organization operating business needs to incur some costs in order to generate revenues and meet profit objective to sustain. Variable costs are one which increases or decreases with increase or decrease in level of output during an accounting period. Examples of variable cost include raw materials and labour.
Fixed costs are one which are incurred during an accounting period irrespective of the level of output as they are fixed obligation as the name suggests. Examples of fixed costs include rent and salaries of employees and others.
Mixed costs are one which encompasses both the characteristics of some fixed obligation and some part of variable cost component. Examples of mixed cost include operating an automobile.
Contribution margin refers to the amount received by a company for operating after deducting its variable cost to sale price from each unit. It is calculated by the below given methods:
First, Contribution Margin per unit = Sales Value less Variable Cost per unit
Secondly, Contribution Margin per unit = Contribution margin ratio * Sales value
We know, Operating Profit = Contribution Margin per unit * (Total units - Fixed Costs)
21. An organization when it decides to do business sets the objective of profit making in order to sustain in long run. Break even point is when the organization reaches the price and output level where it makes no profit nor loss that is total cost is equal to total revenue. It is calculated by dividing Fixed Costs by Gross Profit Margin.
22. Marginal safety points to the organization's safe level of output fall before it touches break even point where total costs equals total revenues. It is calculated as: MOS= (Sales - Break-Even Point)*100 / Sales
23. An organization operating needs to record data and generate information in order to make efficient decisions and includes one such report called Cost-volume-profit income statement prepared by internal management team which determines fluctuations in company's profit level with changes in cost and sales. It establishes relationship between profit with cost and volume level.
It is calculated or shown in the same format as regular statement in addition with the actual changes in profit level with that of changes in cost and output volume. It encompasses calculation of contribution margin less Fixed Costs which gives rise to Net Income along with MOS and BEP.
24. An organization in order to sustain in today's competitive economic market needs to plan its budget in order to meet profit goals. Master budget refers to the total process of encompassing lower level budgets under different heads as one budget which facilitates in decision making and planning process to operate efficiently and effectively along with cash flow forecast, P&L Statement, Balance Sheet and financial planning.
Budgets are useful as they provide tool to compare budgeted sales and revenue with that of actual results, facilitates better allocation of resources with better profits as resources are scarce, helps in setting targets foran accounting period and establish control.