Cost Volume Profit Analysis and Additional Information

Question 1: Calculate:
a) Variable cost per unit = Direct material + Direct labor + Variable overheads
= 205 + 109 + 61 = 375 R.O
b) Contribution per unit = Selling price per unit – Variable cost per unit
= 520 – 375 = 145
c) Overheads absorption rates (OAR) = Budgeted fixed production overheads /
Budgeted units
= 22500 / 2500 = 9 OMR.
d) Under/ (over) absorption = (Actual production units – budgeted production units) *
overhead absorption rate
= (2450 – 2500) * 9
= -50 * 9
= RO 450 under absorption of overheads
e) Total fixed cost = Fixed production cost + non production cost
= 22500 + 6500 (Marketing cost) = 29000 RO
f) (i) Production cost per unit under marginal costing = 375 RO
(ii) Production cost per unit under absorption costing = 375 + 9 = 384 RO
g) Calculation of closing inventory (units) = Opening inventory + Production (unit) –
Sales (unit)
= 0 + 2450 + 2400 = 50 Units
(i) Value of inventory under marginal costing = 50 units * 375 = 18750
RO
(ii) Value of inventory under absorption costing = 50 units * 384 = 19200
RO
2. Cost volume profit analysis:
a) Calculation of:
(i) BEP in units = fixed cost / contribution per unit
= 29000 / 145 = 200 units
(ii) BEP (sales revenue) = 200 * 520 = 104000 RO

b) Calculation of margin of safety in units = Budgeted sales unit – BEP
unit
= 2500 – 200 = 2300 units
(ii) Margin of safety in % = MOS in unit / Budgeted sales unit * 100
= 2300 / 2500 * 100
= 92%
Interpretation of the result:
Margin of safety is 2300 units and BEP is 200 units. It shows that
company should sell more than 200 units to earn profit otherwise there will
be a loss to the company.
Margin of safety shows that company has a safety margin up to 2300. Any
number of units sold above 200 (which is BEP) and less than 2500
(budgeted units will give company profit).
c)
d)
(i) Fixed Cost:
Fixed cost is a cost that is not affected by any increase or decrease in the quantity of
goods and services, whether they are produced products or sold products. Fixed costs
are expenses that a company must pay.
(ii) Variable cost:
BE point
81100
Fixed cost
Variable
cost
29000
104000Margin of
safetyTotal cost

Variable cost is the costs that a company spends, which change with the change in
production output.
In addition to what was mentioned previously, all companies have a number of costs
associated with their activities. These costs are divided into direct costs and indirect
costs and are recorded in the budget as either long-term or short-term expenses. On
the other hand, fixed costs and variable costs together constitute the total cost, which
is a key factor affecting the level of profit in a company.
As a simple comparison between fixed and variable costs is that variable costs are
directly related to production while fixed costs are negotiated within a limited time
period and are not affected by any level of production. However, fixed costs can
decrease when associated with direct costs.
Organizations can connect fixed and variable expenses by investigating unit costs.
Along these lines, the expense of products sold may incorporate fixed expenses and
variable expenses. All in all, all expenses straightforwardly identified with the
creation of merchandise will be gathered and deducted from income for net benefit.
The variable expense and the fixed cost representing each organization shift as per the
cost you use. Economies of scale may likewise be a factor for organizations that
produce enormous amounts of products. Steady expenses can advance better volume
reserve funds, in light of the fact that in enormous scope creation, the unit fixed cost
will be diminished. The fixed expenses straightforwardly identified with creation
fluctuate from organization to organization, yet may incorporate costs, for example,
direct business and lease.
Fixed costs are also allocated in the general part of the income statement, resulting in
operating profit. Depreciation is a common fixed cost and recognized as overhead.
The company is creating a schedule of depreciation expense for asset investments,
and its value will decrease over time. For example, a machinery company might
purchase a production assembly line that will be consumed over time. The other basic
fixed cost and the indirect cost is the administration's salary.
Companies also receive interest payments as a fixed cost, which is a factor in net
income. Fixed interest expense is deducted from the operating profit to achieve net
profit.
Any fixed costs are also included in the statement of income in the balance sheet and
the statement of cash flows. Fixed costs in the balance sheet can be short-term or
long-term debt. Finally, any cash paid for fixed cost expenditures is displayed in the
cash flow statement. In general, the opportunity to reduce fixed costs can ultimately
benefit the business by reducing costs and increasing profits.