Profit Analysis for Costing

Profit Analysis for Costing - I. PROFIT ANALYSIS FOR DIRECT...

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I. PROFIT ANALYSIS FOR DIRECT COSTING A. CONTRIBUTION MARGIN ANALYSIS WHEN DATA ARE IN UNITS AND DOLLARS Profit analysis is usually based on a comparison of the actual data with the budget, but the actual data for the current period can also be compared with the actual data from a previous period. The illustrations below are based on a comparison of actual results against the budget. As indicated above, a difference between budgeted and actual contribution margin may result because of the combined effects of four related but different factors. The purpose of this type of analysis is to isolate the specific cause and effect relationships by separating the total variance into various parts. The following symbols are used to illustrate the techniques: AU = Actual units sold for individual products. BU = Budgeted units sold for individual products. AP = Actual average sales price for individual products. BP = Budgeted sales price for individual products. AV = Actual unit variable cost for individual products. BV = Budgeted unit variable cost for individual products. MR = Budget mix ratio for individual products, i.e., budgeted units for the product divided by total units budgeted for all products. ACM = Actual contribution margin per unit for individual products. BCM = Budgeted contribution margin per unit for individual products. TAU = Total actual units sold. AUA = Actual units adjusted to the budgeted mix = (TAU)(MR) There are many different approaches to profit analysis. The analyst usually starts by determining the total variance in the profit measurement, in this case, contribution margin. This is the difference between actual total contribution margin and budgeted total contribution margin. Then this variance may be separated to show the effects of: 1) sales price and unit cost differences, and 2) sales volume differences. Two Variance Approach In the two variance approach the total variance is divided into a combined price cost (or flexible budget) variance, and a sales volume variance. This is accomplished in the following manner: Price Cost or Flexible Budget Variance = Actual total contribution margin - Flexible budget contribution margin based on actual units = (ACM)(AU) - (BCM)(AU) or (ACM-BCM)(AU) The price cost variance combines the effects of both sales price differences and unit cost differences. It is also frequently called the contribution margin per unit variance and is calculated like a price variance by multiplying the difference between the
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budgeted and actual contribution margin per unit by the actual units sold. The variance is favorable if the actual contribution margin per unit is greater than the budgeted contribution per unit. Sales Volume Variance = Flexible budget contribution margin based on actual units - Master budget contribution margin = (AU) (BCM) - (BU)(BCM) or (AU-BU)(BCM) The sales volume variance combines the effects that sales volume differences have on revenue and costs. It also includes the effects of sales mix differences. It is favorable
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Profit Analysis for Costing - I. PROFIT ANALYSIS FOR DIRECT...

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