Hospitality Management Accounting_Ch 8 Key Points – Flashcards

Cost Volume Profit . An equation that can be used to determine the breakeven level of sales revenue, the sales revenue needed to cover a new fixed cost, the additional sales revenue required to cover a changed variable cost, or multiple changes in cost. The CVP equation can also be used to determine the effect that a change in selling prices will have on operating results to determine the additional sales volume required to cover a loss, or to analyze a new investment.

assist management in evaluating current and future events regarding sales revenue inflows and cost outflows.

can be obtained in sales revenue dollars or sales of units, such as room sold, or guests served.

to find the sales revenue level in dollar or units necessary to cover all operating costs and produce operating income resulting in no profit or loss. We use capital letters to designate their identity in in each of the two basic breakeven equations: breakeven sales and breakeven units.

Fixed Costs/1-(Variable cost/Sales Revenue =Fixed Costs/1-Variable cost % =Fixed Costs/Contribution margin % = BESR FC/1-(VC/SR) = FC/1-VC% =FC/CM% =BESR

FC/SPu =FC/CMu =BEu FC = Fixed Costs CMu = Contribution Margin (SPu-VCu) VCu = Variable Cost % (VCu/SPu) SPu = Selling prices or Sales price per unit

where we are able to fine the breakeven sales revenue, then we can also find the breakeven units. BESR/SPu = BEu Note that anytime breakeven sales revenue in dollars and average selling price are being used to convert to sales units, the entire decimal function (the decimal amount before rounding) must be used to complete the conversion. The same requirements exist when breakeven sales revenue (BE units must be used before rounding): eg 29,090.90 x 20.00 = 581,818 BESR

VC/SR = % x Avg SP = VCu VC = $187,000 SR = $240,000 Avg SPu = $20.00 eg. $187,200/$240,000 =78%, thus $20 x 78% = $15.60 VCu

Contribution Margin Income Statement

the contribution margin. The contribution margin is SR-CS (cost of sales), which can also be represented as a percentage of sales revenue.

a. ALL COSTS can be separated into their variable and fixed elements. b. Identified fixed costs will remain at the same level during the period affected by the decision being made. c. Variable costs will continue to increase or decrease in a consistent linear relationship with increases and decreases in sales revenue. d. Economic and other conditions will remain relatively stable during eh period being evaluated.

a. Decisions concerning an entire organization that operates multiple profit centers contributing to overall income should be evaluated with great care. b. The use of CVP analysis provides only best estimates to assist management in the decision process. CVP analysis techniques rely on accounting data and are mathematically oriented. As such, the resulting CVP information is directed towards a specific quantitative objective and does not consider the potential impact on employee and customer relations or potential social and environmental concerns.

1.The base CVP equation is: Required Sales (dollars or units) = Fixed costs + Required Before Tax Profits / Contribution Margin (% or units) 2. Additional costs can be added to the numerator of the CVP equations in addition to a specified fixed cost. CVP uses two basic equations, CVP sales revenue and CVP sales units. Additional sales revenue or units of sales must provide for each additional cost added to the numerator: Required Sales Revenue = Fixed Cost + New Fixed Cost+ Operating Income + Etc./ Contribution Margin % Required Sales Units = Fixed Cost + New Fixed Cost+ Operating Income +Etc./ Contribution Margin (units) 3. To calculate the breakeven sales revenue, we use the CVP equation for dollars of sales revenue and set the required profit to ZERO. 4. To calculate the breakeven sales units, we use the CVP equation for units that may be added to the numerator of the CVP equation in addition to fixed costs. 5. It is necessary to identify a few terms that may represent potential cost items that may be added to the numerator of the CVP equation in addition to fixed costs. a. Operating Income - identifies operating income before taxes. This identification is used on income statements and contribution margin income statements and is general discussion to indicate income before tax. b. Profit - Identifies income before tax. Profit is commonly used in the CVP equation rather than operating income since it is shorter and means the same thing as operating income. c. Both operating income and profit define income before tax and are derived from : Sales Revenue - Cost of Sales = Gross Margin Gross Margin - Operating Expenses = Operating Income Operating Income - Tax = Net Income. 6. Changes can also be made to various elements of the denominator of a CVP equation. Such changes may affect variable cost percentages, unit variable costs and unit selling prices.

1. a restaurant has a sales revenue of $480,000 with a variable cost of $211,200. Fixed costs are $151,200. Calculate breakeven sales revenue. FC/ 1-VC/SR = FC/VC% = FC/CM% = Breakeven Sales Revenue $151,200/1-($211,200/$480,000) = $151,200/1-.44%= $151,200/56.0% = @270,000 2. a specialty restaurant has an average check of $12.00 and an average variable cost per meal of $5.28. Find the average number of meals that must be sold to breakeven if fixed costs were $151,200. FC/ SPu-VCu= FC/CMu= Breakeven Sales Units $151,200/ $12.00-$5.28 = $151,200/$6.72 = 22,500 meals

Find CVP sales revenue to cover fixed costs and provide $96,000 of operating income: FC+OI/CM% = Required Sales Revenue $151,200+$96,000/1-($211,200/$480,000) = $247,200/1-.44%= $247,200/.56%= $441,429 Find the CVP sales revenue to cover $151,200 of fixed costs and provide operating income of $60,000: FC + OI/ SPu-VCu= FC+OI/CMu = Breakeven sales units $151,200+$60,000/$12.00 - $5.28 = $211,200/$6.72 = 31429 meals

1. The contribution margin is the excess of the selling price minus variable costs of sales. This has been discussed as Sales revenue - Direct (variable) costs = Contribution margin - Fixed Costs = Operating Income. 2. The contribution margin income statement can be used to account for the variable cost % as a percent of sales revenue to find the contribution margin and then deduct fixed costs to find operating income (profit) before tax.

1. Operating income is found by deducting cost of sales, and operating expenses from sales revenue, and represents the income that is subject to income tax. 2. Net income is found by deducting the appropriate tax from the operating income. Net Income(after tax)/(1-Tax Rate) = Operating Income For instance: a restaurant has $480,000 in sales revenue, VC of $211,200 and FC of $151,200. The owner wants to know the sales level needed to provide net income after tax of $40,000. The tax rate is 29%. Calculate the CVP sales revenue: FC+Net Income/1-VC/SR= FC +NI/ VC% = FC+NI/CM%= SR $151,200 + $56,338/1-($211,200/$480,000) = $207,538/1-44%= $207,538/56% = $307,604 Two ways to calculate the tax: 1. OI - NI [AT] $56,338 - $40,000 = $16,338 2. OI x tax rate $56,338 x 29% = $16,338