This presentation is on decision making process. this includes following points :- Cost-Volume Profit Analysis Alternative Choice Decision – Relevant cost Sunk cost Shut-down Process

1. Decision-making
Process

2.  Cost-Volume Profit Analysis
 Alternative Choice Decision –
1. Relevant cost
2. Sunk cost
3. Shut-down Process
Content :

3.  CVP Analysis is the study of the effects on future
profits due to changes in fixed cost, variable cost,
sales price, quantity etc.
 This is most important technique which is used in
managerial decision-making and profit planning.
 In management accounting, it is very important to
find out how costs and profits vary in relation to
changes in volume, i.e., quantity of the product
manufactured and sold.
Cost-Volume Profit Analysis

4.  Sale price remains constant.
 Variable cost remains constant.
 Total fixed cost remains constant.
 Every single unit produced is sold.
 Cost affected because changes in activity.
Assumptions Of CVP Analysis -

5.  Cost – All expenses incurred at the time of
production.
 Volume – it means that quantity of product.
 Profit – it termed as Sales – Cost.
Elements of CVP Analysis-

6.  Break-Even Point (BEP) – it is a point where a firm earns no
profit and does not bear any loss.
 Margin of Safety – it is the difference between the actual sales
and sales at the BEP.
 Sales – Variable cost = Contribution.
 Contribution – Fixed cost = Profit.
Following terms -

7.  Sales – Variable cost = Contribution
 Profit Volume Ratio (P/V ratio) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑆𝑎𝑙𝑒𝑠
× 100
 Break-even point (BEP) –
i. In terms of ₹ =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜
ii. In terms of Volume =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
 Margin of Safety = Sales – BEP
 Desired Sales –
i. In terms of ₹ =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 +𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜
ii. In terms of Volume =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 +𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Formulas –

8. Sales 60,000
Variable cost 35,000
Fixed cost 15,000
Q from the following data, calculate :-
i. P/V ratio
ii. Break-even point in ₹
iii. Margin of safety

9. Sol :-
• Contribution = Sales – Variable cost = ₹60,000 – ₹35,000 = 25,000
• Profit = Contribution – Fixed cost = ₹25,000 – ₹15,000 = ₹10,000
i. P/V Ratio =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑆𝑎𝑙𝑒𝑠
× 100 =
25,000
60,000
× 100 = 41.67%
ii. Break-Even Point =
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜
=
₹15,000
41.67%
= 36,000
iii. Margin of safety = Sales – BEP = 60,000 = 36,000 = 24,000

10. Y
O X
TFC
TC
TR
BEP Angle of
Incidence
Margin of safety
Rupees
Units

11. Alternative choice decisions
I. Relevant cost
II. Sunk cost
III.Shut-down Process

12.  Those costs which are relevant with management decision-
making.
 So, this cost helps in taking right decisions.
 For e.g. – A company have a two types of products and the
direct material cost is ₹ 25 per unit and direct labour cost is ₹
20 per unit. It wants to make some changes in its product line.
The new product line requires direct material at ₹ 25 per unit
and direct labour cost of ₹ 22 per unit. In this case, cost of
material is constant, so it is not relevant for decision-making.
And the labour cost is change, so it is relevant for decision-
making.
 Irrelevant cost are those costs which will not be affected by
any decision made by the management.
I. Relevant cost -

13.  A sunk cost is an expenditure made in past that
cannot be changed.
 These are past costs not future costs.
 Thus, these costs are not relevant for decision-
making.
 For e.g.- the cost of machinery purchased in 2000 is
not relevant now in deciding whether to sell the
machinery or not.
II. Sunk Cost -

14.  Sometimes it becomes necessary for a firm to temporarily
closedown its factory or segment due to trade recession.
 The decision regarding closing down will depend on whether
products are making a contribution towards fixed cost or not.
 If the products are making a contribution towards fixed cost, it
is not advisable to close the factory or segment to minimize the
losses.
 Even though the factory is closed down, some fixed costs
could not be avoided, for instance maintenance of plant or
overhauling etc. So these must be taken into account while
making decision.
VI. Shut-Down process -

15.  In addition some non-cost consideration should be taken into
account before deciding to close down a factory or segment. These
are –
1. Once the business is closed down, the competitors may take
advantage to establish their product and business in the market. It
is very difficult to recapture the market due to high advertisement
cost.
2. Once the workers are discharged it may difficult to get experienced
and skilled labour again to restart the business.
3. If some segment or activities is closed down, it may effect the
reputation of the firm.
4. Temporary close down may not advisable if the relationship with
the suppliers is adversely affected.
5. Fear of non-collection of dues from debtors in case of closure of
business may not to in its favor.
Continue…..