Summary
Summary Business accounting week 2 notes
- Course
- ACC1012 (ACC1012)
- Institution
- University Of Cape Town (UCT)
Business accounting week 2 notes
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Management Accounting: Decision Making – week 2By the end of this week, you should be able to:
Explain what contribution margin is and understand how to calculate
it
Explain what contribution margin per unit is and understand how to
calculate it
Explain breakeven
Explain what cost-volume-profit analysis is
Perform cost-volume-profit analysis when given information, by
o Classifying costs as fixed or variable costs
o Using the information and profit function appropriately to
solve for the unknown variable
Function 2: decision making
Management accounting is designed to produce useful financial
information for the internal users of a business, which are primarily
directors and management.
Their responsibilities include planning (both long and short-term),
budgeting and decision making.
Costs could be split between manufacturing and non-
manufacturing, this split is useful in some ways for management
and if you remember from financial accounting this split could be
used as follows:
, For planning, budgeting and decision-making management need to
know which costs are variable and which are fixed.
- We will use these costs to introduce another aspect of
costing, namely contribution margin
A business needs to cover its fixed costs each month. In order to
do this, it sells inventory.
- But each time it produces and sells inventory it also
incurs variable costs.
- Therefore, it is only the difference between sales and
variable costs (i.e. the contribution margin) that can
be used to cover fixed costs.
The term, contribution margin, refers to the difference between
sales and variable costs and refers to the contribution made from
the activity of the business to the fixed costs.
- Once the fixed costs are covered any surplus is profit.
- when using variable and fixed costs, reference is not
made to manufacturing and non-manufacturing costs
because these could both be either variable or fixed
costs.
The contribution margin per unit of inventory is the difference
between the inventory’s selling price and the variable costs linked
to its production and sale; it is the monetary contribution that each
additional sale makes towards covering the fixed costs of the
business.
- The contribution margin can be determined by
multiplying the contribution margin per unit by the
number of units produced and sold.
By focussing on the contribution margin, or contribution
margin per unit of inventory, managers can consider many
aspects of the business operations.
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