Overview: In Week 2, we’re diving deeper into managerial accounting. We’ll explore how costs behave and how they impact your profits. Think of this as your financial toolkit for making smarter business decisions.
Content:
Cost Behavior: Understanding Costs
Variable Costs
• These costs change when your business activity changes. For example, think of your electricity bill going up when you produce more. Examples are raw material,
Fixed Costs
• Fixed costs stay the same, whether you’re busy or slow. They include things like rent and salaries. E.g Rent
Semi-Variable Costs
• These costs are a mix of fixed and variable. Think of a phone bill with a fixed monthly fee and extra charges based on usage. E.g Electricity.
Cost-Volume-Profit (CVP) Analysis
Breakeven Point
• This is the point where your earnings match your expenses. Before it, you’re losing money; after it, you’re making a profit.
Contribution Margin Ratio
• It’s the part of your earnings that can cover fixed costs and give you profit. A higher ratio means more money for you.
Margin of Safety
• This is your safety net. It tells you how much your sales can drop before you start losing money.
3. Profit Planning
Profit Planning: Your Financial Roadmap
• With CVP analysis, you can plan for future profits. It’s like drawing a map for your business journey, setting goals, and making decisions that lead to success.
Conclusion: Understanding costs and using CVP analysis helps you navigate your business finances. Fixed costs stay steady, semi-variable costs adapt, and variable costs change with your activity. CVP analysis guides you through the financial waters, helping you make wise decisions and steer your business toward success.