What is CVP?
-a way to find out how changes in VC and FC affect business profits. business can use the results of the analysis to see how many units they need to sell the break even or reach a certain minimum profit margin.
Use of CVP analysis (1-2)
-identification of break even point and can reveal margin of safety
-management is able to identify how changes in SP or VC per unit, product mix or TFC can be made to achieve a target profit
Use of CVP analysis (3-4)
-facilitates the making of special decisions such as make or buy, accept special order or shut down decisions
-where a constraint exists on manufacturing capacity management is able to determine optimal production mix for maximizing profits
Nature of the components of job order costing
Direct materials (DM) - raw materials used for the production and selling of an item
Direct labour (DL) - efforts exerted to produce any G+S. Includes physical, mental effort
Overheads - costs are difficult to trace to a single unit of production. used for the benefit of multiple products or clients such as insurance. therefor needs to be allocated to the cost object using an appropriate allocation base such as DL or machine hours.
cash budget (1-2)
-predict future cash inflows and outflows for a budgeted period
-help avoid potential cash shortfalls or excess cash ensuring continuity of business activity
Cash budget (3-4)
-Plan ahead, source additonal short term credit to cover short term cash shortfalls and be able to pay debts as they fall due
-counteract anticipated cash shortfalls by delaying discretionary cash payments and capital expenditure
Importance of cash to business viability
-without adequate cash flows business may struggle to pay bills, meet debt obligations and invest in future growth
-lack of cash leads to missed opportunities, reduced profits and ultimately bankruptcy
Importance of business planning (1-3)
-objective of business strategies including changing goals and performance measurement
-predicting future costs will enable management to avoid cash shortages/excess cash.
-acts as a control mechanism, by comparing budgeted performance with actual management can determine where improvements need to be made.
Importance of business planning
- cost leadership and cost differentiating. business needs to consider and select the strategy that suits there market place and product
-reduced risks and costs by helping management identify areas that are not operating efficiently or requiring change.
Budgeted income statement
-forecast a business expected revenues, expenses and profit for a specific period
-helps identify expenses reducing profitability
Role and function of an accountant
Role:
-collect, record, analyse and present business operations.
-ensure regulations and obligations are met
Function:
-preparation of budgets and tax
-analysis of cap I and CVP
Internal auditing
Definition: the checking of the operating systems of a business to ensure they are working properly. conducted by an accountant within the company
Purpose:
-review business procedures and policies to ensure compliance with laws
-detection and correction of errors
-monitoring and reviewing internal procedures, systems and policies
Asser management (Acc Rec)
-ensure timely cash flows, the amount of credit arrangements with financial institutions needs to be sufficient to pay operating expenses.
Asset management (Inventory)
-when managing inventory if type of quality is incorrect it can result in slow moving items or theft as well as poor liquidity
Asset management (cash)
-amount of cash available needs to be sufficient to pay operating expenses, also determined liquidity
Asset management
Asset management
Asset management
short term source of finance - bank overdraft
Bank overdraft – the bank lets a business withdraw more than what is in its account. Useful for covering temporary cash shortfalls but usually has high interest.
Short term source of finance - trade credit
Trade credit – When suppliers allow a business to buy goods or services now and pay later.
Long term - debentures
Debentures – issued by companies to raise funds. Investors receive a fixed rate of interest. Usually secured against company assets.
Long term - share capital
Share capital – Money raised by issuing shares in the business to owners or external investors. Provides permanent capital but dilutes ownership and dividends may be expected.
Long term - unsecured notes
Unsecured notes – Similar to debentures but not backed by collateral. Higher risk for investors, so businesses usually pay higher interest.
