How to Do Cost Volume Profit AnalysisEdited by Xhohx, Adelaide

Cost-Volume-Profit Analysis is an important tool from Cost Accounting to help

managers decide how many units to sell, answer questions about the product

mix, set profit targets reasonably -- all in accord with a given product's cost

behavior given certain assumptions. BreakEven Analysis is the first of the

tools in the toolbox and next comes Contribution Margin. Learn about Cost

Volume Profit Analysis in the next 7 steps. Note that sometimes BreakEven

Charts are shown as in the top, with Variable Costs layered upon a fixed level

of Fixed Costs, while cometimes fixed Costs are sown as a Layer atop

Variable Costs -- the resulting BreakEven Point is the same, either way.

Steps

1.

1Do price forecasting. This is a difficult job, because the price of the product

must be known. While it may certainly depend a great deal on costs, certain

other factors come into play. Among these are:

Pricing policies per the demand curve and other considerations,

such as growing the business at a certain pace.

Market research studies

Past sales volume

General economic and industry conditions

Relationship of sales to economic indicators such as GNP,

personal income, employment, prices and industrial production

Advertising and other promotional budget

Quality of sales force

Competition

Seasonal variations

Production capacity

Long-term sales trends for various products, i.e. where in

product life cycle it is.

Research and development allocations in the recent past -

product improvements.

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2. 2

Understand that fixed costs, such as rent, depreciation, utilities and

other costs that are incurred regardless of whether products are sold or

not (unless one's depreciation is on the Units-of-Production basis) must

be determined.Products may not be sold under cost due to anti-trust

regulations and legislation. Some costs have a mixed fixed-variable

component basis, which is fine to allocate between so long as treated on a

consistent basis between planning periods.

3. 3

Determine variable costs, and the costs which increase of decrease with

increases and decreases in production. For example, a manufacturer of ski

apparel will have velcro that fluctuates with jackets and warmup pants sold, as

well as seasonal changes in production, and fill, etc., as well as a color mix to

consider (which may need to respond rapidly to changes in consumer tastes).

4. 4

Compute the product's Unit Contribution Margin, which is how much of

the unit sales price remains towards Total Fixed Costs after Unit

Variable Costs are deducted from the Unit Sales Price. For example, the

ski apparel's unit price for a jacket might be $150 and the unit variable

expenses $75, or 50% of the price. The unit variable costs include direct

labor, machine production such as cutting and sewing 4 basic sizes for 2

sexes, then adult and children's, oil for the machinery and repairs to it as

budgeted and are standard, etc. standard indirect labor such as color

consulting, etc. The contribution margin of this jacket is $75 times the number

of jackets projected to be sold, let's say 7812.5 (there are a few 1/2 size infant

outfits made for special order). So that's $585,937.5 in total Contribution

Margin towards Fixed Costs from this one jacket. Multiplied by 16 distributors

of 8 jacket sizes and 8 pant sizes of 4 colors each size, that's 16*(32 + 32) *

$585,937.5 = $600,000,000.00. We plan to increase our sales distribution

marketing to 32 and double our sales if sales take off early in the season.

5. 5

Compute the Breakeven Point. The breakeven point equals the volume of

sales it takes to cover all costs, and it is calculated by dividing the company's

Fixed Costs by the Unit Contribution Margin (mixed, but here grossly

simplified to be the same selling price and variable cost for pants and jackets,

the only two products). For example, let's say the Fixed Costs for this Apparel

Manufacturer are $300 Million. $300/50% = $600 Million Breakeven Point.

6. 6

Estimate the budgeted profit or loss. Here, as mentioned, the Contribution

towards Fixed Costs based on a reasonable sales projection of selling 7812.5

units of each of 8 jackets and 8 pants of 4 colors each at 16 distributors for

$150/selling price per unit will total 1,200,000,000 and that our BreakEven

Point is $600,000,000. You'll therefore anticipate a profit of $0 on sales of

$150*7812.5* 1024 = $1,200,000,000.00, which is a ROS (Return on Sales)

of 0%, and a Return on Fixed Costs of $0/300M = 0% -- so you can pretty

much roll with seasonal changes every two years and stay right with the fast-

moving market of ski fashion, in which there's almost always a role for the

high-end warmup pants and jacket customer, and just break even.

7. 7

Understand that every sale made after the $1,200,0000,000 mark is pure

profit.If we do increase our marketing efforts to 32 distribution points with

sales of $2,400,000,000, we'll make a profit of $600,000,000 -- enough to

purchase a new factory, or rather, set of Fixed Costs. The ROS would then be

$600M/$2,400M or 25%, and the return to Fixed Costs would be $600M/300M

or 200%.Ad

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Warnings

The following assumptions usually underlie a given breakeven

analysis:

o 1. The behavior of costs and revenues has been reliably

determined and is linear over the relevant range.

o 2. All costs may be resolved into fixed and variable elements.

o 3. Fixed costs remain constant over the volume range on the

breakeven chart.

o 4. Variable costs fluctuate proportionally with volume.

o 5. Selling prices are to be unchanged.

o 6. Prices of cost factors are to be unchanged.

o 7. Efficiency and productivity are to be unchanged.

o 8. The analysis either covers a single product or it assumes that

a given sales mix will be maintained as volume changes. Sales mix may be

defined as the relative combination of quantities of a variety of company

products that compose total sales. If the mix changes, overall sales targets

may be achieved, but the effects on profits depend on whether low-margin or

high-margin goods predominated in the sales mix.

o 9. Revenue and costs are being compared on a common activity

base (for example, sales value of production or units produced).

o 10. Perhaps the most basic assumption of all is that volume is

the only relevant factor affecting cost. Of course, other factors also affect

costs and sales. Ordinary cost-volume-profit analysis is a crude

oversimplification when these factors are unjustifiably ignored.

o 11. Changes in beginning and ending inventory levels are

insignificant in amount."

Ccl

 ntroduction of C.C.LC.C.L is a subsidiary company of coal India limited under ministry of coal and mines govt. of IndiaC.C.L is one of the7 coal production subsidiaries of coal india limited under ministry of coaland mines. Company is governed by a board of directors consisting of 5 full time directorsand 6 part time directors. Full time directors are responsible for specific functions of operation, project & planning, finance and personnel.India is third largest country in the production of coal.C.C.L means Central Coalfields Limited.1

 Coal India Limited – A ProfileCoal India limited is the third largest coal producing company in the world. It was formed on 21stOctober, 1975 as a Holding Company under the ministry of coal, Govt. of India, for the entirecoal industry in the country barring the coal mines in Andhra Pradesh and captive mines of TISCO, IISCO and DVC. Its registered office is located at 10, Netaji Subhash Road, Kolkata. Itwas declared Public Sector Undertaking in November, 1975 for reorganizing the nationalizedcoal mines and ensuring integrated development of coal, the prime source of energy.Coal India presently contributes 90% of the total coal production in India. It operates through NINE subsidiaries: EIGHT producing companies: Eastern Coalfield Limited (ECL), Sanctoria,WB; Bharat Coking Coal Limited (BCCL); Central Coalfield Limited (CCL), Ranchi Jharkhand; Northern Coalfield Limited (NCL), Singrauli, MP; Western

Coalfields Limited (WCL), Nagpur,Maharashtra; Mahanadi Coalfields Limited (MCL), Sambalpur, Orissa; The mines of NorthEastern Coalfields Limited (NECL), Assam & Meghalaya; South Eastern Coalfield Limited(SECL), Bilaspur; and Coal Mine Planning & Development at Institute Limited (CMPDI).And Dankuni Coal Companies (DCC) in West Bengal operates directly under coal India.Coal India currently operates 510 mines (tentatively) and 15 washeries spread over nine states to produce and beneficiate coal for meeting the demand of the consumers all over the country. Theranges of products are: Raw coal (coking and non-coking), Washed coal, Middlings, soft coke &Hard coke, coal, tar, coal gas, coal chemicals etc.2

ht http://htmlimg1.scribdassets.com/j87rp8eiof19zp/images/4-f40a51604a.jpg tp:// htmlimg1.scribdassets.com/j87rp8eiof19zp/images/4-f40a51604a.jpg Company ProfileDate of incorporationCoal India Limited was formed as holdingCompany with 5 subsidiaries on 21.10.1975Corporate Status :The company is incorporated under theCompanies Act, 1956 and is wholly owned bythe Government of India (GOI).Business :Engaged in the mining of coal, coal basedproducts and mining consultancy.Wholy OwnedSubsidiariesEastern Coalfields Ltd. Bharat Coking Coal Ltd. Central Coalfields Ltd. Northern Coalfields Ltd.  Western Coalfields Ltd.South Eastern Coalfields Ltd .Mahanadi Coalfields Ltd. andCentral Mine Planning & Design Institute Ltd.North Eastern Coalfields is directly under CoalIndia Ltd.

Registered Office :Coal Bhavan, 10 Netaji Subhas Road, Kolkata - 700 001 West Bengal, India. 

INTERNAL ASPECTSDELEGATION OF POWER CIL exercise the power delegated under DPE guidelines to the MOU signing companies and also powers delegated by the ministry of Coal to Coal India Ltd. from time to time.Obligation of the Government:In order to enable CIL to achieve its objectives and the level of performance set in the MOU, theGovernment on its part undertakes to:-Assist CIL in setting adequate supply of railway wagons.Assist CIL in acquisition of land and getting clearance for forest land by taking up thematter with MOEF and the respective state government so that land acquired under theL A / C B A   A c t   i s   h a n d e d   o v e r   a n d   t h e   f o r es t   c l e a r a n c e   g i v e n   u n d e r   t i m e   b o u n d  programmed.Assist CIL in arranging and getting necessary approval for internal credit.Assist CIL in recovery of outstanding coal sale due.Assist CIL in restructuring of ECL and BCCL in view of report submitted by consultant.MONITORINGCIL has to submit a quarterly report of performance for each of the performance indicators. Thequarterly target in respect of indicators is same as reflected in the annual action plan 2001-02 of the Ministry of coal.The Performance evaluation is based on its annual performance.PERFORMANCE RATING:-

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