Управленческий учет на предприятии

When using principle «from above - down» the plan is formed, proceeding from the target parameters planned by the management of the company. Heads of subordinate links who often have no clear idea on the basis of what these indicators are created (the lack of such planning consists in it) are responsible for achievement of the established indicators in such cases. But the return approach when divisions form the plans is possible also and transfer them «upward», and already on their basis the management defines the financial purposes of all company. It is option of creation of the budget «from below - up». But, as practice shows, such budget seldom approve from the first as local links can not consider information which the top management (for example, has on enterprise strategy, on an estimated economic situation, on emergence new or the termination of release of old types of production, etc.). Therefore in many companies the combined approach is applied: at first determine the common goals following from strategy of the company and market forecasts (by the principle from top to down), and already then make the real budget (by the principle from below up).

Planning and budgeting automation.

Budgeting - quite difficult process connected with collecting, processing and storage of large volumes of data, and also with realization of various techniques of forecasting, planning and the analysis. Today a little who has doubts that the listed conditions can be satisfied only by means of adequate information systems.

In recent years specialized systems of planning of budgeting were widely adopted and now are considered as separate category of the automated systems which, in turn, enters into wider class Business Performance Management. Functionality of the specialized software allows to overcome completely the shortcomings of spreadsheets considered above and corporate systems as this software was initially developed for problems of budgeting and for years of the development «absorbed» in itself all necessary functions and properties.

If to try to generalize arguments in favor of specialized decisions, it is possible to allocate the following main positions.

First, the specialized system contains all functionality necessary for budgeting, including special. Special functions of budgeting, in particular, treat: maintaining the analytical directions and qualifiers, description of financial structure and principles of interaction, accounting of trends, analysis of deviations and others. And real operability of all these functions is confirmed by experience of the numerous enterprises - users of such systems. Using specialized system of budgeting, the financial manager can not be afraid of that sooner or later he will face the problems which decision the system won't be able to provide.

Secondly, the budgetary period, as a rule, exceeds the horizon of planning covered by plans of production and movement of materials (i.e. those plans which are formed with Enterprise resource planning use). While Enterprise resource planning solves problems of tactical and operational management, the problem of management of the budget has as well a strategic component. For this purpose Enterprise resource planning can provide only a certain part of basic data for creation of the budget, and also provide the actual information reflecting activity of the enterprise in different aspects.

Thirdly, in order that Enterprise resource planning could be useful when budgeting, it has to not only exist really at the enterprise, but also work in full. And such introduction requires time, and considerable. As shows experiment of introduction of ERP systems in Russia, this process extremely seldom proceeds without serious consequences. Whether it is worth postponing creation of the system of budgeting before «bright future» when Enterprise resource planning will earn at full capacity?

Fourthly, experience (and not only Russian, but also foreign) shows that information system of the enterprise almost always гетерогенна, i.e. includes different subsystems and modules (including own development), to some extent integrated among themselves. Even having full and working Enterprise resource planning, the enterprises almost always use any other appendices (it concerns even to users of such powerful system as SAP R/3). As in the course of work with the budget the most different data from the most different systems can be demanded, the specialized system of budgeting has to be able to interact with other systems of the enterprise. This requirement not always provided with ERP systems, when developing specialized decisions was considered initially.

Secondly, the budgetary period, as a rule, exceeds the horizon of planning covered by plans of production and movement of materials (i.e. those plans which are formed with Enterprise resource planning use). While Enterprise resource planning solves problems of tactical and operational management, the problem of management of the budget has as well a strategic component. For this purpose Enterprise resource planning can provide only a certain part of basic data for creation of the budget, and also provide the actual information reflecting activity of the enterprise in different aspects.

Thirdly, in order that Enterprise resource planning could be useful when budgeting, it has to not only exist really at the enterprise, but also work in full. And such introduction requires time, and considerable. As shows experiment of introduction of ERP systems in Russia, this process extremely seldom proceeds without serious consequences. Whether it is worth postponing creation of the system of budgeting before «bright future» when Enterprise resource planning will earn at full capacity?

Fourthly, experience (and not only Russian, but also foreign) shows that information system of the enterprise almost always гетерогенна, i.e. includes different subsystems and modules (including own development), to some extent integrated among themselves. Even having full and working Enterprise resource planning, the enterprises almost always use any other appendices (it concerns even to users of such powerful system as SAP R/3). As in the course of work with the budget the most different data from the most different systems can be demanded, the specialized system of budgeting has to be able to interact with other systems of the enterprise. This requirement not always provided with ERP systems, when developing specialized decisions was considered initially. Integration with other control systems.

It is necessary to emphasize especially integration opportunities of specialized systems of budgeting: after all for successful functioning the system of budgeting has to be able to communicate with other control systems working at the enterprise.

First of all, we will emphasize need of integration of system of budgeting with systems of the account and operational planning (as a rule, these functions are realized in class ERP systems). Such integration is necessary as these systems contain considerable part of the budgets given for development, and also practically all actual information necessary for control. Integration of specialized system of budgeting can reckon with corporate Enterprise resource planning as the best decision that is confirmed by practice of the leading international companies. For example, the Oracle Hyperion Planning system contains a number of integration functions, and also allow to organize integration with the main ERP systems - SAP R/3, JD Edwards, PeopleSoft, Oracle Applications and others.

By means of the flexible budget communication between the static budget and the actual results is accurately designated. (An example in tab. 12.4).

Table 12.4 - Analysis of performance on the basis of the flexible budget

Articles of expenses	budget	fact	Deviations from budget
Direct materials	42 000	46 000	(4 000)
Direct work	68 250	75 000	(6 750)
General production expenses
Variables:
- indirect materials	10 500	11 500	(1 000)
- indirect work	14 000	15 250	(1 250)
- the municipal expenses	7 000	7 600	(600)
- the other	8 750	9 750	(1 000)
Constants
- salary of controlers	19 000	18 500	500
- depreciation	15 000	15 000	-
- the municipal expenses	4 500	4 500	-
- the other	10 900	11 100	(200)
total	199 900	214 200	(14 300)
Sales volume (unit)	17500	19100	1600

Formula of the flexible budget:

Average variable expenses Ч Quantity of made units + the Budgetary constant expenses. Data of the flexible budget.

On the basis of the above-stated flexible budget the budget of any level of production pays off. For receiving the budgetary sums variable costs of unit are multiplied by 19 100 units.

Information on constant general production expenses is transferred from the flexible budget (tab. 12.5). As shows the report, the actual expenses exceeded budgetary within a year only for 540 rub or less, than on 0,3.

Table 12.5-Flexible budget

Articles of expenses	Averages variables expenses, tenge.	Output, unit.
		15000	17500	20000
Direct materials	2,4	36 000	42 000	48 000
Direct work	3,9	58 500	68 250	78 000
OPR variables
Indirect materials	0,6	9 000	10 500	12 000
Indirect work	0,8	12 000	14 000	16 000
Utility costs	0,4	6 000	7 000	8 000
The other	0,5	7 500	8 750	10 000
Total variable expenses	0,8	129 000	150 500	172 000
Constant OPR
Зарплата контролеров		19 000	19 000	19 000
Amortization		15 000	15 000	15 000
Utility costs		4 500	4 500	4 500
The other		10 900	10 900	10 900
Total constant expenses		49 400	49 400	49 400
Total expenses		178 400	199 900	221 400

Table 12.6-Report on implementation of the plan

Articles of expenses	Budget in calculation on 19 100 units	The actual expenses on 19 100 units	Deviations from the budget
Direct materials	45840	46000	(160)
Direct work	74490	75000	(510)

Manufacturing expenses Variables
Indirect materials	11 460	11 500	(40)
Indirect work	15 280	15 250	30
Utility costs	7 640	7 600	40
The other	9 550	9 750	(200)
Constants
Salary of controlers	19 000	18 500	500
amortization	15 000	15 000	---
Utility costs	4 500	4 500	---
The other	10 900	11 100	(200)
total	213 660	214 200	(540)

If the actual expenses are higher standard, such deviation is considered adverse.

Deviations subdivide into three look: deviations of expenses of direct materials; deviations of factor labor cost; deviations of manufacturing expenses.

Deviations of expenses of direct materials.

The general deviations of expenses of direct materials is defined as a difference between the actual and standard costs of direct materials: The actual quantity X the Actual price - Standard quantity X Standard price.

This general deviation can be spread out to two parts: deviation at the price and a deviation by quantity.

Deviation at the price of direct materials = (The actual price - Standard price) Ч the Actual quantity, (12.3)

Deviation by quantity of direct materials = (The actual quantity - Standard quantity) Ч Standard price, (12.4)

Deviation of factor labor cost.

The general deviations of factor labor cost is defined as a difference between the actual and standard costs of work on the made volume of production except for marriage (both final, and remediable).

The general deviation of factor labor cost = the Actual hours X the Actual rate of payment - Standard hours Ч the Standard rate of compensation, (12.5)

It is necessary to know, what part of the general deviation is called by change of expenses of working hours, and what part - change of rates of compensation.

Deviation on a rate of payment of direct work = (The actual rate - the Standard rate) X the Actual hours, (12.6)

Deviation on productivity direct work = (The actual hours - Standard hours) Ч Standard rate of compensation.

Deviation of general production expenses, (12.7)

The analysis of deviations of general production expenses is carried out to some stages. At first the general deviation of general production expenses which is defined as a difference between the actual OPR and the standard OPR added with use of coefficients of variables and constant OPR is calculated. Then the general deviations are subdivided into two parts: controlled deviation of OPR and deviation on volume.

Example.

The firm made within a month of 180 units of production X.

Labor input of production of unit.

X - 24 hours.

The OPR standard variables were planned of 5,75 tenges. at 1 o'clock direct work, constants of 1 300 tenges. in a month. The fund of working hours makes 400 hours of direct work.

The actual suffered OPR in a month made 4 100 rub. Standard coefficients of OPR make of basic data:

? variables - 5,75 at 1 o'clock;

? constants - 1300: 400 = 3,25 tenges. at 1 o'clock direct work;

? general coefficient of OPR = 5,75 + 3,25 = 9 tenges and 1 hour of direct work.

General deviation of OPR: Actual OPR of 4 100 tenges Minus standard.

General deviations (212) tenges.

The general deviations have to be divided into two parts.

The controlled deviation of OPR represents a difference between the actual.

OPR and the budgetary OPR counting on the reached level of production.

Actual OPR of 4 100 tenges.

Minus planned OPR (the flexible budget) for 180 units X.

OPR variables.

OPR deviation is determined by volume as a difference between the budgetary OPR counting on the reached level of production and OPR carried on made production on standard coefficients.

Planned OPR of 3 784 tenges.

Minus the added OPR (180 units. X the 24th hour/unit) X 9 tenges. / hour of 3 888 tenges.

OPR deviation on the volume of 104 tenges

OPR deviation on volume is favorable as actually it was made production more, than it was supposed proceeding from fund of the worker of times:

400 hours: The 24th hour/unit = 167 units. X.

The general deviation in the sum to equally controlled deviation and a deviation on volume (316) + 104 = (212) [3].

Questions

1. «The flexible budget» and order of its formation.

2. Calculation of formulas of the flexible budget.

Situational tasks

Task 1.

By the last estimates of the DB company the maturity date of accounts payable for suppliers for the end of the current year makes 45 days. Purchases the current year are estimated at $474,500. Now the DB company prepares the budget the next year and predicts growth of purchases by 10%. The sum of accounts payable for suppliers, in $, subject to payment for the end of the next year, by estimates, will be same, as the sum for the end of this year.

Task 2.

Calculate in days the budgetary maturity date of accounts payable for suppliers on the end of the next year.

Task 3.

«It is necessary to use different types of budgets for the various purposes. The budget for planning has to differ from the budget used for establishment of target indicators of activity».

Task 4.

Explain the above-stated statement, and also what conflicts can arise if one budget for both purposes is used.

Tests

1. How production product cost is defined?

A) By summation of cost of materials, fuel, energy, a salary of production workers, equipment depreciation, and also other expenses which have been directly connected with units of production caused by technology and the organization of production;

B) By summation of all expenses and expenses on realization;

C) By summation of all expenses and period expenses;

D) By summation of all expenses for production;

E) By summation of all expenses for production and administrative expenses.

2 What control methods behind use of materials are used in production?

A) Documentary registration, partionny cutting, inventory;

B) Standard, statistical;

C) Indirect, balance;

D) Quick, balance;

E) Inventory, accounting.

List of references

1. Horngren Ch. Foster Dzh. Datar Highway. Management accounting, the 10th izd./the lane with English - SPb. : St. Petersburg, 2008. - 1008с.

2. Druri K. Management accounting for business - decisions: The textbook / Lane with English - M: YUNITI - is GIVEN, 2003. - 655с.

Chapter 13. Adoption of administrative decisions

13.1 Break-even point and profit maximization

Break-even (or break even) is the point of balance between making either a profit or a loss. The term originates in finance, but the concept has been applied widely since. Management of the company should make various administrative decisions the prices of realization of goods concerning, for example, planning of sales volume, opening of new outlets, increase or, on the contrary, economy by separate types of expenses. To understand and estimate consequences of made decisions the analysis of ratios of expenses, volume and profit is necessary.

The break-even point can be defined as a point where total costs (expenses) and total sales (revenue) are equal. Break-even point can be described as a point where there is no net profit or loss. The firm just «breaks even.» Any company which wants to make abnormal profit, desires to have a break-even point. Graphically, it is the point where the total cost and the total revenue curves meet. The analysis of profitability shows that will happen to profit at change of output, the price and key parameters of expenses. The English name of the analysis of profitability - the CVP analysis (cost - volume - profit, that is «expenses - release - profit») or Break - even - point (an interruption point, a profitability point in this case). The origins of break-even point can be found in the economic concepts of «the point of indifference.» Calculating the break-even point of a company has proved to be a simple but quantitative tool for the managers. The break-even analysis, in its simplest form, facilitates an insight into the fact about revenue from a product or service incorporates the ability to cover the relevant production cost of that particular product or service or not. Moreover, the break-even point is also helpful to managers as the provided info can be used in making important decisions in business, for example preparing competitive bids, setting prices, and applying for loans.

Adding more to the point, break-even analysis is a simple tool defining the lowest quantity of sales which will include both variable and fixed costs. Moreover, such analysis facilitates the managers with a quantity which can be used to evaluate the future demand. If, in case, the break-even point lies above the estimated demand, reflecting a loss on the product, the manager can use this info for taking various decisions. He might choose to discontinue the product, or improve the advertising strategies, or even re-price the product to increase demand.

Another important usage of the break-even point is that it is helpful in recognizing the relevance of fixed and variable cost. The fixed cost is less with a more flexible personnel and equipment thereby resulting in a lower break-even point. The importance of break-even point, therefore, cannot be overstated for a sound business and decision making.

However, the applicability of break-even analysis is affected by numerous assumptions. A violation of these assumptions might result in erroneous conclusions.

Figure 13.1 Break-even point

Profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue-total cost perspective relies on the fact that profit equals revenue minus cost and focuses on maximizing this difference, and the marginal revenue-marginal cost perspective is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.

For the full analysis of activity of the enterprise the stock of financial durability, an index of safety and the operational lever is defined. The stock of financial durability shows, by what size the company can reduce turns before will enter into a zone of losses, in a percentage ratio it is characterized by a safety index. By means of the operational lever profit change under the influence of increase or reduction of an estimated factor is defined. On the one hand, it shows risk of activity of the organization, and with another - its potential. The this value, the more strongly profit is higher reacts to change of the corresponding factor. If the lever high and volumes increase, it is the potential but if volumes start falling, the lever will show risk of hit in an unprofitability zone.

Algorithm.

Let's define a profitability point for sales volume in physical units:

Profitable volume = Constant expenses / (The price - Variable expenses on a unit of production), (13.1)

Let's define the marginal income (the size covering constant expenses):

The expected sum of expenses = Expected a profit / Indicator of rate of return

The profitable revenue can be found on a formula:

Profitable revenue = Profitable volume Ч Price, (13.2)

But this formula doesn't work if how many constant expenses aren't known it is the share of a concrete product, and variable expenses are stored in terms of money that happens at the enterprises to the big nomenclature of goods. In this case such concept, as profitable revenue for all organization is used. Let's assume that to us variable expenses on a unit of production aren't known, and we will determine a profitability point for sales volume in monetary units by a formula:

Profitable revenue = Constants a consumption / Share of a marginal expense in revenue = Constant expenses Ч Sales proceeds / (Sales proceeds - Variable expenses), (13.3)

Let's determine the size of expenses in a point of critical output where the size of variable expenses is defined as work of critical sales volume on the relation of variable expenses to sales volume:

Expenses in a point of critical sales volume = Constant expenses + Profitable revenue Ч Variables expenses / Sales proceeds, (13.4)

Let's define a stock of financial durability and a safety index:

Stock of financial durability = Sales proceeds - Profitable revenue; (13.5)

The safety index = Reserved financial durability / Sales proceeds Ч 100%, (13.6)

Let's define the operational lever:

Force of influence of the operational lever = Marginal income / Profit on sales.The assumptions accepted in the CVP analysis, (13.7)

The analysis of profitability is made in the short-term period at observance of the following conditions in some range of the outputs, the called acceptable range:

* expenses and release are as a first approximation expressed by linear dependence;

* productivity doesn't change within considered changes of release;

* the prices remain stable;

* stocks of finished goods are insignificant.

The academician and our only compatriot - the Nobel prize winner on economy for 1975 of L.V.Kantorovich spoke: «economists-mathematicians begin all the works with «let's assume that …». And so it in any way can't be assumed». Perhaps, and in our case of the professor walked twice into the same water?

The answer to this question pleases: hypotheses the workers checked by practice of management accounting. If they are broken, not difficult to make changes in model.

Acceptable range of outputs (relevance area) is defined by a hypothesis of linearity of expenses. If the hypothesis doesn't raise doubts, range is accepted as CVP model restrictions. Main classical ratios:

1. AVC ? const, i.e. average variable expenses are rather constant.

2. FC are invariable, i.e. the threshold effect is absent.

Then the general costs of release of a product are defined by a ratio

TC = FC + VC = FC + and Ч Q, (13.8)

where Q - release volume.

Break-even point is the number of units (N) produced which make zero profit.

Revenue - Total costs = 0

Total costs = Variable costs Ч N + Fixed costs, (13.9)

Revenue = Price per unit Ч N, (13.10)

Price per unit Ч N - (Variable costs Ч N + Fixed costs) = 0, (13.11)

So, break-even point (N) is equal

N = Fixed costs / (Price per unit - Variable costs), (13.12)

The single-product task lives in textbooks, and multigrocery - in practice.

* Single-product tasks answer questions from area of the analysis of profitability in the form of quantity of the made product (Q). Most often the CVP analysis in the theory is consolidated to definition of a classical point of profitability which shows, how many it is necessary to make units of production to cover all fixed expenses. As a rule, it extends and on target profit, i.e. is reduced to scoping of the output providing set profit.

Multigrocery tasks answer the same questions in the form of revenue (TR). The invariance of its structure, at least that is constancy of a share of marginal profit in revenue is thus supposed.

Methods of the account influence applicability of the CVP analysis. The analysis of profitability is kept by means of Variable Costing as and the more so Absorption Costing give to Direct Costing mistakes. If in the company Direct Costing isn't applied at least, to the analysis of profitability to be, therefore one of the reasons of unpopularity of the CVP analysis in Russia: Absorption Costing domination.

Profitability points.

1) The classical point of profitability by quantity of units of production assumes payback of the general expenses (the HARDWARE = TR). Critical such size of sales volume at which the company has the expenses equal to proceeds from sales of all production (i.e. where isn't present arrived, a loss) is considered.

In single-product option value of a point of profitability (Qб) is directly brought out of this ratio:

The example of calculation of a classical point of profitability by quantity of units of production of Corporation is made the decision on opening of several shops like «mini-wholesale». Their characteristics:

* narrow specialization (office paper, mainly A4 format);

* small floor space (the room to 20 sq.m., or a portable outlet);

* the minimum trade personnel (to two people);

* form of sales - mainly small wholesale.

It is necessary to calculate a critical point at the set parameters specified in the table, for one shop (see tab. 13).

The table - 13.1 - Calculation of a critical point

Parameter	value,
The price for unit (paper 80 g/m2 500 x A4)	224
Variable expenses on unit	180
Constant expenses (the license, a tenancy, a salary of the trade personnel), the period - month.	10000

* Marginal unit profit: 224 - 180 = 44 tengeschityvay critical point on a formula:

* Profitability point = Constant expenses / Marginal profit on unit, (13.5)

We receive: 10000: 44 = 227,27

To reach a critical point the shop needs to sell within a month of 228 packs of paper (10 packs a day), at six working days a week.

2) Multigrocery analysis of profitability. Still we assumed that one product is issued, but in real life it is an insignificant special case. It is paradoxical, but the multigrocery case is less demanded in literature and the more so in practice. The matter is that in this case the result of the analysis of profitability difficult gives in to interpretation. For the practician he isn't specific as gives hundreds versions of the answer instead of a clear reference point for an assessment.

Let's consider mathematics of this case. It is clear, that the revenue has to cover the general expenses. Thus we receive not one point of profitability, and the plane in N-dimensional space, where N - number of types of production. If to make assumption rather correct and accepted in classical management accounting of constancy of AVCi = by Vi, we receive the linear equation:

* Point of profitability of one product at known release of other products. Important special case is finding of value of release of one product (Qб) at known release of other products. Let this known release give revenue of TR0 and causes VC0 expenses. Then the release of a key product providing profitable production, will make:

* Profitability points on the basis of rough Absorption Costing. Sometimes use logic of Absorption Costing, i.e. appropriating to each product the share of the fixed expenses:

Randomness of a razneseniye of the fixed expenses generates randomness of points of profitability. Therefore classics don't recommend to use this method.

* Profitability point on the basis of the fixed proportions of release (sets). It is simplest to explain this method on an example. Let's say the firm lets out 2 types of production in a proportion 1:2 in pieces. Marginal profits per piece are respectively equal 3 and 1 euros. Total on a set the marginal profit will make of one unit of the first product and two units of the second: 3 + 2 Ч 1 = 5. To cover the fixed expenses of 50 thousand euros it is necessary 50000: 5 = 10000 sets. The general formula of a point of profitability on the basis of sets is as follows: * Profitability points on the basis of developed Direct Costing. On the first step to each product its own (individual) fixed expenses (MFCi, i.e. shop, license, on advance, etc.) are attributed. They should be covered first of all:

These points according to the logic of reasonings are very similar to points of marginal and variable profitability. Unfortunately, the remained inseparable fixed expenses can't be distributed between products on one of the balanced bases. If all products are «milk cows», the conditional marginal profit (revenue minus variable expenses and a minus own fixed expenses on each product) could be such base. But as in a question of a profitability point release is unknown, neither the conditional marginal profit, nor revenue don't work.

Example of calculation of points of profitability on the basis of developed Direct Costing.

Let's say the firm lets out two types of production: «Alpha» and the «Beta», sold at price 9 and 20 thousand dollars apiece, respectively. Average variable expenses (AVC) are planned at the level of 4 and 10 thousand dollars, respectively. The individual fixed expenses for «Alf» made 2000 thousand dollars for planned quarter, and for «Beta» - 8000 thousand dollars. The remained fixed expenses (NFC) were equal 10000 thousand dollars. let's test to determine profitability points by different options. At first we will calculate a covering of own fixed expenses:

a) at division of the undivided fixed expenses equally (on 5000 by sight production) we receive:

b) at division in proportion to the plan it is necessary this plan to know: 2900 and 2175, let us assume, in pieces. As base of distribution we accept revenue minus a covering of own fixed expenses:

22500 thousand dollars = 2900 Ч 9 - 400 Ч 9 for «Alf»;

27500 thousand dollars = 2175 Ч 20 - 800 Ч 20 for «Beta».

Total:

c) the base of marginal profit assumes that planned release decreases by the size of own covering (in piece): 2900 - 400 = 2500 2175 - 800 = 1375

Then the marginal profit of this reduced planned release is calculated:

2500 Ч 5 = 12500 1375 Ч 10 = 13750

Total:

Conclusion: deviations in calculations are insignificant therefore it is possible to use any of the offered methods in case of approximate equality of volumes of products. Otherwise it is better to use methods B and B:

B - for the growing markets and products;

In - for «milk cows».

3) Classical point of profitability on revenue - the most widespread approximate solution of a multigrocery task. It is supposed that the structure of revenue changes slightly. The task is set so: to find such value of revenue at which the profit is nullified. For this purpose from the economist demand the coefficient (k) showing a share of variable expenses in revenue. It is easy to find it, knowing shares of variable expenses in the general expenses and arrived in revenue. As a result we receive the equation:

For example:

* share of variable expenses in revenue = 9742/16800 = 58%

* the fixed expenses = 5816 thousand;

* profitability point = 5816 / (1-0,58) = 13848 thousand revenue.

Unlike a classical point of profitability by quantity of units of production here it is necessary to make a reservation concerning the accuracy of results:

* the formula (13.5) is for certain correct at invariable structure of release;

* however it is possible to formulate and less severe constraint: invariance of coefficient of k, i.e. share of variable expenses in revenue.

* Profitability point on the basis of marginal orderliness on decrease. The point of profitability is displaced to the left when using orderliness of products on decrease of marginal profit.

Let's consider this interesting and seldom described effect on an example. So, the firm has the fixed expenses equal 16000 dollars and makes 4 products with a different share of marginal profit in revenue (see tab. 13.2).

Table 13.2 Basic data for calculation of a point of profitability on the basis of marginal orderliness

product	Revenue (TR) Dollars.	Marginal profit (dollars.),	Share of marginal profit in revenue
А	20000	12000	0,6
Б	8000	4000	0,5
В	16000	6000	0,375
Г	6000	2000	0,333
Total	5000	24000	k = 0,48

Let's define it taking into account that we will make at first the most profitable products: And and B.Ikh just will suffice on covering the fixed expenses: (A) + (B) = 12000 + 4000 = 16000 = FC. Thus, we will receive an optimistic assessment of a point of profitability: 20000 + 8000 = 28000

* The profitability point on the basis of marginal orderliness on increase gives a pessimistic assessment. For an illustration we use the same example. Products of, In, will suffice B only on covering 12000 dollars, and of 4000 dollars one third of release of a product of A.To est a pessimistic assessment of a point of profitability gives the remained fixed expenses:

Profitability points on the basis of marginal orderliness on decrease and increase in aggregate give an interval of possible points of profitability.

4) LCC profitability point. Life Cycle Costing approach to a problem of expenses and profit defines a profitability point as the release which is paying back full expenses taking into account all term of life of goods. LCC approach attempts upon prerogatives of investment design. He except the fixed expenses insists and on a covering of investment expenses.

Example.

LCC analysis.

Let's say the consortium of firms enclosed 500 mln. dollars in research and developmental development (Research and development) of the new plane. Constant expenses consist of 700 mln. dollars on research and development (single expenses in some year), and also of the annual fixed expenses in 50 million dollars. Variable costs of one plane - 10 million dollars. It is expected that in a year 25 planes will be made, and in the market they can be sold a maximum for 16 million dollars. What quantity of planes should be sold to compensate all expenses without time factor (it too a profitability point, but taking into account what? ) and how many years on it will leave? Decision: Let's designate unknown number of years for Y. Constant expenses will depend on number of years of achievement of a point of profitability:

700 + 50 Ч Y.

Let's equate the general expenses and revenue for Y:

700 + 50 Ч Y + 25 Ч 10 Ч Y = 25 Ч 16 Ч Y

From here Y = 7 years for which 175 planes will be made and sold.

5) Point of marginal profitability (point of payback of an additional unit of production). By modern difficult production far not at once marginal expenses (on production of an additional unit of production) become lower than the price. The release providing profitability of an additional unit of production, is defined by a ratio:

Qбм: Р = MS (Qбм), (13.6)

This point shows the moment (release) when the company starts working «in plus» i.e. when with release of one more unit of production the profit will start growing.

Unfortunately, no more detailed formula is present. This ratio (13.6) always individually. Nevertheless, I recommend it for consideration about inclusion in business plans. But no more, than in five percent of cases it is necessary to a place.

6) Point of profitability of variable expenses (point of a covering of variable expenses):

TR = VC or R = AVC, (13.7)

It shows that process of payback of constant expenses will begin soon. It is an important indicator as for the managers who have «started» a new product, and for owners. However and here no more intelligible formula for calculations is present. Same reason: ratio (9) always individually.

Points of target profit.

They show release of the only product (or revenue - in case of multigrocery production), providing the set weight or rate of return.

1. Point of target profit by quantity of units of production. Traditional indicator is the release providing target profit. Similar calculations are carried out in many firms. Let's assume, the demanded profit makes, that is This formula is easily modified in case of target profit after the taxation. Here the simplified calculations. If the target profit after the taxation has to be equal to z,

(TR - the HARDWARE) Ч (1 - t) = to z,

where to t - a profit tax rate. Therefore,

(P - AVC) Ч Q Ч (1 - t) = z + FC Ч (1 - t)

2. The point of target profit on revenue easily pays off by analogy to a formula (12):

It in a multigrocery case is affected by the same restrictions about an invariance of coefficient of k, i.e. a share of variable expenses in revenue.

Concert.

The production center considers possibility of carrying out in Almaty of a concert of the well-known orchestra. It will entail the considerable fixed expenses, basic of which:

* salary of musicians - 10000 euros;

* «concert hall» rent - 5000 euros;

* expenses on advertizing - 15000 euros;

* other expenses - 10000 euros.

Concert highlight that it is held in the open air. To each viewer the ration worth 5 euros will be given. The number of places in «concert hall» practically isn't limited.

Questions:

1. The estimated price of the ticket is 25 euros. Find a profitability point.

2. How many tickets it is necessary to sell to get profit in 30000 euros?

3. What edge of safety at sale of number of the tickets, providing target profit in 30000 euros?

Decisions: AVC = 5, P - AVC = 20

The analysis of sensitivity is based on reception use «that will be if changes one or several factors influencing size of sales volume, expenses or profit». On the basis of the analysis it is possible to obtain data on total result at the set change of certain parameters. The analysis of sensitivity is based on safety edges.

Safety edges (it is sometimes translated as a margin of safety or a safety limit) show margin of safety, profitabilities of business as a percentage or physical units, or in revenue rubles. Representation is as a percentage more evident and, the main thing, allows to normalize it an important indicator. Though these norms the extremely approximate, but useful. Mathematicians speaks about such figures and formulas with neglect: «managerial indicators». But from it «engineering approach» not to get to anywhere.

Classical edge of safety by quantity of units of production:

It shows as far as percent the revenue can decrease by not unprofitable production. Indicator less than 30% - a sign of high risk.

Classical edge of safety on revenue:

Both of these edges of safety are good for business as a whole as the fixed expenses are clear, but are of little use for business segments. However «front» application of variables or marginal expenses as you remember, demands nonlinearity of their functions. Classical management accounting doesn't study these functions and therefore is compelled to consider them linear. Whether it means, what other edges of safety, except classical, aren't present? The answer will be negative.

The safety edge at the price shows as far as it is necessary to reduce the price that the profit addressed in zero. It will be at the critical price Рk = AC. Then the edge of safety will make percentage of the existing price:

The safety edge on variable expenses shows as far as it is necessary to increase specific variable expenses that the profit addressed in zero. Critical AVC value is reached at AVC = by P - AFC. ThereforeThe safety edge on the fixed expenses in absolute expression is equal to profit, and in the relative:

Pay attention that in formulas (15-17) release remains invariable.

Problems in definition of points of profitability

If the firm faces semipermanent expenses, points of profitability can be a little. On profitability graphics (see fig. 2) three points of profitability are shown, and zones of profits and losses replace each other at increase of volume of activity.

Similar reproduction concerns also nonclassical points of profitability.

Difficulties in carrying out the analysis of profitability can be connected with the following reasons:

* at high level of the offer, probably, it is necessary to reduce the price per unit of output. Therefore, there will be the new point of profitability lying more to the right;

* probably the right to wholesale discounts will be provided to «large» buyers. The profitability point again moves to the right;

* if the size of demand exceeds the offer, that, it is possible, expedient to increase the price. It will shift a profitability point to the left;

* the cost of raw materials and materials can decrease by a unit of production at large volumes of purchases or increase at interruptions in deliveries;

* specific costs of a salary of production workers probably can decrease at large volume of production;

* both constant, and variable expenses tend to increase over time;

* expenses not always can be divided into constants and variables precisely;

* the structure of sales can change very significantly.

Primitive business plans simply ignore all these elementary analytical calculations.

Nevertheless, it is considered that the analysis of profitability is carried out everywhere and its value is great. My supervision don't confirm it. As any model, at CVP has the «a battle field», and it is fragmentary. Many firms carry out the CVP analysis only for new projects. With profitability of products and segments in our country, unfortunately, while it isn't enough regular work.

13.2 Margin of safety

The old checked principle says: the one who doesn't wish to risk, has to be content with rather low level of profitability. From this the main idea of investment activity proceeds: profitability level to which to aspire the investor to be in a certain dependence on degree of risk which he is ready to bear. But Benjamin Graham considered differently. Profitability level which the investor wants to reach, has to depend on the size of intellectual efforts which he wants and can put for performance of the tasks. The minimum profitability is received by the passive investor who is interested in safety of the invested capital and, besides, doesn't want to be engaged demanding effort and time in operations in stock market. The maximum profitability will be received by the attentive and enterprising investor who uses for this purpose a maximum of reason and skills available for it. In 1965 such postulate was formulated:» Actually, in many cases the real risk connected with acquisition of «underestimated» actions which assumes possibility of receiving bigger profit, can be lower, than the risk connected with acquisition of usual bonds». Having set for itself a task, to present a secret of reasonable investments in the form of two words, Graham offered the following motto - the SAFETY MARGIN. Demonstration by the company of ability to earn the profit which size considerably exceeds its percentage payments, creates that «safety cushion» which can be considered how protection against loss or disappointment in case of possible decrease in net profit of the company in the future.

The margin which exceeds continuous payments of the company, can be considered in the form of percent of possible decrease in profit, it is less which the company won't have enough profit for payment of percent. For example, if the net profit of the company makes 100 million, and payments of percent make 20 million, the margin of safety makes 80%. What does it mean? It means that the net profit of the company has to fall to 80% that it could have problems with payment of percent on the credit. the margin of safety is a difference between two indicators, first of which represents the relation of specific profit on an action to the price of its purchase, and the second represents percentage profitability of bonds. As it is impossible to predict precisely, what profit of the company will be in the future, to the investor, adhering rule of a margin of safety, exact forecasts it isn't required. If value of a margin big, is enough of it to assume that future profit significantly won't decrease and the investor will is rather protected from falsities of stock market. The safety margin for bonds and preference shares can be calculated, comparing a total cost of the company to an amount of debt. For example, the cost of the company of 30 million, and a debt - 10 million, the company can lose 2/3 costs before holders will start incurring losses. The volume of this stock of cost of the company or the «safety cushion», the exceeding size of a debt, it is possible to define by the average price of common stocks during the certain period of time. As the average price of an action is connected with average ability of the company to a profit earning, a margin «company costs» over a debt and a profit margin over the fixed payments in most cases have to be equal. If each of 20 and more actions in a diversified portfolio of the investor is characterized such safety marches, the probability of favorable result is very high. That is why observance of rules of a margin of safety doesn't demand from the investor of a special insight and foresight at operations with actions. If the investor throughout the long period of time gets actions at the average level of stock market, at the price already there is the corresponding margin of safety. Danger consists in the concentrated acquisition of actions at higher levels of stock market or in purchase of unpresentable actions which have higher, than on the average, risk of decrease in force of profitability. Level of a margin of safety always depends on the price of acquisition of actions. It will be more at one price level, small, at higher course at all will disappear at higher course. The essence of the concept of a margin of safety becomes more obvious if we try to apply it to the underestimated actions. In this case, by definition, we receive a favorable difference between the price, on the one hand, and their true cost - with another. This difference also represents a safety margin. It is intended «to soften» result of wrong calculations or falling of a share price is lower than average market level. If upon their purchase sufficient level of a margin of safety is observed, the investor can be sure what even a certain decrease in force of profitability of actions won't surely lead to serious deterioration of indicators of its activity. The safety margin in this case carries out the task. As there is no uniform standard definition of the concept «investment activity» therefore experts can give such definition which most of all to be pleasant to them. Many of them deny existence of any useful difference from the practical point of view between investment and speculation concepts. Graham considers that such position is harmful as encourages congenital tendency of people to speculation in stock market. Therefore he suggested to use the concept of a margin of safety as the standard at determination of distinction between investment and speculation. The investment concept of a margin of safety is based on simple and accurate mathematical calculations, with use of statistical data. Thus, true investment assumes use of the real margin of safety which has to have quantitative measurement, to be convincingly reasonable and to be confirmed by practice.

13.3 Operational lever

Business activity is connected with many factors influencing its result. Everything can be divided them into two groups. The first group of factors is connected with maximizing profit. Other group of factors is connected with identification of critical indicators on the volume of the realized production, the best combination of limit revenue and limit expenses, with division of expenses into variables and constants. The effect of the operational lever is that any change of sales proceeds always generates stronger change of profit.

In modern conditions at the enterprises questions of regulation of weight and dynamics of profit come to one of the first places in management of financial resources. The solution of the matters is included into a framework of operational (production) financial management.

Basis of financial management - the financial economic analysis within which into the forefront the analysis of structure of prime cost acts.

It is known that business activity is connected with many factors influencing its result. Everything can be divided them into two groups. The first group of factors is connected with maximizing profit at the expense of supply and demand, price policy, profitability of production, its competitiveness. Other group of factors is connected with identification of critical indicators on the volume of the realized production, the best combination of limit revenue and limit expenses, with division of expenses into variables and constants.

To variable expenses which change from change of volume of output, raw materials and materials, fuel and energy for the technological purposes, purchased products and semi-finished products, the main salary of the main production workers, development of new types of production, etc. belong. To constant (all-firm) expenses - depreciation charges, a rent, an administrative-and-management personnel salary, percent for the credit, travel expenses, expenses on advertizing, etc.

The analysis of production expenses allows to define their influence on the volume of profit on realization but if to approach to these problems more deeply, the following becomes clear:

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