Chapter 8 Cost Management
Section 2 cost-effectiveness Analysis and application
1, cost-effectiveness analysis Overview
(I) The meaning and basic assumptions of cost-effectiveness analysis
cost-effectiveness analysis is referred to as CVP analysis. It is a quantitative analysis method that provides necessary financial information for enterprise prediction, decision-making, planning and performance evaluation based on the cost of and variable cost method . Among them,
"principal" refers to cost, including fixed costs and variable costs, "quantity" refers to business volume, generally refer to sales volume "profit" generally refers to operating profit. The volume-profit analysis mainly includes break-even analysis, safety margin analysis, target profit analysis, sensitivity analysis and other contents.
In order to facilitate the establishment of a simple mathematical model to reflect the relationship between cost, business volume and profit, cost-effectiveness analysis must be based on certain assumptions. Generally speaking, the cost-effectiveness analysis is mainly based on the following four basic assumptions
(1) The total cost consists of two parts: fixed cost and variable cost. The total fixed cost remains unchanged, and the variable cost changes in a direct proportional manner to the business volume within a certain range. Dividing costs by cost characteristics is a prerequisite for cost-effectiveness analysis.
(2) Sales revenue and business volume are completely linearly related to . When sales volume changes within the relevant range, the unit price of the product will not change, and sales revenue will change with the change of sales volume.
(3) Production and sales balance, that is, it is assumed that all products produced in each period can be sold in the current period, regardless of the impact of inventory changes on profits. Because break-even analysis is a short-term decision that only considers the recovery of all costs in a specific period, and inventory contains costs from previous periods, it is not within the scope of consideration.
(4) The product production and sales structure is stable. Because when producing and selling multiple products, the break-even point will be affected by the contribution of multiple products and the production and sales structure, only the break-even analysis conducted on the basis of the unchanged production and sales structure is effective.
(II) Basic principles of cost-effectiveness analysis
1. Basic relationship formula of cost-effectiveness analysis
0 The relevant factors of cost-effectiveness analysis include sales volume, unit price, sales revenue, unit change cost, fixed cost, operating profit, etc. The relationship between these factors can be reflected by the following basic formulas
profit = sales revenue - total cost
= sales revenue - (variable cost + fixed cost) = sales volume × unit price - sales volume × unit variable cost - fixed cost = sales volume × (uniform price - unit variable cost) - fixed cost
2. Marginal contribution
Marginal contribution, also known as marginal profit and contribution gross profit, refers to the difference after sales revenue minus variable cost, which is the ability to measure the product's ability to contribute profits to the enterprise. From the perspective of total sales and individual products, it can be divided into total marginal contribution and unit marginal contribution. Marginal contribution rate refers to the percentage of marginal contribution in sales revenue. From the perspective of total sales and a single product, it can be divided into marginal contribution rate and variable cost rate.
2. Single product break-even analysis
(I) break-even analysis
break-even analysis, also known as guaranteed capital analysis, is a quantitative analysis method to study the relationship between capital and quantity profit when the company happens to be in a break-even state, and is the core content of capital and quantity profit analysis.
break-even point refers to the business volume or sales when the total revenue of the enterprise is equal to the total cost and profit is zero during a certain period. The breakeven point of a single product has two manifestations: the breakeven point business volume and the breakeven point sales.The business volume of the break-even point = fixed cost/(unit price-unit variable cost) = fixed cost/unit marginal contribution sales of the break-even point = business volume of the break-even point × unit price = fixed cost/(1-variable cost rate) = fixed cost/marginal contribution rate
break-even operating rate = business volume of the break-even point/normal operating business volume (actual business volume or estimated business volume) × 100%
= sales of the break-even point/normal operating sales (actual sales or estimated sales) × 100% From the calculation formula of the break-even point, it can be seen that there are mainly three ways to reduce the break-even point
(1) reduce the total fixed cost. When other factors remain unchanged, the reduction of the break-even point and the fixed cost is the same.
(2) Reduce unit change cost. When other factors remain unchanged, the break-even point and the reduction range of unit change cost are inconsistent.
(3) Increase the unit price of sales. When other factors remain unchanged, the break-even point and the change range of sales unit price are inconsistent.
1. Traditional cost-effectiveness relationship chart
As shown in Figure 8-2, in the traditional cost-effectiveness relationship chart, the horizontal coordinate represents sales volume, and the vertical coordinate represents sales revenue or cost. The three function lines in the coordinate system are the sales revenue line y=px, the total cost line y=a+bx and the fixed cost line y=a. The intersection point E (xo, yo) of the sales revenue line and the total cost line is the break-even point. The difference between total cost and fixed cost is variable cost. It can be seen intuitively from the figure that as sales volume increases, variable cost is also getting larger and larger. The difference between sales revenue and total cost is the size of profit. At break-even point E, sales revenue is equal to total cost. At this time, the profit is exactly zero. On the left side of the break-even point E, the area surrounded by the sales revenue line and the total cost line is the loss area on the right side of the break-even point E. The area surrounded by the sales revenue line and the total cost line is the profit area. The lower the break-even point, the smaller the loss area will be and the larger the profit area will be. The distance between the actual sales volume Y and the break-even point of sales y indicates the size of the safety margin. The distance between the actual sales volume X and the break-even point of sales volume X indicates the size of the safety margin.
2. Marginal contribution form cost-effectiveness relationship chart
Marginal contribution form cost-effectiveness relationship chart is similar to the traditional cost-effectiveness relationship chart, except that the fixed cost line is replaced by the variable cost line, as shown in Figure 8-3. The marginal contribution-based cost-effectiveness relationship chart mainly reflects the marginal contribution formed by minus sales revenue minus variable costs, and the marginal contribution forms profit after making up for fixed costs. The advantage of the marginal contribution-based cost-effectiveness relationship chart is that it can represent the value of marginal contribution. When the marginal contribution exceeds the fixed cost, the company enters a profit state.
Sales revenue or cost Sales revenue line y=p
3. Profit formula cost-volume profit relationship chart
coordinate represents sales profit, and the marginal contribution line y=cm·x in the coordinate system ("cm" represents unit marginal contribution) and profit line y=cm·x-a ("a" represents fixed cost) are parallel. The intersection point (X., 0) of the profit line and the x-axis is the break-even point. On the left of the break-even point, the area surrounded by the profit line and the horizontal axis is the loss area on the right of the break-even point, and the area surrounded by the profit line and the horizontal axis is the profit area. The difference between marginal contribution and profit (note that it is not the distance between the marginal contribution line and the profit line) is a fixed cost.
(III) Safety margin analysis
Safety margin refers to the difference in the normal (or actual, expected) sales volume exceeding the break-even point sales volume. Safety margin analysis refers to the degree to which the company can withstand the adverse effects of sales due to decline in sales and the company's ability to resist operating risks by analyzing the difference between normal sales exceeding the break-even point. Safety margin analysis mainly includes two indicators: safety margin and safety margin rate.
Safety margin = actual sales volume (sales) or expected sales volume (sales) - sales volume (sales) at break-even point (sales) Safety margin rate = safety margin/actual sales volume (sales) or expected sales volume (sales) × 100% The relationship between break-even operating rate and safety margin rate
The sales volume at break-even point + safety margin = actual sales volume Break-even operating rate + safety margin rate = 1
3. Product portfolio Break-even analysis
In the market economy environment, many enterprises produce and operate multiple products at the same time. The methods for break-even analysis of multiple products mainly include: weighted average method, joint unit method, segment algorithm, sequence method, main product method, etc.
(I) Weighted Average Method
Weighted Average Method refers to a method that determines the marginal contribution rate of the enterprise weighted on the basis of mastering the marginal contribution of various products, based on the proportion of the expected sales revenue of various products to the total revenue as the weighted ratio, and then analyzes break-even under multiple varieties. The specific calculation is as follows:
The sales weight of a certain product = the sales of the product/the sales of various products
Comprehensive marginal contribution rate = (the marginal contribution rate of each product x the sales weight of each product) = 1-Comprehensive change cost rate Sales at the break-even point (comprehensive) = total fixed cost/comprehensive marginal contribution rate = total fixed cost/(1-Comprehensive change cost rate)
Sales at the break-even point of a certain product = profit Sales at break-even point (comprehensive) x The sales weight of the product break-even point business volume = the sales of a certain product break-even point ÷ the unit price of a certain product
(II) Joint unit method
Joint unit method refers to an analysis method that determines the proportion of physical production and sales between various products in advance, and conducts cost-effectiveness analysis of the unit price and unit change of each joint unit.
The so-called joint unit refers to a group of products composed of fixed physical proportions. For example, Company A produces four products A, B, C, and D at the same time, and the production and sales volume of the four products remain a fixed ratio of 4:3:2:1 for a long time. Then, 4 products A, 3 products B, 2 products C and 1 product D form a group of products, referred to as the joint unit. In this case, the calculation formula for the business volume of the joint break-even point is as follows:
Fixed cost Total
The business volume of the joint break-even point = joint unit price - joint unit variable cost
In the above formula, the joint unit price is the total income of a joint unit, and the joint unit variable cost is the total variable cost of a joint unit.
The business volume of a product's break-even point = the business volume of a joint break-even point x the quantity of the product contained in a joint unit
(III) Sub-algorithm
Sub-algorithm is a method that reasonably allocates all fixed costs among various products according to certain standards under certain conditions, determines the amount of fixed costs that each product should compensate, and then conducts cost-effective analysis of each product according to the conditions of a single product.
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[Tip] The key to the segment algorithm is to reasonably allocate the fixed costs. For fixed costs exclusive to a certain product, which should be directly included in the fixed costs of the product. For the common fixed costs that should be shared by multiple products, appropriate allocation standards (such as sales, marginal contribution, labor hours, product weight, length, volume, etc.) should be selected to allocate between various products. The most common allocation criterion is to allocate fixed costs according to the proportion of marginal contributions, because fixed costs need to be compensated by marginal contributions.
(IV) Sequence method
Sequence method refers to a method that uses the marginal contribution of various products to compensate the entire fixed cost of the entire enterprise in order to complete the marginal contribution of the product in accordance with the pre-determined order of sales of each product, until all the marginal contribution of the product is compensated, thereby completing the cost-effectiveness analysis.
Due to people's different preferences for risks, there are optimistic and pessimistic arrangements when determining the order of compensation.Its specific meaning is
(V) Main product method
When there are many varieties of enterprises, if there is a product that is the main product, and the marginal contribution it provides accounts for a large proportion of the total marginal contribution of the enterprise, representing the dominant direction of the enterprise's products, then the capital-to-value analysis can be carried out based on the relevant information of the main product, which is regarded as a single product. The calculation method of the main product method is the same as the cost-effectiveness analysis of a single variety.
4. Target profit analysis (I) Target profit analysis
Target profit analysis introduces target profit into the basic model of capital and profit analysis, and reveals the relationship between cost, business volume and profit on the premise of establishing unit price and cost levels and ensuring the realization of target profits.
5. Sensitivity analysis
Profit sensitivity analysis is to study the direction and degree of influence on profit when the factors affecting profit in capital and quantity analysis undergo slight changes.
Profit sensitivity analysis based on cost-effectiveness analysis mainly solves two problems: one is the degree of impact of changes in each factor on the final profit change; the other is the extent to which the lift and decrease of each factor is allowed when the target profit requirements change.
(I) The degree of impact of each factor on profit
Sensitivity coefficient = percentage of profit change/percentage of factor change
If some factors only undergo small changes, they cause large changes in profits, profits are very sensitive to the changes in these factors, and these factors are called sensitive factors. On the contrary, although some factors change greatly, they may have a small impact on profits, which are called insensitive factors. The absolute value of the sensitivity coefficient is greater than 1, which is a sensitive factor, and the absolute value of less than 1 is a non-sensitive factor.
6. Application of cost-effectiveness analysis in business decision-making
In business decision-making cost-effectiveness analysis method is to determine the "cost dividing point". The so-called "cost dividing point" is the business volume of the two alternatives with the same expected costs. Once you find the "cost dividing point", you can choose the best solution within a certain business volume range.
The essence of business decisions is to use the basic model of capital and quantity to find the most profitable solution, which is the optimal solution.
(I) Selection of production process equipment
The ultimate goal of enterprise production and operation is to obtain profits. When making decisions, the solution with the largest profits should be chosen. In the selection of production process equipment, when the products produced by new and old equipment are consistent, decisions can be made according to Table 8-6.
(II) Selection for new product production
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