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ACC2CAD Cost
Accounting and Decision
Making
Semester 1, 2011
Mini Case Study 5
Delphina Products Ltd.


NGOC TAN TRAN
15954047
THURSDAY 1 PM
May 25
th
2011
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Table of Contents

Recommendation Page 3

Executive Summary Page 4

Introduction Page 5

Analysis Page 6 - 7

Recommendation and conclusion Page 8

Appendix 1 Page 9


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Recommendation
As managers need to estimate Iuture revenues, costs, and proIits to help them plan and
monitor operations. They use cost-volume-proIit (CVP) analysis - a technique that
examines changes in proIits in response to changes in sales volumes, costs, and prices to
identiIy the levels oI operating activity needed to avoid losses, achieve targeted proIits,
plan Iuture operations, and monitor organizational perIormance. The CVP analysis will
thereIore contribute valuable inIormation Ior Delphina managers by helping them
understand the interrelationship between cost, volume, and proIit in an organization
which is helpIul Ior their decision making. However, although CPV analysis has the
potential to help managers make decision, it should only be used in short term with
caution as it is based on the number oI assumptions in which the useIulness oI CVP
analysis may be undermined where these assumptions are not meet.


















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Executive Summary
Delphina Products Ltd is a regional Iirm with three major product lines: cereals, breakIast
bars and dog Iood. There is an income statement which was prepared by product line to
measure the company`s Iinancial perIormance. However, in order to better assist the
managers in their decision making, it is recommended that the company should do a cost
volume proIit analysis oI its operation. A revised income statement has been prepared in
which it shows the contribution margin Ior each product line and the operating proIit
beIore taxes Ior the company as a whole.

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Introduction
Delphina is a regional Iirm with three major product lines: cereals, breakIast bars and dog
Iood. The income statement prepared by its accountant reIlects cash Ilow rather than the
interrelationship between the elements including in it. A revised income statement has
been prepared showing contribution margin Ior each product line and the operating proIit
beIore taxes Ior the company.
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Analysis
As mentioned above, in order Ior the CVP analysis to be useIul, it has to Iollow some
assumptions which very Iew oI them could be satisIied in practice. Following are
assumptions and limitations managers should consider when using CVP Analysis:

- All costs can be analysed into their Iixed and variable elements. When we talk
about Iixed and variable costs, we usually assume that it is possible to take a look
at individual or total costs and split them into their Iixed and variable elements.
However, in reality, it`s not that easy and assessing the Iixed and variable cost
split can be Iraught with diIIiculties and can be time consuming.
- Fixed costs remain Iixed even over a wide range oI activity. Again however Iixed
costs are unlikely to stay constant as output increases beyond a certain range oI
activity. We may not, in Iact, know how our Iixed costs will behave outside our
relevant range unless and until we carry out detailed cost analysis oI extra
relevant range scenarios.
- Variable costs always vary directly with activity. It is possible Ior a cost to be
truly variable and behave in a perIectly linear way. There are however, the more
likely exceptions to that behaviour. For example, even though the quantity oI
components in a product remains standard and Iixed, their cost per unit can Iall as
a result oI these economies oI scale.
- Selling prices are constant per unit. As There is no reason why any business needs
to sell to all oI its customers at the same price Ior all products, so when we
consider the realistic side oI total sales a true curve emerges; and again, this
means that any analysis oI sales immediately becomes more diIIicult than the
basic assumptions oI CVP analysis.
- A major limitation oI cost-volume-proIit analysis and the related contribution
income statement is the use oI single unit-level activity cost driver. Even when
multiple products are considered, the CVP approach restates volume either in
terms oI an average unit or in terms oI a dollar oI sales volume.
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- Sales mix issues. It deals with the contribution to sales ratio (the C/S ratio). The
average C/S ratio has to be based on the weighted average oI the two; and the
value oI this weighted average varies as the sales mix varies. By changing the
sales mix, in a situation where the values oI the C/S ratio change Irom product to
product, the weighted average value oI all C/S ratios also changes; and unless this
point is appreciated, the results oI any CVP analysis could easily be invalidated.
- Uncertainty does not exist. Which means that labour productivity, production
technology and market conditions do not change, or prices are sure; variability oI
cost is certain; and level oI Iixed cost is certain. Having said that 'the only things
certain in this world are death and taxes, CVP analysis is not the exception!














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Recommendations and Conclusion
Perhaps the greatest danger lies in relying on simple CVP analysis when a manager is
contemplating a large change in volume that lies outside oI the relevant range. However,
even in these situations, the manager can adjust the model to take into account anticipated
changes in selling price, Iixed costs, and the sales mix that would otherwise violate the
cost volume proIit assumptions.
Despite its limitations, in many business settings CVP analysis still provides useIul
inIormation. Accountants and managers use their knowledge oI the organization`s
operations and their judgment to evaluate whether the CVP assumptions are reasonable
Ior their setting. They can rely more on CVP results when the assumptions are less likely
to be violated. In this particular case, as long as the assumptions underlying CVP analysis
are less likely to be violate (e.g. the inventories on 30 June were essentially identical to
those on 30 June in previous years this satisIied the assumption that the levels oI all
inventory at the beginning and end oI the period are the same) Delphina manager could
have a great beneIit by using this technique as it is actually a power tool in assisting
managers in their decision making.
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Appendix 1
Dog Iood Cereal BreakIast bars Total
Sales (in kgs) 2 000 500 500 3 000
Sales revenue $1 000 $400 $200 $1 600
Variable manuIacturing costs:
Direct material $330 $160 $100 $590
Direct labour 90 40 20 150
Variable manuIacturing overhead* 27 12 6 45
Total variable manuIacturing costs $447 $212 $126 $785
ManuIacturing contribution margin $553 $188 $74 $815

Other variable costs:
Commissions $50 $40 $20 $110
Contribution margin $503 $148 $54 $705

Fixed costs:
Fixed manuIacturing overheadf $135
Fixed operating expenses 160
Fixed general and admin expenses 185
Total Iixed costs $480
Operating proIit beIore taxes


$225

*Total variable manuIacturing overhead indirect labour supplies employee on-costs on indirect labour
$15 000 $30 000$45 000

- Variable manuIacturing overhead Direct labour $ $45 000 $150 00030

- Variable manuIacturing overhead Ior dog Iood direct labour $ Ior dog Iood * 30 $90
000*30$27 000

- Variable manuIacturing overhead Ior Cereal direct labour $ Ior cereal * 30 $40
000*30$12 000

- Variable manuIacturing overhead Ior BreakIast bar direct labour $ Ior breakIast bar * 30
$20 000*30$6 000


- Fixed manuIacturing overhead total manuIacturing overhead-variable manuIacturing
overhead$180 000-$45 000$135 000

- Fixed operating expensestotal selling expense commissions$270 000-$110 000$160 000

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