formules BF.docx

# Cost and pricing strategies This topic explores the fundamental principles of cost calculation, profit margin determination, and the strategic use of target costing to set maximum allowable production prices. ### 1.1 Calculating total cost The total cost of a product or service is the sum of all expenses incurred in its production. This is generally comprised of direct and indirect costs. ### 1.2 Determining profit margins Several methods can be employed to determine the profit margin, which is the difference between the selling price and the cost of a product. #### 1.2.1 Fixed amount profit margin This method involves adding a predetermined fixed amount to the cost price to arrive at the selling price. * **Formula:** `Selling Price = Cost Price + Fixed Amount` * **Example:** If the cost price is 50 dollars and the fixed profit amount is 15 dollars, the selling price would be 65 dollars. #### 1.2.2 Percentage of cost price profit margin In this approach, the profit margin is calculated as a percentage of the cost price, which is then added to the cost price. * **Formula:** `Selling Price = Cost Price + (Cost Price × Profit Percentage)` * **Example:** If the cost price is 100 dollars and the desired profit margin is 20 percent of the cost price, the profit would be `100 dollars * 0.20 = 20 dollars`, making the selling price 120 dollars. #### 1.2.3 Percentage of selling price profit margin This method calculates the profit margin as a percentage of the final selling price. To find the selling price, the cost price is divided by the complement of the profit margin percentage. * **Formula:** `Selling Price = Cost Price / (1 - Profit Percentage of Selling Price)` * **Example:** If the cost price is 80 dollars and the desired profit margin is 25 percent of the selling price, the calculation would be `Selling Price = 80 dollars / (1 - 0.25) = 80 dollars / 0.75 = 106.67 dollars`. ### 1.3 Target costing Target costing is a pricing strategy where the maximum allowable production cost is determined by subtracting the desired profit margin from the target selling price. This approach focuses on managing costs to meet a predetermined market-driven price. * **Formula:** `Maximum Production Price = Selling Price - Desired Profit Margin` ### 1.4 Additional related financial concepts (from provided text) While not strictly core to cost and pricing strategies, the document also mentions related financial calculations: * **Total Selling Price:** This is defined as `Selling Price = Cost Price + Profit Margin + VAT`. * **VAT Payable:** Calculated as `VAT Payable = VAT Due on Sales - Reclaimable VAT on Purchases`. * **VAT Taxable Base:** This is determined by `Taxable Base = Price - Discounts + Charged Costs (transport) + Mandatory Tips`. * **Gross Profit (Sole Proprietorship):** Calculated as `Gross Profit = Revenue - Cost of Goods Sold + Inventory Change (Ending Inventory - Beginning Inventory)`. * **Forfaitary Professional Costs:** This is `Income × 30%`, subject to a legal maximum amount. * **Taxable Profit (Corporate Tax):** Defined as `Taxable Reserved Profit + Disallowed Expenses + Distributed Dividends`. * **Combined Taxable Income (CTI):** `CTI = Net Income – Paid Maintenance Allowances`. * **Current Ratio (Liquidity):** Measured by `Current Ratio = Current Assets / Current Liabilities`. * **Solvency (Financial Independence):** Calculated as `(Equity / Total Assets) × 100%`. * **Gross Margin (Accounting):** Defined as `Revenue - (Purchases of Goods, Raw Materials)`. * **Break-Even Point:** Calculated as `Fixed Costs / Contribution Margin`. * **Contribution Margin:** Calculated as `Selling Price - Average Variable Costs`. * **Price Variance (Variance Analysis):** `(Standard Price - Actual Price) × Actual Quantity`. * **Efficiency Variance (Quantity Variance):** `(Standard Quantity for Actual Production - Actual Quantity) × Standard Price`. * **Budget Control (Total Variance):** `(Standard Quantity × Standard Price) - (Actual Quantity × Actual Price)`. --- # Taxation and contributions This section outlines the calculation of social contributions for self-employed individuals, the principles of Value-Added Tax (VAT) calculation, and the determination of taxable income for both corporate and income tax purposes. ### 2.1 Social contributions for self-employed individuals Self-employed individuals are required to pay social contributions based on their net professional income. * **Social contribution rate:** $20.5\%$ of net professional income. ### 2.2 Value-added tax (VAT) VAT is a consumption tax applied to goods and services. The amount of VAT payable is determined by the VAT collected on sales minus the VAT that can be reclaimed on purchases. #### 2.2.1 VAT payable The net VAT payable is calculated as follows: * **VAT payable = VAT on sales - Recoverable VAT on purchases** #### 2.2.2 Measure of assessment for VAT The base upon which VAT is calculated (the measure of assessment) includes the price of goods or services, any applicable costs such as transport, and mandatory tips. Discounts are deducted from the price before calculating the VAT. * **Measure of assessment = Price - Discounts + Charged costs (e.g., transport) + Mandatory tips** ### 2.3 Taxable income determination Determining taxable income involves different methodologies depending on the type of tax and the entity's structure. #### 2.3.1 Corporate tax For corporate tax purposes, taxable profit is adjusted from the reserved profit based on specific accounting and tax rules. * **Fiscal profit (Corporate tax) = Taxable reserved profit + Disallowed expenses + Distributed dividends** #### 2.3.2 Income tax for sole proprietorships For sole proprietorships, gross profit is calculated from turnover, and specific deductions or flat-rate expenses can be applied. * **Gross profit (Sole proprietorship) = Turnover - Cost of goods sold + Inventory change (Ending inventory - Beginning inventory)** #### 2.3.3 Forfaitary professional expenses A flat-rate deduction for professional expenses can be applied, capped at a legally defined maximum amount. * **Forfaitary professional expenses = Income $\times$ $30\%$ (up to a legal maximum)** #### 2.3.4 Joint taxable income The joint taxable income is the net income after deducting any paid maintenance allowances. * **Joint taxable income (GBI) = Net income - Paid maintenance allowances** ### 2.4 Pricing and profit determination Various methods are used to determine pricing and profit margins, from calculating the total cost price to setting a target selling price. #### 2.4.1 Total cost price The total cost price is the sum of direct and indirect costs incurred in producing a good or service. * **Total cost price = Direct costs + Indirect costs** #### 2.4.2 Selling price The selling price is determined by adding a profit margin and VAT to the cost price. * **Selling price (VP) = Cost price + Profit margin + VAT** #### 2.4.3 Profit margin calculation methods Three primary methods can be used to determine the profit margin: 1. **Fixed amount:** A constant monetary value is added to the cost price. * **Example:** Cost price + $15 dollars. 2. **Percentage of cost price:** The profit margin is a percentage of the cost price. * **Formula:** Profit margin = Cost price $\times$ Profit percentage. * **Selling price:** Cost price + (Cost price $\times$ Profit percentage). 3. **Percentage of selling price:** The profit margin is a percentage of the final selling price. * **Formula:** Cost price / (1 - Profit percentage). #### 2.4.4 Target costing Target costing focuses on establishing the maximum acceptable production cost to achieve a desired profit margin at a set selling price. * **Target costing (Maximum production price) = Selling price - Profit margin** #### 2.4.5 Gross margin (Accounting) In accounting, the gross margin is calculated as turnover minus the cost of goods purchased. * **Gross margin (Accounting) = Turnover - (Purchases of goods for sale, raw materials)** ### 2.5 Break-even analysis The break-even point is a crucial metric indicating the sales volume required to cover all costs. #### 2.5.1 Break-even point calculation This is calculated by dividing fixed costs by the contribution margin per unit. * **Break-even point = Fixed costs / Contribution margin** #### 2.5.2 Contribution margin The contribution margin represents the revenue remaining after deducting variable costs, which contributes to covering fixed costs and generating profit. * **Contribution margin = Selling price - Average variable costs** ### 2.6 Variance analysis Variance analysis helps identify and quantify deviations from planned or standard costs and quantities. #### 2.6.1 Price variance This variance measures the difference between the standard price of a resource and its actual price. * **Price variance = (Standard price - Actual price) $\times$ Actual quantity** #### 2.6.2 Efficiency variance (Quantity variance) This variance measures the difference between the standard quantity of a resource allowed for the actual production and the actual quantity used. * **Efficiency variance = (Standard quantity for actual production - Actual quantity) $\times$ Standard price** #### 2.6.3 Budget control (Total variance) The total variance, also known as budget control, represents the overall difference between the budgeted cost and the actual cost. * **Budget control (Total variance) = (Standard quantity $\times$ Standard price) - (Actual quantity $\times$ Actual price)** --- # Financial ratios and liquidity This section delves into key financial metrics used to assess a company's short-term financial health and long-term financial independence. ### 3.1 Liquidity assessment Liquidity refers to a company's ability to meet its short-term obligations. A primary measure for this is the current ratio. #### 3.1.1 Current ratio The current ratio assesses the relationship between a company's current assets and its current liabilities, indicating its capacity to pay off its debts over the next year. * **Formula:** $$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$ * **Current Assets:** These are assets that are expected to be converted to cash or used up within one year or the operating cycle, whichever is longer. Examples include cash, accounts receivable, and inventory. * **Current Liabilities:** These are obligations that are expected to be settled within one year or the operating cycle, whichever is longer. Examples include accounts payable and short-term loans. > **Tip:** A current ratio greater than 1 generally suggests that a company has sufficient assets to cover its short-term debts. However, an excessively high ratio might indicate inefficient use of assets. ### 3.2 Financial independence (solvability) Solvability measures the extent to which a company is financed by its owners versus creditors, indicating its long-term financial stability and independence. #### 3.2.1 Solvability ratio The solvability ratio, also known as the equity ratio, highlights the proportion of a company's total assets that are funded by its shareholders' equity. * **Formula:** $$ \text{Solvability Ratio} = \left( \frac{\text{Equity}}{\text{Total Assets}} \right) \times 100 $$ * **Equity:** This represents the owners' stake in the company, calculated as total assets minus total liabilities. * **Total Assets:** This is the sum of all assets owned by the company. > **Tip:** A higher solvability ratio indicates greater financial independence, as the company relies more on its own funds rather than borrowed money. This generally implies lower financial risk. --- # Break-even analysis and variance accounting This section outlines the core principles of break-even analysis for determining profitability thresholds and introduces the concepts of variance accounting for analyzing cost and revenue deviations from planned figures. ### 4.1 Break-even analysis Break-even analysis is a crucial tool for understanding the relationship between costs, sales volume, and profit. It helps businesses determine the sales level required to cover all their costs. #### 4.1.1 Calculating the break-even point The break-even point (BEP) is the level of sales at which total revenue equals total costs, resulting in zero profit or loss. It can be calculated using fixed costs and the contribution margin. The formula for the break-even point in units is: $$ \text{Break-even point (units)} = \frac{\text{Fixed costs}}{\text{Contribution margin per unit}} $$ The contribution margin per unit is calculated as the selling price per unit minus the average variable cost per unit. $$ \text{Contribution margin per unit} = \text{Selling price per unit} - \text{Average variable costs per unit} $$ > **Tip:** The contribution margin represents the amount each unit sold contributes towards covering fixed costs and generating profit. ### 4.2 Variance accounting Variance accounting is a technique used to compare actual results with planned or standard costs and revenues. Analyzing these differences, or variances, helps identify areas of performance that deviate from expectations and allows for corrective actions. #### 4.2.1 Price variance Price variance measures the difference between the standard price of a resource and the actual price paid for it. The formula for price variance is: $$ \text{Price variance} = (\text{Standard price} - \text{Actual price}) \times \text{Actual quantity} $$ A favorable price variance occurs when the actual price is lower than the standard price, while an unfavorable variance occurs when the actual price is higher. > **Example:** If the standard price for raw material A is 10 dollars per kilogram, but the company actually paid 11 dollars per kilogram for 100 kilograms purchased, the price variance would be $(10 - 11) \times 100 = -100$ dollars. This is an unfavorable variance. #### 4.2.2 Efficiency variance Efficiency variance, also known as a quantity variance, measures the difference between the standard quantity of a resource that should have been used for the actual production level and the actual quantity of the resource that was used. The formula for efficiency variance is: $$ \text{Efficiency variance} = (\text{Standard quantity for actual production} - \text{Actual quantity used}) \times \text{Standard price} $$ A favorable efficiency variance occurs when less of a resource is used than the standard allows, while an unfavorable variance occurs when more is used. > **Example:** If the standard quantity of raw material A for producing 50 units is 2 kilograms per unit, and 110 kilograms were actually used, with a standard price of 10 dollars per kilogram, the efficiency variance would be $( (50 \times 2) - 110 ) \times 10 = (100 - 110) \times 10 = -100$ dollars. This is an unfavorable variance. #### 4.2.3 Budget control and total variance Budget control involves comparing actual financial performance against a budget. The total variance can be seen as the overall difference between the planned cost of production and the actual cost incurred. The total variance (also referred to as budget variance) can be calculated as: $$ \text{Total variance} = (\text{Standard quantity} \times \text{Standard price}) - (\text{Actual quantity} \times \text{Actual price}) $$ This formula encapsulates both price and efficiency differences, providing a comprehensive view of the deviation from the budgeted cost. > **Tip:** Analyzing variances helps in cost management, performance evaluation, and strategic decision-making by highlighting where actual operations differ from planned ones. --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Total Cost | The sum of direct costs and indirect costs incurred in producing a product or service. | | Selling Price (SP) | The price at which a product or service is sold, calculated as Cost Price + Profit Margin + VAT. | | Profit Margin Determination (3 methods) | Methods to set profit include adding a fixed amount to the cost price, applying a percentage to the cost price, or calculating based on a percentage of the selling price. | | Target Costing | A method of determining the maximum production price by subtracting the desired profit margin from the selling price. | | Social Contributions (Self-employed) | A percentage (20.5%) of net professional income that self-employed individuals must pay. | | VAT Payable | The amount of Value Added Tax to be paid, calculated as VAT due on sales minus refundable VAT on purchases. | | Tax Base (VAT) | The amount on which VAT is calculated, comprising the price, minus discounts, plus invoiced costs like transport and mandatory tips. | | Gross Profit (Sole Proprietorship) | Revenue minus the cost of goods sold, adjusted by the change in inventory (Ending Inventory - Beginning Inventory). | | Flat-rate Professional Expenses | A deductible amount calculated as 30% of income, subject to a legal maximum limit. | | Taxable Profit (Corporate Tax) | The net profit before tax, adjusted by non-deductible expenses and distributed dividends. | | Joint Taxable Income (JTI) | The net income after deducting paid alimony or maintenance payments. | | Current Ratio (Liquidity) | A financial metric calculated as current assets divided by current liabilities, used to assess a company's ability to meet short-term obligations. | | Solvability (Financial Independence) | The ratio of equity to total assets, expressed as a percentage, indicating the degree to which a company is financed by its owners. | | Gross Margin (Accounting) | Revenue minus the cost of goods purchased, raw materials, and other direct production costs. | | Break-Even Point | The level of sales at which total revenue equals total costs, resulting in neither profit nor loss. It is calculated as Fixed Costs / Contribution Margin. | | Contribution Margin | The selling price of a product minus its average variable costs per unit. | | Price Variance (Variance Analysis) | The difference between the standard price and the actual price paid for a good or service, multiplied by the actual quantity purchased. Formula: $(Standard \ Price - Actual \ Price) \times Actual \ Quantity$. | | Efficiency Variance (Quantity Variance) | The difference between the standard quantity of input allowed for actual production and the actual quantity used, multiplied by the standard price. Formula: $(Standard \ Quantity \ for \ Actual \ Production - Actual \ Quantity) \times Standard \ Price$. | | Budgetary Control (Total Variance) | The overall difference between the standard cost of production and the actual cost of production. Formula: $(Standard \ Quantity \times Standard \ Price) - (Actual \ Quantity \times Actual \ Price)$. |