Basic mangament Accounting Techniques

Question 0

Fixed vs. Variable costs

Answer 0

Fixed costs:
•unaffected by changes in volume output
•increase with periods
• fixed cost per unit decrease as more units are produced

Variable cost:
•vary directly with volume output
• cost per unit remains the same for each unit produced
• TOTAL variable cost increases as volume of output increases

Total cost = fixed cost + variable cost

Question 1

How are the fixed and variable elements of semi-variable costs determined?

Answer 1

• High-low method
1. Calculate variable cost: cost at highest volumes - cost at lowest volumes

2. Calculate variable cost per unit: highest - lowest volumes
3. Go back to original high and low volumes. Calculate fixed costs = cost at highest volume - variable costs (high volume x variable cost per unit)

Variable cost per unit = difference in total costs / difference in activity levels

•Scattergraph method

Question 2

Cost-volume-profit/ break even analysis

Answer 2

BEP=fixed costs/ contribution (profit) per unit

Question 3

Contribution/Sales (C/S) ratio

Answer 3

C/S ratio measures how much contribution is earned from each $1 of sales

= contribution per unit/ sales price per unit

= fixed costs/ break even point

Question 4

Margin of safety

Answer 4

= Budgeted sales volume - break even sales volume (or revenue)

*expressed as a % of budget

** margin of safety/ budgeted units

Question 5

Relevant costs

Answer 5

Future cash flows arising as a consequence of a decision

1. Future costs
2. Cash flows
3. Opportunity costs
4. Incremental Costs
5. Differential costs - difference in total costs between alternatives
6. Avoidable costs