Book: Cost Volume Profit Analysis And Capil Investment Decitions Flashcards
Are all costs relevant for decision making
No, only avoidable costs
What are sunk costs
Costs created by decisions in the past that cannot be changed by decisions in the future. Committed costs
What is the sunk cost falacy
The human tendency to get emotionally invested in sunk cost. “Now when we have payed 100k for this crappy thing we should pay a million to finish it so at least we get something out of it (even if it is not worth it)”
What is opportunity cost
The cost of not taking other opportunities with your resources
What is incremental or differential costs
The difference between the costs of each action considered
What are marginal costs
The cost of producing one additional unit
What is the use of cost volume profit analysis
Too see how many units need to be sold to break even, how selling more by reducing price would affect profits, what additional volume is required to justify an add campaign and if sales should be rewarded by salary or commission
What is the break even point
The level of production on which no profits or losses occur
What is CVP analysis
The study of how activity volumes affect financial ratios
How does the CVP relationship between cost and revenue apear in a graph
At first revenue is linear as higher prices lead to larger revenue but as demand wavers it begins to curve down. The costs behave in a similar way but at first there is a spike because inefficiency and fixed costs and later there is also a spice when operating over capacity
What is increasing return to scale
The increased revenue when a business scales cuz division of labor and lower portion fixed costs
Why is there decreasing return to scale in the upper levels of the cpv relationship
Because when facilities operate beyond their capacity bottlenecks develop
How many break even points are there in a cpv relationship curve
Two
What is a relevant range in a cpv curve
The output range the firm assumes to operate in the short term. Analyses should be done here.
Why does management accounting often assume a straight line cvp relationship on short time periods
Becouse it is simpler and therefor cheaper
How does the fixed cost function work
It is constant until a threshold is reached where it behaves like a staircase. Use If functions in exel
Is the revenue function assumed to be linear in the short term
Yes but in the long run it slopes when demand fades and you have to lower price to sell more
What is contribution margin
The difference between dales revenue and variable cost
How do you calculate the breaking point
Contribution margin = fixed costs
What is contribution margin ratio aka contribution sales ratio or profit volume ratio
Contribution margin divided by sales price
What is the margin if safety
Expected sales - break even divided by expected sales. Unit distance from break even in percent
What is contribution margin ratio
The CM divided by sales
What does a profit volume graph show
The levels of profit at different levels of production with the break even point at zero y
How do you make cost volume profit analysis on multiple products
You place the products in batches with simple ratios like two x is sold for every y and put a price on the batch. Then the relationship is.
Break even number of batches = total fixed costs / contribution margin per batch
