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EKF113 Management Accounting > Book: Cost Volume Profit Analysis And Capil Investment Decitions > Flashcards

Book: Cost Volume Profit Analysis And Capil Investment Decitions Flashcards

1
Q

Are all costs relevant for decision making

A

No, only avoidable costs

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2
Q

What are sunk costs

A

Costs created by decisions in the past that cannot be changed by decisions in the future. Committed costs

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3
Q

What is the sunk cost falacy

A

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)”

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4
Q

What is opportunity cost

A

The cost of not taking other opportunities with your resources

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5
Q

What is incremental or differential costs

A

The difference between the costs of each action considered

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6
Q

What are marginal costs

A

The cost of producing one additional unit

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7
Q

What is the use of cost volume profit analysis

A

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

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8
Q

What is the break even point

A

The level of production on which no profits or losses occur

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9
Q

What is CVP analysis

A

The study of how activity volumes affect financial ratios

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10
Q

How does the CVP relationship between cost and revenue apear in a graph

A

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

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11
Q

What is increasing return to scale

A

The increased revenue when a business scales cuz division of labor and lower portion fixed costs

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12
Q

Why is there decreasing return to scale in the upper levels of the cpv relationship

A

Because when facilities operate beyond their capacity bottlenecks develop

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13
Q

How many break even points are there in a cpv relationship curve

A

Two

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14
Q

What is a relevant range in a cpv curve

A

The output range the firm assumes to operate in the short term. Analyses should be done here.

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15
Q

Why does management accounting often assume a straight line cvp relationship on short time periods

A

Becouse it is simpler and therefor cheaper

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16
Q

How does the fixed cost function work

A

It is constant until a threshold is reached where it behaves like a staircase. Use If functions in exel

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17
Q

Is the revenue function assumed to be linear in the short term

A

Yes but in the long run it slopes when demand fades and you have to lower price to sell more

18
Q

What is contribution margin

A

The difference between dales revenue and variable cost

19
Q

How do you calculate the breaking point

A

Contribution margin = fixed costs

20
Q

What is contribution margin ratio aka contribution sales ratio or profit volume ratio

A

Contribution margin divided by sales price

21
Q

What is the margin if safety

A

Expected sales - break even divided by expected sales. Unit distance from break even in percent

22
Q

What is contribution margin ratio

A

The CM divided by sales

23
Q

What does a profit volume graph show

A

The levels of profit at different levels of production with the break even point at zero y

24
Q

How do you make cost volume profit analysis on multiple products

A

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

25
Q

How does the sales mix affect the break even point

A

If more products with a high profit margin is sold in relation to the whole the break even point comes down

26
Q

What are the seven assumptions of cvp analysis

A
  1. All other variables (taxes and inflation) remain constant, 2. A single product or constant sales mix, 3. Total cost and revenue are linear, 4. Profits are calculated on a variable costing basis, 5. Costs can be accurately divided into fixed and variable, 6. The relevant range, 7. This is a short time horizon.
27
Q

What is sensitivity analysis

A

The analysis of how cvp is affected by changes in different variables such as sales mix, fixed and variable costs

28
Q

What assumptions are often done when comparing investment opportunities

A

All cash in and outflows are known with certainty, sufficient funds are available, taxes are absent and so is inflation

29
Q

What are some other names of opportunity cost

A

Minimum required rate of return, cost of capital, discount rate or interest rate

30
Q

Explain the concept of risk return tradeof

A

That for a risky investment to be worth it, it should offer a higher return than a lower risk one. The benchmark is a risk free government guaranteed bond

31
Q

What is the relationship between discounted cash flow and compounding interest

A

They are opposites

32
Q

How is future value of cash now calculated

A

FV(n) = V(0)*(1+K)^n

K is interest rate
V is value

33
Q

Explain discounting

A

To translate future cash into todays value accounting for the time value of money through interest rate resulting in the discounted present value

34
Q

Explain compounding

A

Translating present value to future value accounting for the time value of money by interest rate

35
Q

How is present value of future cashflow calculated

A

V(0) = FV(n) / (1+K)^n
n is time into future in years

36
Q

What is net present value NPV

A

The present value of each yearly return of an investment minus the initial cost

37
Q

What is an annuity

A

An asset that pays a fixed term each period for a specific number of periods

38
Q

How is present value calculated of an annuity

A

V(0) = A*(1-(1/(1+K)^n))/K

where A is the amount received each peruod

39
Q

What is the internal rate of return or discount rate of return

A

The sum of the return of an investment accounting for the time value of money

40
Q

What is the maximum amount a company can pay for an investment without hurting equity

A

The investments internal rate of return

41
Q

What is the payback method to compare investments

A

To compare the time for different investments to pay back what they cost

42
Q

When is the payback method for comparing investments appropriate

A

When investments are risky and when the company faces liquidity problems

EKF113 Management Accounting (10 decks)

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