chapter 1 Flashcards
What is the main purpose of financial accounting?
To provide information to external users (investors, creditors) for decision-making about investment in a company
What is the primary focus of management accounting
To provide internal managers with relevant information for decision-making, planning, and controlling operations.
What is absorption costing?
A costing method where all production costs, including fixed and variable, are assigned to products.
How does variable costing differ from absorption costing
Variable costing only includes variable product costs, while fixed costs are treated as period expenses.
What is the difference between fixed and variable costs?
Fixed costs remain constant regardless of production levels, while variable costs change directly with production volume
How is contribution calculated?
Contribution = Sales Revenue – Variable Costs
What does contribution per unit represent?
The amount each unit sold contributes toward covering fixed costs and generating profit
What is the break-even point?
The sales level at which total revenue equals total costs, resulting in zero profit.
How is the break-even point in units calculated?
Break-even point (units) = Total Fixed Costs / Contribution per Unit.
What is CVP analysis used for?
To analyze the relationship between costs, sales volume, and profit, helping in decision-making regarding pricing and production levels.
What are relevant costs in decision-making?
Costs that will be affected by future decisions, such as future variable costs and avoidable fixed costs.
What are irrelevant costs?
Costs that will not change regardless of the decision, such as sunk costs (already incurred expenses).
How do managers use profit planning?
By setting sales, pricing, and production targets to achieve a specific profit level, using tools like CVP analysis and contribution.
Why are sunk costs irrelevant for decision-making?
Because they have already been incurred and cannot be changed by future decisions.
