Chapter 8 - Short Term Decisions Flashcards
What are the two main types of short term decisions ?
- Break-even analysis
- Marginal costing
To help with decision making it is important to identify which two costs ?
- Relevant costs (Avoidable)
- Irrelevant costs (Unavoidable)
Out of relevant costs and irrelevant costs, which is changed by a decision ?
Relevant costs
Out of relevant costs and irrelevant costs, which is not changed by a decision ?
Irrelevant costs
What are the methods of presenting a decision ?
Verbal presentations & email reports
What should a written report include ?
- An introduction - Sets out the task or problem
- Content of the report - Explains steps towards a solution
- Conclusion - Reccomendation of the decision to be made
What is break-even often refered to as ?
CVP (Cost, Volume, Profit)
What is Break-even ?
It is the point where there is no profit or loss
What is the calculation to work out the Number of units to break even ?
Fixed costs(£) / contribution per unit (£) = Number of units to break even
What is the Margin of safety within a business ?
The amount of sales that exceed the break-even point
What is the calculation used to work out the margin of saftey as a % ?
Current outrput - Break even output / Current output x 100 = % margin of safety
To help with short term decision making, costs are classified by their ………… ?
Behaviour
How do you work out contribution per unit ?
Selling price per unit - variable cost per unit
Using the total contribution and total fixed costs how would a business calculate profit ?
take away the fixed costs from the contribution
In order to use the break-even (CVP) analysis, we need to know ?
- Selling price per unit
- Costs of the product
- limitations (maximum production capacity, maximum sales)
Break even: Profit Volume Ratio
What does the profit-volume (PV) ratio analyse the relationship between ?
it analyses the relationship between the amount of contribution and the amount of the value of sales
Break even: Profit Volume Ratio
What is the Profit-volume (PV) ratio also refered to as ?
Contribution-sales (CS) Ratio
Why is the calculation of the break-even point important to new businesses ?
it is needed to see the sales revenue needed by the new business in order to cover costs, or to make a particular level of profit
Break-even anaylysis can be used to answer **W….. I…. **? Questions
what if
What is ‘Special Order’ pricing ?
Special order pricing is where a business uses its spare capacity to make extra sales of its product at a lower price than its usual selling price
What costing technique does ‘Special Order’ pricing make use of ?
Marginal costing
