Chapter 8 (WEEK 3) Flashcards
Revenue
inflows of assets received in exchange for products provided to customers
Revenue driver
factor that affects revenues (units of output sold, selling prices, levels of marketing costs)
Cost
a resource sacrificed or forgone to achieve a specific objective and a cost driver is any factor that affects costs
General case
A detailed and complex way to predict total revenues and total costs by using multiple revenue drivers and multiple cost drivers.
cost-volume product (CVP) analysis
examines the behaviour of total revenues, total costs and operating profit as changes occur in the output level, selling price, or fixed costs.
operating profit
total revenues from operations minus total costs from operations
net profit
operating profit plus non-operating revenues minus non-operating costs minus income taxes.
6 assumptions CVP
- total costs can be divided into fixed component and a variable component
- total revenues and costs is linear in relation to output units within the relevant range
- unit selling price, unit variable costs and fixed costs are known and constant
- single product or multiple but will remain constant
- all revenues and costs can be added and compared without considering the time value of money
- changes in level if rev and costs arise only because of changes in number of products
Breakevenpoint CVP
quantity of output where total revenues and total costs are equal, operating profit is ZERO
You can determine breakeven point with three methods
equation method, contribution margin method and graph method
Equation method
Revenues - variable costs - fixed costs = operating profit
Contribution margin method
fc/ucm
Contribution income statement
groups line items by cost behaviour pattern to highlight the contribution margin
PV graph
shows the impact on operating profit of changes in the output level
Equation method with tax
rev - variable costs - fixed costs = (target net profit/1-tax rate)
Can income tax change the breakeven point?
no because operating profit at the breakeven point is zero and thus no income taxes will be paid
Do other kinds of taxes affect the breakevenpoint?
yes
Sensitivity Analysis
what-if techique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes
Why do managers use this
broadens their perspectives as to what might actually occur despite their well laid plans
Margin of safety
excess of budgeted revenues over the breakeven revenues
whats the question when it comes to margin of safety
if budgeted revenues are above breakeven and drop, how far can they fall below budget before the breakeven point is reached.
actions and events
actions are choices made by management and events are ocurrences that management can not control
operating leverage
the effects that fixed costs have on changes in operating profit as changes occur in units sold and hence in contribution margin
organizations with a high proportion of fixed costs in their cost structures have a high/low operating leverage
high operating leverage
the degree of operating leverage equals
contribution margin divided by operating profit
revenue mix (sales mix)
relative combination of quantities of p/s that constitutes total revenues
what’s the best decisions
to recognize the contribution margin per unit of the constraining factor
contribution margin
revenues - all variabele costs
gross margin
revenues - cogs
