costs and cost volume analysis Flashcards
cost
sacrifice made in order to obtain a benefit
cost objective
any activity for which a separate measurement of costs is desired
product costs
manufacturing costs
period costs
non manufacturing costs
prime costs
direct materials and direct labour
conversion costs
direct labor, variable and fixed manufacturing overheads
indirect costs
overheads
what are overheads
Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service. Thus, overhead costs do not directly lead to the generation of profits - see definition of indirect costs
examples of period costs
marketing
admin
define manufacturing
transforming an raw material into a form that has greater value to the customer
define manufacturing costs
costs of producing the goods that can specifically (directly or indirectly) identified with merchandised purchased or produced for resale - cost of goods sold
direct materials
material costs that can be physically identified with a specific product - form large part of the manufacturing cost
direct labor
labor costs that can be specifically identified with the product
prime costs
sum of direct labor and direct materials
indirect materials (variable)
cannot be identified with any one individual product - used for the benefit of all products (cleaning materials, electricty)
indirect labor (variable)
indirect manufacturing costs
cost driver
factor within the organization that causes a fixed or variable manufacturing overhead to be incurred
fixed cost
remain constant over a wide range of activity for a specified time period - total fixed costs are constant for all levels of activity while fixed cost per unit decreases proportionally with the level of activity
variable cost
vary in direct proportion to the volume of activity. total var costs are linear as unit variable costs are constant
examples of fixed manufacturing overheads
factory rent
manager salary
insurance
annual depreciation
examples of variable manufacturing overheads
indirect labout - security, cleaning, repairs
indirect materials
factory telephone
water and telephone
non manufacturing costs are sub divided into…
marketing/selling costs
admin costs
what is variable costing?
focuses on variable product costs - therefore only variable costs of production are used to calculate the costs of the product produced
what is cost volume profit analysis
systematic method of examining the relationship between changes in
- prices of products
- changes per unit in variable costs
- changes in total fixed costs
- volume or level of activity
- mix of products sold - and the resulting effect on the firm’s net profit
what are the cost volume profit analysis assumptions
all other variables remain constant
a single product or constant sales mix
profits are calculated on a variable costing basis
total costs and total revenue are linear functions of output
the analysis applies to the relevant range only
costs can be accurately divided into their fixed and variable elements
what is contribution margin
sales - all variable expenses
money left over after subtracting all variable costs - the money left over to pay off fixed costs and then for profit
what happens if contribution margin isnt sufficient
a loss
formula for contribution margin
selling price - variable costs
contribution margin ratio
contribution margin per unit*100/selling price per unit
what does it mean to break even
profit = 0
income = total costs
contribution margin equals fixed expenses
calculate break even units
fixed expenses/contribution margin per unit
calculate break even value
fixed expenses/contribution margin ratio
equation method to calculate break even
salesX = variablecostsX+fixed costs+profit
what is the degree of operating leverage
how sensitive the net operating income is to percentage changes in sales volumes
is a multiplier
what happens if operating leverage is high and what if its low
high = small percentage increase in sales will produce a much higher percentage increase in net operating income
a firm with high fixed costs…
will have a higher DOL as variable costs are lower resulting in a higher contribution margin
what is the DOL dependent on
cost structures
DOL is not constant…
it is at its highest close to the breakeven point and creases as sales and profits increase
why does the DOL decrease as sales and profits increase
google it
DOL formula
total contribution margin/net profit
if sales volumes increase by x%, net income is expected to increase by
DOL*percentage increase
if sales volumes decrease by x%, net income is expected to decrease by
DOL*percentage decrease
what is the margin of safety
calculates the amount by which sales can drop before the firm makes a loss
calculate margin of safety
actual sales - breakeven sales
margin of safety percentage
margin of safety*100/actual sales
target sales volume
total fixed costs+target profit/CM per unit
target sales value
target sales volume*selling price per unit
target sales value using CM ratio
total fixed costs+target profit/CM ratio
