CVP and ABC

Question 1

what is the purpose of CVP analysis?

Answer 1

analyzes the relationship between changes in activity (output volume) and changes in total sales revenue, cost and profit. allows for the prediction of the financial impact when volume changes.

Question 2

assumptions of CVP analysis

Answer 2

1. sales price and variable cost do not change with volume
2. sales mix remains constant
3. linear relationship between total revenue and total variable costs within a relevant product range
4. profits are calculated on a variable costing basis
5. costs can be accurately divided into fixed and variable
6. CVP only appropriate for decisions taken within a relevant range
7. CVP only applies to short-term

Question 3

what is the contribution margin?

Answer 3

the amount of selling price less var costs that contributes to covering fixed costs (but can also contribute to profit)

Question 4

contribution margin ratio

Answer 4

CM / revenue or sales x 100

% of rand sales value that is available to cover fixed costs and profit

Question 5

what is the breakeven point?

Answer 5

the point at which you make neither a profit nor a loss. sales only covers total costs.

Question 6

breakeven sales formula

Answer 6

fixed costs / CM ratio

how much sales value is necessary to cover fixed costs

Question 7

why is the breakeven point important?

Answer 7

allows us to assess how close a business is to making a loss. the closer your demand is to your breakeven, the riskier it is that you may not sell enough to cover your costs

Question 8

margin of safety formula

Answer 8

= current sales - breakeven sales

= budgeted sales - breakeven sales / budgeted sales

Question 9

what is the margin of safety

Answer 9

looks at how close to the breakeven you are

Question 10

target units formula

Answer 10

(fixed costs + target profit) / CM per unit

Question 11

breakeven units formula

Answer 11

fixed costs / CM per unit

Question 12

what is the sales mix?

Answer 12

the relevant proportions in which a company’s products are sold

Question 13

what is the operating leverage?

Answer 13

CM / net profit

the extent to which orgs use fixed costs in the cost structure

Question 14

degree of operating leverage formula

Answer 14

= % change in op inc / % change in sales
= CM ratio / operating margin
= total contribution / net op inc

Question 15

what can operating leverage help us determine?

Answer 15

• how well you use fixed costs

- relationships between profits and costs

Question 16

what is the degree of operating leverage?

Answer 16

the multiple by which operating income of a bus changes in response to a given % change in sales (extent of operating leverage)

Question 17

what does high OL mean?

Answer 17

more sensitive to changes in sales. high op profit margin.

Question 18

why is it necessary to allocate overheads?

Answer 18

for decision making

Question 19

what is an indirect cost?

Answer 19

a cost which cannot be specifically/exclusively identified with a given cost object

Question 20

PDOHR formula

Answer 20

budg OH costs / budg activity level

Question 21

what are the consequences of arbitrary allocation as used in traditional costing?

Answer 21

undercosting and overcosting, meaning products will be priced incorrectly

Question 22

what is the purpose of ABC?

Answer 22

assigns indirect costs accurately to cost objects based on cost driver

Question 23

how ABC assigns costs

Answer 23

assigns costs based on the most appropriate cost driver for an activity – can volume or non-volume based

Question 24

steps to implement ABC

Answer 24

1. id and define activities of an org
2. assign costs to cost activities
3. identify cost drivers for each activities
4. calculate activity rates for cost drivers
5. assign costs to cost objects

Question 25

p/s sustaining activities in ABC

Answer 25

performed to enable the production of individual p/s

Question 26

facility-sustaining activities in ABC

Answer 26

performed to support the org as a whole. will not be allocated for ABC.

Question 27

why do we not allocate rent in ABC?

Answer 27

it is not alterable in production unless a facility is shut down. can use floor space to allocate if necessary.

Question 28

why do we allocate depreciation in ABC?

Answer 28

increased production = inc machine hours = more wear and tear on the machine = inc future capex

Question 29

what is capital expenditure in ABC?

Answer 29

the once-off/upfront cost of purchasing equipment

Question 30

capacities to use in ABC

Answer 30

practical for fixed OH

actual for variable OH

Question 31

disadvantages of ABC

Answer 31

• substantial resources and inv required to implement
• costs can > benefits as ABC isn’t applicable to all businesses
• mgmt may oppose as ABC exposes wages

Question 32

advantages of ABC

Answer 32

• data is reliable – gives more accurate costs as it reflects real utilization of services
• charges divisions based on consumption rather than revenue can encourage divisions to be more efficient and reduce costs/wastage