CVP/TAC/MC Flashcards
what does cvp stand for
cost volume profit
what does tac stand for
total absorption costing
what does mc stand for
marginal cost
if P=price per unit, S=units sold, V=variable cost per unit, F=fixed costs, what is profit and breakeven point (write out) ***
profit = SP-SV-F or S(P-V)-F,
P-V=contribution so the breakeven point is,
0+S(P-V)-F
F/P-V = S
equation for contribution *
contribution = price per unit - variable cost per unit, contribution = P-V
what are possible behavioural reasons why you may or may not want to subcontract out
redundancy concerns,
quality of sub-contracted product,
transport costs,
reliability of company to deliver on time,
other uses for the capacity created by sub-contracting
whats the difference between total costing and marginal costing *
total costing allocate fixed costs,
marginal costing not allocate fixed overheads
what is the equation for fixed overhead absorption rate (FOAR)
FOAR = budgeted fixed overhead / budgeted labour hours
what does FOAR stand for
fixed overhead absorption rate
what happens if actual fixed overheads or the actual labour hours are different from the budgeted figures
you will get under/over absorption of the fixed overheads and an adjustment will have to be made to your profit figure at the end of the period
are differences between TAC and MC because of under/over absorption
no, they are due to different valuations put on the stock
what are differences between TAC and MC due to *
differences between TAC and MC are due to the different valuations put on stock (MC values at marginal cost, TAC values at MC including fixed overheads per unit)
what does sales - cost of sales equal *
sales - cost of sales = contribution
what does cost of sales equal *
cost of sales = variable costs - closing stock
how do you value stock for TAC
stock valued at cost including FC
what are the different types of costs
indirect and direct
direct costs d
those directly traceable to the product eg material costs, direct wages
indirect costs d
those that cannot be traced and therefore will be allocated in full costing eg overheads
what is relevant costing
a relevant cost is defined as a future incremental cash flow
advantages of relevant costing
enables visibility of net cash impact of decisions,
considers exactly what will change within company as a result of the decision,
considers indirect consequences of the decision,
more realistic than marginal cost
disadvantages of relevant costing
not easy for managers to calculate,
cannot always see the indirect consequences of a decision
advantages of marginal costing
variable costs are easily identified so no need for estimates,
allocating fixed costs to period they incurred reflects what actually happens,
easiest approach to understand,
helps decisions on make or buy
what does tac do differently (total absorption costing)
TAC brings fixed overheads into it
advantages of TAC
ensures fixed costs are covered in pricing decisions,
profit assessments,
financial statements,
internal management and control of costs
disadvantages of TAC
complex and time consuming,
shift towards service industries increased proportion of overheads of total costs,
modern manufacturing is not labour or machine hours driven but process and technology driven
what is the traditional method of absorbing overhead
total absorption costing (TAC)
what does CBA stand for
cost benefit analysis
are overhead costs small or large with direct labour and material accounting for a large majority of cost
small
when was TAC more appropriate and why
historically more overheads were by volume which was often linked to labour hours (eg machine operators) so TAC was more appropriate
what are overheads related to
many overheads related to volume,
many related to non-volume support activities,
more support services
what does ABC stand for
activity based costing
what are the main ideas of ABC (activity based costing)
activities cause costs,
producing products creates demand for such activities,
costs are allocated to products based on their usage of such activities
definition of ABC (activities based costing)
ABC involves the identification of the factors (cost drivers) which cause the costs of an organisation’s major activities
what are the two types of overhead for ABC (activities based costing)
overhead that vary with production level in the short term (cost driver related to volume),
overheads that vary with some other activity should be allocated to products using cost drivers such as production runs, number of orders received etc
what are the steps for ABC (activities based costing)
identify an organisation’s major activities,
identify factors which determine the cost of an activity (cost drivers),
collect the costs associated with each cost driver into a cost pool,
allocate costs to products based on their usage of an activity as measured by number of cost drivers it generates
whats another phrase for the identification of the factors which cause the costs of an organisation’s major activities
cost drivers
advantages of ABC (activities based costing)
ABC recognises complexity of modern manufacturing,
companies must be able to assess product profitability realistically,
helps give a good understanding of what drives overhead costs
disadvantages of ABC (activities based costing)
some degree of arbitrary cost apportionment still required,
can a single cost driver explain the cost behaviour of all items in its pool,
cost drivers need to be measurable to be usable (what drives cost of an annual external audit),
sometimes just introduced because it is fashionable
what goes in a marginal costing profit statement *
sales open stk var costs clos stk COS contribution fixed costs (include non manufacturing as well as manufacturing)
profit
(in this order)
what goes in a total absorption costing profit statement *
sales open stk production costs closing stk COS over / under absorption gross profit
non manufacturing overheads
profit
(in this order)
what does marginal costing value stock at
variable cost
what does total absorption costing value stock at
variable cost plus fixed overhead
equation for COS within profit statement *
var costs - closing stock (try remember what profit statement looks like go back in notes)
equation for contribution within profit statement *
sales - COS (try remember what profit statement looks like go back in notes)
which one will have higher profit for multiple choice questions out of absorption costing or marginal costing (think about it) *
when stock levels decrease from one period to next then marginal costing has higher profit
what is the first part of working out cost per unit for ABC ***
cost, driver, total oh, no of drivers, cost/driver,
those are all headings for the columns and then you have the different things going down the side such as number of set-ups, inspections, machinery etc (TQ1)
what is the second part of working out cost per unit for ABC ***
overhead, activity, cost, activity, cost, activity, cost
those are all the headings for the columns with activity and cost relating to each of the products and then you have all the things going down the side like set-ups, inspections etc and then total cost, total units and cost / unit (TQ1)
what is the third part of working out cost per unit for ABC ***
product d, product c, product p
those are headings for columns and then materials, labour, o/h (worked out in previous steps), total (TQ1)
