Decision making Flashcards
Recommended retail price
A selling price that is recommended by the manufacture or wholesaler
Competitors price
Price charged by business competing in the same market
Mark-up percentage
Determining selling prices by adding to the cost price a predetermined profit margin
How to figure out selling price
Selling price = cost price x ( 1 + mark-up/100)
How to figure out mark-up
Mark up = (selling price/cost price) -1 ) x100
How to figure out cost price
Cost price = selling price / ( 1 + mark-up/100)
Cost volume-profit analysis
An analysis tool that allows a business to determine a selling price or volume of sales that will let them achieve a specific profit goal
Break even point
The level of sales where total revenue equals to total expenses and the business makes neither a net profit nor a net loss
Variable cost
Costs that vary directly with the level of activity
Fixed costs
Costs that do not vary directly with the level of activity
Cost volume profit equation
Quantity to be sold = (total fixed costs + profit) / (selling price per unit - variable cost per unit)
What is budgeting
The process of predicting/estimating the financial consequences of future events
Budgeting process
Budgeted reports (prepared, predicting what is likely to occur) Actual reports (prepared to detail what has happened in the current period) Variance reports (prepared to highlight differences/problem areas) Decisions (made to improve business performance for the next period)
Cash budget
An accounting report which predicts future cash receipts and payments, determines the expected cash surplus or deficit and thus estimates the bank balance at the end of the budget period
Preparing for a cash deficit
1) Increase effective advertising, adjust prices, expand services offered to increase cash fees
2) Cash capital contribution
3) Reducing cash payments for expenses
4) Deferring a purchase of a non-current asset or using credit facilities to purchase them
5) Reducing or deferring loan repayments
6) Reduce or half cash drawings
7) Organise (or extend if already in place) an overdraft facility
Preparing for a cash surplus
1) Purchase more or newer non-current assets
2) Increase loan repayments
3) Increase cash drawings
4) Expand operating activities by increasing advertising, employing more staff, increasing the number of services offered etc.`
Budgeted income statement
An accounting report which predicts revenues earned and expenses incurred, and thus the expected net profit for the budget period
The budgeted income statement aids planning by:
Changing prices, advertising or the service offered to increase cash fees
Seeking cheaper supplies for an inventory of materials/supplies/parts
Examining rosters to ensure staffing levels are appropriate
The budgeted income statement can be used as a decision making tool:
Revenue earning performance, the effectiveness of marketing/advertising
Expense control
Staff performance
Variance reports
Accounting report that compares actual and budgeted figures, highlighting variances so that problems can be identified and corrective action taken
Variance
Differences between the actual figure and a budgeted figure, expressed as ‘favourable’ or ‘unfavourable’
Cash variance report
Favourable
Unfavourable
Compares actual and budgeted cash figures
Favourable - cash receipts are higher than expected/ cash payments are lower than expected or bank is higher than expected
Unfavourable - cash receipts are lower than expected/ cash payments are higher than expected, or bank is lower than expected
Income statement variance report
Compares actual and budgeted revenue and expense figures
Favourable - Revenues are higher than expected/ expenses are lower than expected or profit is higher than expected
Unfavourable - Revenues are lower than expected/ expenses are higher than expected, or profit is lower than expected
Uses of variance reports
Identifies potential problem areas where corrective action can be taken
Assessing whether benchmarks or KPIs have been achieved
