Exam 1 Flashcards
describes how costs react to changes in the volume of activity
cost behaviors
in total: change in direct proportion
per unit: constant
Variable Costs
Examples of Variable Costs
direct materials and direct labor
in total: constant
per unit: changes inversely
Fixed Costs
Examples of Fix Costs
Depreciation, rent, advertising
A variable and fixed element with no constants
mixed costs
Examples of mixed costs
utilities and overhead
range of activity within which the assumptions made by managers are valid
Relevant Range
high-low method equation
(change in cost for 2 data points)/(change in activity level 2 data points)
total cost =
fixed cost+variable cost
Contribution Margin=
Sales Revenue-Variable Costs
Net Income
Contribution Margin-Fixed Costs
When revenues increase, variable costs and contribution margin…
increase as well
helps managers understand the relationship among cost, volume, profit
Cost Volume Profit Analysis
What are the 4 basic elements of a CVP analysis
break-even calculations
target profit analysis
margin of safety
operating leverage
contribution margin/unit=
selling price/unit - variable cost/unit
CM ratio=
CM/SR
when the net income=0; no profit or loss
breakeven point
Selling Price per unit x # of units
Sales Revenue
Variable Cost Ration
VC/SR
trying to come up with the volume of sales that would be necessary to earn a good level of income
target profit analysis
measure of firm riskness
margin of safety
margin of safety=
actual sales revenue-break even sales revenue
degree of operating leverage=
contribution margin/net income
the relative combination of products being sold by a firm
Sales mix
helps push the organization toward its overall goals
tactical decision making
a cost that differs between alternatives; a cost that is different if we choose A instead of B
relevant cost
a cost that can be eliminated but always relevant
avoidable cost
examples of avoidable costs
direct materials, direct labor, all variable costs, some fixed costs
a cost that exists under all decision alternatives; never relevant
unavoidable costs
examples of unavoidable costs
some fixed costs
a cost that cannot be directly linked to a cost object, assigned to a product using an arithmetic process, never relevant
Allocated Costs
Examples of allocated costs
rent & administrative salaries
a cost that has been incurred and can not be recovered by some future action; never relevant
sunk costs
the originial cost of a building when trying to sell it in 5 years is an example of what cost
sunk costs
a benefit given up by choosing one alternative over another; always relevant
opportunity costs
make of buy decision
should we make the part ourself, or should we buy the part from an outside supplier
if the (avoidable costs+opportunity costs) > (outside purchase price) should you buy or make
buy
if the (avoidable costs+opportunity costs) <(outside purchase price) should you buy or make
Make
keep or drop decision
the company must decide whether a segment of a business should be kept or eliminated
if the (avoidable costs+opportunity costs) > (lost contribution margin) should you drop or keep
drop
if the (avoidable costs+opportunity costs) < (lost contribution margin) should you drop or keep
keep
one time orders usually requested at a lower selling price than regular sales
special order decision
if the (actual selling price of special order) > (minimum acceptable selling price of special order) should you accept or reject
accept
if the (actual selling price of special order) < (minimum acceptable selling price of special order) should you accept or reject
reject
minimum acceptable selling price of special order equation
variable costs per unit of the special order + contribution margin lost from ‘given up’ regular sales
contribution margin ‘lost’ is equal to
(CM per unit of regular sales x units of regular sales given up)/(units in the special order)
one raw material that will generate multiple products
joint products
able to uniquely identify each joint product
split off point
costs incurred prior to being able to separately identify products
join costs
Process further only if the
(sales value from further processing - additional processing costs)> sales value at the split off point
Joint costs are considered in calculating
net income
which costs does not have an effect on the decision to sell now or process further
joint costs
In product mix decision, a company should produce products that have
the highest CM per unit of scarce resource
CM per unit of scarce resource
CM per unit/ Scarce resource needs per unit
What happens when a company is faced with more than one resource constraint?
used linear programming to determine the optimal mix of products
What is the first step of linear programming
define your decision variables (label them as x and y)
what is the second step of linear programming
determine the objective function; which will always to be to maximize the CM
what is the third step of linear programming
determine the resource constraints
what is the fourth step of linear programming
solve the linear program to determine the optimal product mix