Final Flashcards
What is the break even point defined as
where the contribution margin equals total fixed expenses
OR
where total sales revenue equals total expenses (variable and fixed) –> net incomes = 0
what is the contribution margin ration
contribution margin as a percentage as sales
example: 100,000/250,000 =40percent
for each $1 extra of sales there will be 40 cents increase to CM
Assumptions of CVP Analysis:
-sales price is constnant
-costs can accurately be divided into fixed and variable elements
-sales mix constant
-in manufacturing companies inventory doesn’t change
what is operating leverage
a measure of sensitive net income is to percentage change in sales
what is plant wide overhead rate
a single overhead rate used throughout an entire factory. simple but can distort product costs
activity cost pool
a cost bucket in which costs related to a particular activity are accumulated
what does shifting of overhead cost mean when a company implements ABC
overhead cost often shifts from high volume to low volume products with a higher unit product cost resulting for the low volume products
What are 3 benefits to ABC
-more accurate product costing
-better cost estimation
-ability to implement activity based management
2 limitations of ABC
- Cost of implementation may exceed benefits.
Product costs are not always relevant when making decisions.
4 categories of quality costs
prevention costs: cost to prevent future defects or errors
appraisal costs: costs to carry out quality inspection activities
internal failure costs: cost associated with fixing an error before its delivered to the customer
external failure costs: cost to fixing an error once the error is found by the customer
what is a relevant cost
a cost that differs in total between alternatives, and is thus relevant for making a decision.
differential cost
different in costs between 2 alternatives
opportunity cost
Are the benefits that are foregone as a result of pursuing some course of action.
not usually in dollar and not recorded in accounts of organization
avoidable costs
Costs that can be eliminated (in whole or in part) by choosing one alternative over another
2 examples of unavoidable costs
sunk costs
future costs that don’t differ between alternatives
What does the comparative income approach tell us
only to drop a line if profit would increase meaning that the fixed cost savings exceed the lost contribution margin
planning
involves developing objectives and preparing various budgets to achieve these objectives
control
involves the steps taken by management that attempt to ensure the objectives are attained
advantages of budgeting
communicating plans
coordinate activities
define goals and objectives
uncover potential bottlenecks
means of allocating resoruces
think about and plan for future
what is a fiscal year
A Fiscal Year is a one-year accounting period used for calculating annual financial statements
what is zero based budgeting
where managers have to set everything back o 0 and then justify every part of their budgets not just take from last years budget
if you were developing budget for your own company, what would be the first department you would prepare a budge for?
sales
master budget order for manufacturing company
- sales budget
- production budget
- selling and admin expenses budget
- cash budget
- budgeted income statement
- budgeted balance sheet
What is the budget committee
standing committee responsible for overall policy matters relating to budget and coordination preparation of the budget
