Financial planning and control - DEFINITIONS section Flashcards
CVP stands for?
cost-volume-profit
The ability to analyze the impact of alternative assumptions
sensitivity analysis
A cost that dose not change as activity changes
Fixed cost
When are costs only fixed?
Short-term only over a range of activity; long term, all costs are variable
Are fixed costs fixed when expressed on a per-unit-bases?
NO - fixed costs are fixed IN TOTAL; when expressed on a per-unit basis, the cost per unit varies inversely as the number of units varies
How is it best to express fixed costs?
IN TOTAL (rather than on a per-unit basis = avoids the mestake of thinking that fixed costs respond to changes in volume)
________ is the range of activity over which a fixed cost remains fixed.
Relevant range
Outside of relevant range, a fixed cost will _________
increase OR decrease
How does a graph of fixed cost and activity appear?
Set of stair steps - A graph of a fixed cost (total fixed costs on the Y axis and activity on the X axis) that includes several relevant ranges typically resembles a set of stair steps
_________ is a cost that varies directly as a function of changes in the level of activity
Variable cost
How are variable costs expressed?
fixed amount per unit; total cost will vary directly depending on number of units consumed
How can consumption be expressed for variable costs?
Consumption can be expressed in terms of any logical relationship (e.g., number of units, number of procedures, time, and units of material)
What is the dependent variable for variable costs?
cost = dependent variable
“cost driver” = independent variable
________ is a cost that is a mixture of both fixed and variable elements
Mixed costs
_________ is the sum of all variable and fixed elements
Total cost
What is the total cost equation, assuming simple linear relationship?
The total cost can be expressed with the equation Y = aX + b, where “a” is interpreted as the variable rate per unit and “b” is interpreted as the total fixed costs
What is the total cost equation, assuming simple linear relationship?
The total cost can be expressed with the equation Y = aX + b, where “a” is interpreted as the variable rate per unit and “b” is interpreted as the total fixed costs
When the total cost equation is derived from operating data, any extrapolation _________ the relevant range should be __________________.
outside; carefully scrutinized
________ is defined as the difference between revenue and variable costs
Contribution margin
Contribution margin - The amount that remains after ____________ have been recovered is available to contribute to the _________ and, after the ___________ are recovered, to __________.
variable costs; fixed costs; fixed costs; profit
______________ is when the contribution margin is expressed as a percentage of revenue
contribution margin ratio
The expression ____________ used in the narrow sense refers only to the relationship between fixed costs and volume
economies of scale (EOS)
EOS - The lowest per unit fixed cost within a given relevant range is achieved by __________________________________________________________________________.
attaining the highest volume level that can be attained while staying within the relevant range.
- Capital intensive operations typically require high volumes to justify incurring fixed capital costs
If a firm can keep total fixed costs constant while increasing volume, this is sometimes referred to as ____________________
leveraging fixed costs
The advantages a firm obtains due to size, such as the ability to influence price and the power to negotiate supply chain contracts advantageously, can be referred to as ___________________ to acknowledge that these advantages are attributable to the scale of operation
scale economies
________________ are budgets that can be adjusted to respond to a change in the level of activity (i.e., units of output, number of customers, and number of patients)
Flexible budgets
To employ flexible budgets, an organization must be able to __________________________
assign a variable cost to a cost driver
- An organization that cannot specify which costs are variable and which costs are fixed cannot employ flexible budgeting.
_____________ make no provision for changes in the volume of activity
Static budgets
__________ is a technique where a company compares its performance against the best firms, determines how those firms achieved their superior performance, and uses the knowledge to improve its own performance.
Benchmarking
____________ predicts that managers copy the practices of highly successful companies through benchmarking studies.
Economic Darwanism
- The practice of benchmarking dates back to 607, when Japan sent teams to China to learn the best practices in business, government, and education. Today, most large enterprises routinely conduct benchmarking studies to discover the best business practices and then implement them in their firms.
_________ means aligning the interests of employees with maximizing the value of the firm.
Control
