Formulae/Concepts Flashcards
High-low method?
1) unit variable cost (change in costs / change in units between both ALs)
2) FC = TC - VC (for HAL)
3) TC = FC + unit VC * X
Include units throughout!
CVP analysis?
Helps managers understand relationship between cost, volume + profit by focusing on: prices, volumes, per unit VCs andTFCs
Contribution margin?
Amount remaining from sales rev after variable expenses have been deducted
CM ratio?
CM/sales*100 (in terms of units)
Profit statement order?
Sales
Variable expenses
CM
Fixed expenses
Net profit
Stupid Victor Can’t Fix Nothing
Shortcut solution to calculate changes in NP?
Increase in CM (change in units in Q * unit CM)
Increase in expenses
Then the difference!
Difference between managerial + financial accounting?
Managerial = provides info. for managers who direct + control operations
Financial = provides info. for shareholders, creditors + other stakeholders (external parties)
Different types of costs + explain?
Direct = directly attributed to specific product/service, e.g. wages of workers, indirect = overhead costs, e.g. rent
Product = in prod. process, e.g. direct materials, period = e.g. sales + marketing expenses
Fixed = don’t change with prod., e.g. rent, variable = changes, e.g. direct materials
Differential = differences in costs between 2 decisions
Sunk = costs that can’t be recovered
Define break-even point + formulae?
Point where profit = 0 (no profit/losses)
BEP in units sold = fixed expenses/unit CM
BEP in total sales = fixed expenses/CM ratio
Define target profit + formulae for units sold to attain?
How many units to be sold to make a specific level of profit
(Fixed expenses + target profit)/unit CM
Contribution margin approach?
Units sold to attain target profit = (fixed expenses + target profit) / unit CM
The margin of safety?
Excess of sales over the break-even volume of sales, can be expressed as % of total sales
Total sales - break-even sales = MOS
Operating leverage?
A measure of how sensitive net profit is to % changes in sales, e.g. high leverage = small % increase in sales leads to much larger % increase in net profit
CM/net profit
Difference between absorption and variable costing?
Absorption = assigns both fixed + variable manufacturing costs to each unit of prod.
Variable = only assigns variable manufacturing costs to each unit of prod.
Advantages and disadvantages of variable costing?
A: easier to understand for management and forecast profits, removes effect of inventory from profit
D: difficult to assess profits (FC ignored), product pricing more difficult to deduce
Advantages and disadvantages of absorption costing?
A: in LT, prices need to cover all costs, better for pricing + stock valuation
D: distorts profits (may over-allocated to fixed OH costs)
Capital budgeting?
How managers plan significant expenses on projects that have LT effects, .e.g. the purchase of new equipment
What are the different categories of budgeting decisions?
Screening (does a proposed project meet its criteria?)
Preference (selecting the project from a bunch that best meets preferences of organisation)
Time value of money?
Sum of money worth more now than in future
Annuity
An investment that involves equal cash flows paid/received at end of year
What is the NPV method?
1) Calculate the PV of cash inflows
2) Calculate the PV of cash outflows
3) Subtract PV of outflows from inflows
Internal ROR?
Interest yield promised by an investment project over its useful life
PV factor for internal ROR? (given future cash flows remain constant)
Investment required/net annual CFs (then use this to find ROR)
Benefits of CVP?
Helps in profit planning
Helps determine the BEP
