Lectures 5 - 7 Flashcards
financial models
accurate, reliable simulations of relations among relevant costs and benefits that are useful in supporting business decisions
financial modelling objectives (3)
improve quality of decisions
allow responsive analysis
simulate accurately the relevant factors
BASIC CVP model
revenue = Var. Costs + F Costs + Income
at the breakeven point
income = 0 (revenue and expenses are equal)
Break even point
fixed expenses / unit contribution margin
Contribution margin ratio
contribution margin / sales
target income
fixed expenses + target income / unit contribution margin
operating leverage is
the risk of missing sales target
high operating leverage is
indicative of high committed costs like interest (small change in sales can lead to a loss)
Low operating leverage is
indicative of low committed costs
operating leverage factor
contribution margin / net income
Best case scenario
high price and high quantity with low costs
worst case scenario
low price and low quantity with high costs
most likely case scenario
most likely price and quantity and costs
Managing scarce resources
the contribution margin per unit of scarce resources should be maximised
pricing decisions
product costs
product life cycle
competitors
customers
influences on prices
prices are determined by the market, subject to costs that must be covered in the long run
life cycle costing
tracks costs attributable to each product from start to finish and provides important info for cost management and pricing
linear programming
applied to production situations with multiple products
Job costing
units of output are different
each unit has a high value
costs can be traced to the unit
Process costing
units of output are homogenous
each unit has a low value
costs cant be traced back to the product
Operation costing
is a hybrid often used for batches of similar products with different types of materials
Basic cost flow model
BB + TI - TO = EB
POHR formula
budgeted total manufacturing o/h cost for the coming year / budgeted total units in the allocation base for the coming period
