Managerial Decision Making Flashcards
Examples of Fixed Costs
Rent, insurance, wages of full-time or permanent employees, depreciation and interest of long-term debit.
Variable Costs
Costs that increase in proportion to the output being produced by the business.
Examples of Variable Costs
Inventory purchases, packaging, hourly wages and incentive payments
Mixed Costs
Costs that contain some fixed and some variable.
Examples of Mixed Costs
Motor vehicle expenses and telephone expenses
Contribution Margin
Contribution Margin is a managerial accounting term that describes the amount of gross profit from sales after variable costs are deducted. The contribution margin can be prepared based on information found in the income statement.
Contribution Margin Formula
Total Sales - Total variable costs
Direct Materials
These are materials that can be traced to a particular product or service. It is usually possible to look at the manufacture of a good and determine exactly what the components of that good are.
Examples of Direct Materials
Pizza Toppings, car tires
Direct Labour
Labour that is directly traceable to the manufacture of a particular product or service
Examples of Direct Labour
Staff
Over head expenses
Other costs that are incurred in the production of the good or service other than direct materials or direct labour. An attempt must be made to determine how much overhead is necessary to manufacture the product or provide the service.
Examples of Over head expenses
Electricity, rent, rates
Period costs
Costs that are necessary in addition to the cost of actually producing the product
Examples of Period Costs
Advertising expense, interest expense
Break Even Point Formula units
Total fixed costs / contribution margin
Managerial Accounting
Managerial accounting deals with providing information useful for decision making to management. This is information internal to the organisation, and as such is not governed by legislation. It is the opposite of financial accounting.
Managerial accounting answers what questions?
- Should the Selling Price increase or decrease?
- How many units must be produced to make a profit?
- Should advertising dollars be increased?
- Should a product line be removed or retained?
- How many units must be sold to break even?
Contribution Margin %
Contribution Margin $ / sales x100
Two main reason businesses are interested in their break even point.
- To know what level of sales (volume) they must achieve as a minimum to cover costs.
- To assess whether the current price structure is appropriate - does it need to increase, decrease or remain at its current level - is the profit generated by the sales sufficient
Break even point $
Break even point in units x selling price
Sales in units formula
(Fixed cost + target profit) / contribution margin per unit
Sales amount $ formula
Sales units x selling price
Fixed Costs
Costs that do not vary when the level of output (sales) changes
