Managment accounting lec 7 Flashcards
Relevant costs and relevant revenues are
costs and revenues that will differ for each option available to the decision maker
sunk costs
past costs, costs already incurred, irrelevant to a decision
what are relevant costs and revenues
futures costs and revenues that will change under different options
What are variable costs
they vary in direct proportion with activity RELEVANT
what are fixed costs
remain constant over wide ranges of activities (do not change in total for given time period despite wide changes in in the related level of total activity or volume NOT RELEVANT
What affects the classification of costs
time period involved, short term some costs are fixed, long term they are variable
what are opportunity costs
value of the benefit sacrificed when one course of action is chosen in preference to an alternative
absorption costing vs relevant costing
relevant costing tends to look at short term decision making, absorption tends to be production decisions (longer term when all costs are variable)
total costs =
fixed costs + variable costs
Marginal cost =
cost of one additional unit of a good or service (therefore marginal cost is the variable cost)
marginal costing decision making
under marginal costing fixed costs are ignored and decisions are based on marginal costs
contribution =
sales price - variable costs
profit =
sales revenue - variable costs - fixed costs = contribution - fixed costs
why are fixed costs not relevant to a decision
do not change, we are not interested in them in the short term, not interested if an activity is profitable just whether it makes a positive contribution towards fixed costs and profits
what is the key decision maker in marginal costing
contribution the contact makes
example of a variable costs
materials
labour
manufacturing overheads are NOT variable
what should be the decision when accepting special orders at lower price
where there is spare capacity and the contract will make a positive contribution to fixed costs and profits should be considered, but need to be assured that true price paid by others is not affected
a one off order can be considered if
it will utilise unused capacity for only a short period and capacity will then be released for use on more profitable opportunities
General rule for outsourcing
if the variable cost is lower than the outsourcing price then it is more profitable to manufacture in house
when adding on opportunity cost to which side do you add it
opportunity is sacrificed so add it to the one that does not provide the opportunity (cost of the missed opportunity)
if a product x is dropped what is the profit lossed
the contribution per unit * number of units, the shared fixed costs would not change so this is ignored
whether to drop a product line general rule
if a product makes a contribution it is generally worth keeping
product x brings in revenue 32 and has variable costs 24, should it be dropped and the space rented out for 13
opportunity cost = 13, relevant cost of x = 13 + 24 = 37
contribution of x = 32 - 37 = (5) therefore no longer worthwhile
in the long term what are all costs
variable
