Short-term Decision Making: Cost-Volume-Profit Analysis Flashcards
What are mixed costs
Costs that have a mixed behaviour, semi variable ad semi fixed foe example employee salary could be fixed wage + variable commission
What is the linearity assumption and the relevant range
We can assume that within a level of activity, we have a linear relationship
However have to be aware of where the relevant range is, for example discounts may be given based on how many more units over a specific amount
Mixed costs formula
Fixed costs + variable costs x quantity of units produced
Starts halfway up the Y axis as we have fixed costs already
Analysis of mixed costs: How to do the High-Low Method
Look at HIGHEST and LOWEST activities (units) if lots.
1) Find the change in units and cost for both levels
2) Variable element = cost/units
Fixed element = total cost - (variable cost x units) –> you can choose whatever activity level as both should give same answer
How to do do formula and work out etching cost
Formula = Y = a + bX
a = fixed costs
b= variable cost
x = units
Input units into the formula to work out etching cost
What is cost-volume profit analysis
Helps managers understand the interrelationships between cost, volume and profit in an organisation
Profit and operating profit formula
Profit = total revenues (price x quantity) - total costs
Operating profit = (selling price - variable costs per unit) x volume of activity - total fixed costs
What is an assumption in CVP analysis
That we make the same quantity of units that we sell