Short term decisions Flashcards
What is meant by short term decisions ? P269
- Actions effect costs and revenue
- maximum of one year ahead
What are the two types of short-term decisions ? P269
- Break-even analysis
- Marginal costing
What is the break-even analysis ? P269
- Break even point = output level
- Sales revenue - covers all the costs
What is marginal costingused forv ? P269
- Fixed and variable costs identified
- make a product/ provide a service
What information is needed for decision making ? p269
- relevant (avoidable) costs
- irrelevant (unavoidable costs
What is the definition of relevant/irrelevant costs ? P269
- Changed by decision
- not affected by decision
What further information about costs and revenue , other than relevant and irrelevant costs, would be needed ? P269
future costs and revenues
differential costs and revenues
What are future costs and revenues ? P270
- Relevant
- past useful = guide
- sunk costs = irrelevant
What is differential costs and revneue ? P270
- alter result of decision making = relevant and avoidable
- Sames costs for alternatives = irrelevant and avoidable
- changing costs when decisions made = relevant
What are exmaples of relevant costs and revenue that will change as a result of decision making ? P270
- Selling prices
- variable costs / variable of semi variable
- contribution per unit
- marginal costs
What are all costs, in relation to decision making, in the long term ? P270
Relevant and avoidable
How must costing information be present to mamagement/ appropriate person ? P270
With professional competence
What is the definition of professional competence ? P270
- Ethical principle
- maintain professional knowledge and skill
- competent and professional service
What should the information within the costing info presented to management include ? P270
- Reccomendations
- well-presented reasoning
- professional competence
- little technical accounting terminology
What are the methods of presenting cost information ? 271
- Verbal presentation -.e.g Zoom presentation
- written reports/emails
What should written reports regarding cost information include ? P271
- Introduction - tasks and probem
- content - step towards solution & accounting calculation
- conclusion - reccomendations of decision
- appendix - full accounting calculation explanation
What should verbal presentations in the context of costing information include ? P271
- form of hnadouts
- computer presentations
What is break even ? P272
- Neither profit/loss made
- revenue just covers cost
Why is break even referred to as CVP ? P272
- cost, volume , proift
- costs of output
- volume of output
- profit made
What is the break-even formula: calculating number of units to break even P272
Fixed costs/ contribution per unit = number of units to break even
What is the formula for break-even in sales revenue ? p272
Break-even point (units of output) * selling price unit
What do you need to know to use the break-even analysis ? P273
- Selling price ( per unit)
- costs of the product :
- variable costs (materials and labour)
- overhead costs - fixed/ variable
- Limitations - maximum production capacity and maximum sales
What does the additional contribution form , once the breaking even point has been reached P276
The profit
What is the margin of safety ? P276
- Amount sales exceed break-even point
How can the margin of safety be expressed ? P276
- A number of units
- A sales revenue amount
- A percentage
How can the percentage within the margin of safety be expressed in formula ? P277
- current output - break even output / current output * 100 = percentage of margin of safety
Why is the margin of safety important in the time of recession ? P277
- The cushion - beyond break even point
- comparisons with two products
- product = highest margin of safety = most favourable
How do you calculate the slaes revenue needed to achieve the target profit ? P277
Number of units of output (inc target profits) * sales revenue per unit (£) = target sales revenue
How do you calculate the sales revenue to achieve the target profit ? P277
Number of units of output * sales revenue per unit (£) = target sales revenue
What does the profit-volume ratio analyse ? P278
- Relationship:
- amount of contribution
- amount of value of sales
How is PV ratio calculated ? P278
Contribution (£) / selling price (£)
What can the ratio/ percentage of the profit-volume ratio be calculated on the basis of ? P278
- Single Unit
- Production
- Whole business
- Higher PV = better for business
What can we use PV ratio to find , if the fixed costs are known ? P278
- Sales revenue - business breaks even
- sales revenue - target profit
When are the times when break-even analysis is often used ? P279
- Before starting a new business
- When making changes
- Measure profit and losses
- Answer ‘what if?’ questions
Why should the break-even analysis be considered when starting a new business ? P279
- cover costs/ make profit
- Feasibility of break even - bank manager/ other parties (banks)
Why should you consider the break-even analysis when making changes ? P279
- Costs of major change
- e.g.increase in productuion = balance of fixed and variable
- Break even planning = profitability
Why should the break-even analysis be taken into consideration when measuring profit and losses ? P279
- Limitations of break-even analysis
- profit/ loss = Different levels of output
- new output - close to current levels
- no change to structure
What else can the break-even analysis help with ? P280
Choice of production method
How can break-even anlysis help with a choice in production ? P280
- Relationship : high break even points and low break even points
- sales revenue
- money availability
What is special order pricing ? P280
- Spare capacity -extra sales
- lower price
When is special order pricing used ? P280
- Business profitable = reached break even
- additional sales (special orders) - selling price - above marginal costs but below absorption costs
What can happen if additional slaes at special order prices are made (above marginal costs but below absorption costs ) ? P280
- profit increase- additional sales at spare capacity
How do you increase the profit from additional sales ?
- Contribution to profit - special order
What can the principles of marginal costing also be used to establish ? P282
- Effect of changes - costs and revenues - profit of busiiness
What do changes in the costs and revenues on the profit of the business include ? P282
- Reduction in selling price - greater units / profit
- increase in selling price - increase profit
What are the points to consider when using marginal costs principles in decision making ? P286
- Fixed period costs must be covered
- separate markerts for marginal cost
- effect on customers
- problems of product launch on marginal basis
- special edition products
- ‘last minute’ sales
What must be remebered about fixed costs when using marginal costing principles ? P286
- Balance- above marginal costs and sold at absorption costs
- high enough price
- contribution =/> fixed costs
Why must separate markets be used for marginal costs ? P286
- Separate markets
- E.g. Not different costs - if same town
How does marginal costing affect the customer ? P286
- persuasion - absorption costs later
- Squeeze profit = too widely
What are the problems of product launch on marginal cost basis ? P286
- Setting below absorption / above marginal
- collaspe - older products
- most sales = marginal costs
- increase to absorption difficulty
What are special edition products within marginal costing ? P286
- Sell of older products
- e.g. old model car
- low price ( above marginal costs )
What are last minute sales under marginal costing ? P287
- Products = no value = opportunity to sell gone
- deadline aproaches
- marginal for lowest
- small contribution - fixed costs
