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Management accounting techniques > Short term decisions > Flashcards

Short term decisions Flashcards

1
Q

What is meant by short term decisions ? P269

A
  • Actions effect costs and revenue
  • maximum of one year ahead
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2
Q

What are the two types of short-term decisions ? P269

A
  • Break-even analysis
  • Marginal costing
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3
Q

What is the break-even analysis ? P269

A
  • Break even point = output level
  • Sales revenue - covers all the costs
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4
Q

What is marginal costingused forv ? P269

A
  • Fixed and variable costs identified
  • make a product/ provide a service
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5
Q

What information is needed for decision making ? p269

A
  • relevant (avoidable) costs
  • irrelevant (unavoidable costs
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6
Q

What is the definition of relevant/irrelevant costs ? P269

A
  • Changed by decision
  • not affected by decision
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7
Q

What further information about costs and revenue , other than relevant and irrelevant costs, would be needed ? P269

A

future costs and revenues
differential costs and revenues

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8
Q

What are future costs and revenues ? P270

A
  • Relevant
  • past useful = guide
  • sunk costs = irrelevant
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9
Q

What is differential costs and revneue ? P270

A
  • alter result of decision making = relevant and avoidable
  • Sames costs for alternatives = irrelevant and avoidable
  • changing costs when decisions made = relevant
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10
Q

What are exmaples of relevant costs and revenue that will change as a result of decision making ? P270

A
  • Selling prices
  • variable costs / variable of semi variable
  • contribution per unit
  • marginal costs
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11
Q

What are all costs, in relation to decision making, in the long term ? P270

A

Relevant and avoidable

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12
Q

How must costing information be present to mamagement/ appropriate person ? P270

A

With professional competence

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13
Q

What is the definition of professional competence ? P270

A
  • Ethical principle
  • maintain professional knowledge and skill
  • competent and professional service
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14
Q

What should the information within the costing info presented to management include ? P270

A
  • Reccomendations
  • well-presented reasoning
  • professional competence
  • little technical accounting terminology
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15
Q

What are the methods of presenting cost information ? 271

A
  • Verbal presentation -.e.g Zoom presentation
  • written reports/emails
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16
Q

What should written reports regarding cost information include ? P271

A
  • Introduction - tasks and probem
  • content - step towards solution & accounting calculation
  • conclusion - reccomendations of decision
  • appendix - full accounting calculation explanation
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17
Q

What should verbal presentations in the context of costing information include ? P271

A
  • form of hnadouts
  • computer presentations
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18
Q

What is break even ? P272

A
  • Neither profit/loss made
  • revenue just covers cost
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19
Q

Why is break even referred to as CVP ? P272

A
  • cost, volume , proift
  • costs of output
  • volume of output
  • profit made
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20
Q

What is the break-even formula: calculating number of units to break even P272

A

Fixed costs/ contribution per unit = number of units to break even

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21
Q

What is the formula for break-even in sales revenue ? p272

A

Break-even point (units of output) * selling price unit

22
Q

What do you need to know to use the break-even analysis ? P273

A
  • Selling price ( per unit)
  • costs of the product :
  • variable costs (materials and labour)
  • overhead costs - fixed/ variable
  • Limitations - maximum production capacity and maximum sales
23
Q

What does the additional contribution form , once the breaking even point has been reached P276

A

The profit

24
Q

What is the margin of safety ? P276

A
  • Amount sales exceed break-even point
25
Q

How can the margin of safety be expressed ? P276

A
  • A number of units
  • A sales revenue amount
  • A percentage
26
Q

How can the percentage within the margin of safety be expressed in formula ? P277

A
  • current output - break even output / current output * 100 = percentage of margin of safety
27
Q

Why is the margin of safety important in the time of recession ? P277

A
  • The cushion - beyond break even point
  • comparisons with two products
  • product = highest margin of safety = most favourable
28
Q

How do you calculate the slaes revenue needed to achieve the target profit ? P277

A

Number of units of output (inc target profits) * sales revenue per unit (£) = target sales revenue

29
Q

How do you calculate the sales revenue to achieve the target profit ? P277

A

Number of units of output * sales revenue per unit (£) = target sales revenue

30
Q

What does the profit-volume ratio analyse ? P278

A
  • Relationship:
  • amount of contribution
  • amount of value of sales
31
Q

How is PV ratio calculated ? P278

A

Contribution (£) / selling price (£)

32
Q

What can the ratio/ percentage of the profit-volume ratio be calculated on the basis of ? P278

A
  • Single Unit
  • Production
  • Whole business
  • Higher PV = better for business
33
Q

What can we use PV ratio to find , if the fixed costs are known ? P278

A
  • Sales revenue - business breaks even
  • sales revenue - target profit
34
Q

When are the times when break-even analysis is often used ? P279

A
  • Before starting a new business
  • When making changes
  • Measure profit and losses
  • Answer ‘what if?’ questions
35
Q

Why should the break-even analysis be considered when starting a new business ? P279

A
  • cover costs/ make profit
  • Feasibility of break even - bank manager/ other parties (banks)
36
Q

Why should you consider the break-even analysis when making changes ? P279

A
  • Costs of major change
  • e.g.increase in productuion = balance of fixed and variable
  • Break even planning = profitability
37
Q

Why should the break-even analysis be taken into consideration when measuring profit and losses ? P279

A
  • Limitations of break-even analysis
  • profit/ loss = Different levels of output
  • new output - close to current levels
  • no change to structure
38
Q

What else can the break-even analysis help with ? P280

A

Choice of production method

39
Q

How can break-even anlysis help with a choice in production ? P280

A
  • Relationship : high break even points and low break even points
  • sales revenue
  • money availability
40
Q

What is special order pricing ? P280

A
  • Spare capacity -extra sales
  • lower price
41
Q

When is special order pricing used ? P280

A
  • Business profitable = reached break even
  • additional sales (special orders) - selling price - above marginal costs but below absorption costs
42
Q

What can happen if additional slaes at special order prices are made (above marginal costs but below absorption costs ) ? P280

A
  • profit increase- additional sales at spare capacity
43
Q

How do you increase the profit from additional sales ?

A
  • Contribution to profit - special order
44
Q

What can the principles of marginal costing also be used to establish ? P282

A
  • Effect of changes - costs and revenues - profit of busiiness
45
Q

What do changes in the costs and revenues on the profit of the business include ? P282

A
  • Reduction in selling price - greater units / profit
  • increase in selling price - increase profit
46
Q

What are the points to consider when using marginal costs principles in decision making ? P286

A
  • 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
47
Q

What must be remebered about fixed costs when using marginal costing principles ? P286

A
  • Balance- above marginal costs and sold at absorption costs
  • high enough price
  • contribution =/> fixed costs
48
Q

Why must separate markets be used for marginal costs ? P286

A
  • Separate markets
  • E.g. Not different costs - if same town
49
Q

How does marginal costing affect the customer ? P286

A
  • persuasion - absorption costs later
  • Squeeze profit = too widely
50
Q

What are the problems of product launch on marginal cost basis ? P286

A
  • Setting below absorption / above marginal
  • collaspe - older products
  • most sales = marginal costs
  • increase to absorption difficulty
51
Q

What are special edition products within marginal costing ? P286

A
  • Sell of older products
  • e.g. old model car
  • low price ( above marginal costs )
52
Q

What are last minute sales under marginal costing ? P287

A
  • Products = no value = opportunity to sell gone
  • deadline aproaches
  • marginal for lowest
  • small contribution - fixed costs

Management accounting techniques (9 decks)

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