Strategic Planning Flashcards
What is the breakeven point?
The point a which revenues equal total costs
What is the total cost formula?
Total cost = fixed cost + (variable cost per unit x volume)
The contribution approach is also known as what?
Variable costing or direct costing
What is the contribution approach formula?
Revenue less: variable cost = Contribution margin less: fixed costs = Net Income
What is the unit contribution margin?
The unit sales price minus the unit variable cost
What is the contribution margin ratio?
The contribution margin expressed as a percentage of revenue
Contribution margin / revenue
What financial reporting approach is required under US GAAP?
The absorption approach
What is the absorption approach formula?
Revenue less: COGS = Gross margin less: operating expenses = Net income
What is the major difference between the contribution approach and the absorption approach?
The treatment of fixed factory overhead.
Absorption method : Fixed manuf OH = Product cost (only expense the portion related to unit sold)
Contribution margin method: Fixed manuf. OH = Period cost (expense 100%)
What is breakeven analysis?
A determination of the sales required to achieve zero profit or loss
What is the breakeven point in units formula?
Total fixed costs / contribution margin per unit
What is the contribution margin per unit formula?
Unit price x breakeven points in units
What is the contribution margin ratio formula?
Total fixed costs / contribution margin ratio
What is the basic formula for target profit?
(Fixed cost + profit) / Contribution margin ratio
What is the formula for the target breakeven point in sales?
Sales = Variable costs + fixed costs + target profit before tax
What is the margin of safety?
The excess of sales over breakeven sales
What is the target cost computation?
Market price - required profit
When is the operational decision method(marginal analysis) used?
When analyzing business decisions. It focuses on the relevant revenues and costs associated with that decision.
What are incremental costs(differential or out of pocket costs)?
Additional costs incurred to produce an additional amount of the unit
Also known as Prime cost
What are sunk costs?
Unavoidable costs that were incurred in the past and cannot be recovered as a result of a decision
What are opportunity costs?
The cost of foregoing the next best alternative when making a decision
What are controllable costs?
A cost that a specific level of management is responsible for
What are marginal costs?
The sum of all costs required for a one unit increase in activity
What costs make up marginal costs?
All variable costs and any avoidable fixed costs
What are special order decisions?
Opportunities that require a firm to decide if a specially priced order should be accepted or rejected
When should a special order be accepted if there is excess capacity?
If the selling price per unit is greater than the variable cost per unit
What are joint costs?
The costs of a single process that yields multiple products
What are separable costs?
Costs incurred after the split off point
What is sensitivity analysis?
The process of experimenting with different parameters and assumptions regarding a model and cataloging the results
What is linear regression?
A method for studying the relationship between two or more variables
What is regression analysis?
An explanation for variation in a dependent variable as a linear function of one or more independent variables
What does the coefficient of correlation measure?
The strength of the linear relationship between the independent variable and dependent variable
What does the coefficient of determination measure?
The proportion of the total variation in the dependent variable explained by the independent variable
What is a learning curve analysis?
A step by step method of logically projecting costs when learning is a variable
What is the high low method?
A technique used to estimate the fixed and variable portions of cost
