Theory/Terms Flashcards
Opportunity Cost
the value of the next best option
Controllable Cost (Benefits)
a cost or benefit that a decision maker chooses to insure relative to nothing
ex: Stages is debating whether or not they should open on Sundays
Relevant cost (benefit)
a cost or benefit that differs across decision options
ignore information that is irrelevant in the question
Sunk Costs
= a past expenditure that cannot be changed
Cost flows by type of cost
Total Cost
Product costs (COGS)
Variable manu.
Direct Material
Direct labour
Manufac. OH
Variable oh
Fixed oh
Period Costs (expenses)
Selling and Admin.
Variable S&A
Fixed S&APrime costs
= the sum of direct materials & direct labour costs (the primary inputs into the production process)
Conversion costs
= direct labour + manufacturing overhead costs
Capacity costs
= variable oh + fixed overhead (aka MO)
Traceability
the degree of which we can directly ralate a cost or revenue to a decision option
Direct cost/benefit
Indirect cost/benefit
Direct cost/benefit
uniquely relates to a decision option (ex: raw materials)
Indirect cost/benefit
not unique to a decision option - only portion (ex: salary of a plant manager; salary of a janitor for the plant)
product cost
any cost associated with getting products and services ready for sale “inventoriable costs”
period cost
any costs that are not period costs - costs related to selling the goods or the administration of the organization
Income statement (basic structure)
revenue - COGS (product costs) -------------- Gross margin - Expenses (period costs) --------------- profit before taxes
Income statement (contribution margin)
revenue - variable costs -------------- Contribution margin - fixed costs --------------- profit before taxes
Time and controllability
more costs and benefits become controllable over time
fixed cost
a cost that does not change as the volume of activity changes
variable costs
a cost that is proportional to the volume of activity (product materials)
mixed costs
a cost that contains both fixed and variable components (utilities)
Cost driver
the units we use to distribute the cost pool amount cost objects (labour hours, machine hours, materials used, etc.)
Relevant range
the idea that fixed costs are only fixed costs for a certain range of operating levels (rent, a machine that has Max # of units)
The high-low method
uses equation to estimate how much it will cost you at different quantities of production/usage/etc.
the high low equation
b = cost of highest driver - cost of lowest driver / high driver - low driver
what is profit
profit is a function of revenue, variable costs and fixed costs where both revenuer and variable costs are proportionate to volume
profit before tax formula
revenues -variable costs - fixed costs
[(selling price * volume) - (cost/unit * volume)] - fixed costs
what is CVP used for
manipulating the profit before tax equation to make it do what you need it to with the information given from question
revenue
revenue = sales price * number of units sold
variable costs
variable costs = variable costs per unit * number of units sold
Contribution margin
Contribution margin = total revenue - total variablee costs
Contribution margin per unit
Contribution margin per unit = sales price - variable costs per unit
Break even volume
the number of units one must sell in order to cover fixed costs (profit = $0)
Break even revenue
the revenue ($) needed to cover fixed costs (break even revenue = breakeven volume * sales price)
margin of safety
the amount by which expected revenues exceed breakeven revenues (expressed as a percentage). A measure a risk. High the percentage the better (100% means you have no fixed costs) (0% means you are operating at your BE point)
equation for MOS
MOS = (Sales in Units - Breakeven Volume) / sales units
(revenues - breakeven revenues) / revenues
