Topic 3 Chapter 13/17 - Cost management concepts and behaviour and accounting for decision making Flashcards
What are fixed costs?
Costs that do not change or vary with the level of sales or production. When working with fixed or variable costs, we should consider relevance.
What are variable costs?
Costs that change in proportion to output or
activity. When working with fixed or variable costs, we should consider relevance.
What is the objective of break-even analysis?
The objective of break-even analysis is to determine the break-even quantity (point) by studying the
relationships among the cost structure, volume of output and operating profit. Accounting break-even analysis includes all accounting elements such as depreciation. This is helpful decision making to determine whether a project should proceed.
What is the break even point?
The point where the level of sales cover the costs of production or operation, in consideration of all fixed and variable costs. The break even point is that in which costs are covered by operating profit is 0. Cash break even points exclude depreciation.
What is the meaning of relevance in the context of financial management and decision making?
Costs and benefits are only relevant to a decision if they will change as a result of the decision. For example, the fixed rent costs of a retail store generally have no relevance on whether to stock a new line of product.
What is meant by qualitative factors?
Qualitative factors are those that are not directly financial in nature but may still influence a decision. For example, the aesthetic appeal of a store fit out, availability or lead time of a product.
What is a budget?
A future plan and forecast of future events
What are the main reasons to introduce a budget?
To compel management to look ahead and set short-term targets. By looking ahead,
management is then in a good position to anticipate potential problems.
To encourage greater co-ordination of the functions within the organisation. For
example, a production budget can only be constructed with knowledge of the forthcoming period’s sales and desired inventory levels.
To force management to formally communicate their objectives and strategies in the
forthcoming periods. Communications are also enhanced in the organisation when
budgets are compared periodically with actual expenditure. Discussions through this
control mechanism will invariably occur regarding future actions.
To provide a basis for identifying those responsible for differing functions within an
organisation and a basis for measuring their performance.
If they wish to implement control mechanisms as budget is an important part of these
mechanisms. Budgets in such cases will act as a benchmark that can be compared with
actual performance of managers and operatives.
As a medium for which expenditure is authorised. If expenditure is contained within a
budget it implies that it has been approved by top management and no further
approval is required.
To motivate employees. In this sense the budget is once again being primarily used as
a target to motivate employees to reach certain levels of attainment.
What are some disadvantages of implementing budgets
Budgets are time consuming
Conditions change very quickly which can make budgets obsolete, eg sales reduce with economic conditions
Funds being allocated in response to market pressures
Information technology allows rapid production of financial information for companies to use
Budgets can be de-motivating in some organisations
What is a contribution margin?
Contribution margin is a product’s price less all associated variable costs, resulting in the incremental profit earned for each unit sold. It is the profit contribution of a particular unit.
