Using costs for decision making Flashcards
cost behaviours
related to level of activity (on x axis)
give some examples of measures of activity
production quantity, number of customers, units of time, service supplied
variable costs
vary in direct proportion to activity
eg number of units produced
fixed costs
do not change in proportion to activity, they remain constant over a relevant range
step-fixed cost
fixed costs which change to reflect stages in activity
semi-variable/mixed costs
have a fixed and a variable part
what is meant by the relevant range
a level of activity which has a maximum and a minimum amount
analysis should remain within one relevant range
eg one ‘step’ in a graph
how do you calculate total cost
fixed costs+variable costs = FC+(VC per unit x output)
change in total costs =
change in variable costs
variable cost per unit is
constant per unit within the relevant range
fixed cost per unit
decreases as the activity increases
same fixed cost spread over increasing units within a relevant range
cost-volume-profit (CVP)
the study of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity and mix
what is contribution
how much revenue is contributing towards fixed costs
what is the formula for contribution
contribution = selling price - variable cost (total or per unit)
why are contributions only towards fixed costs
because contribution already accounts for the variable costs which change in direct proportion to activity
the remaining amount is a contribution towards fixed costs which do not change in direct proportion to activity
break-even point (in units) =
fixed costs/contribution per unit
break-even point (in revenue) =
(fixed costs x selling price)/contribution per unit
required sales (in units) =
(fixed costs + profit)/(selling price - variable costs per unit)
what is any contribution above the break-even point
profit
what is margin of safety
the difference between expected sales and break even based on the estimated customer demand
CVP is used for ___ term decision making
short
we assume for CVP that all costs and revenues have a ___ relationship with activity level
linear
we assume for CVP that ____ is the only factor to influence variable costs, its capacity cannot be increased or decreased
production
CVP is useful for
setting short term goals
relevant costs
those that change between alternatives, changes are due to a decision being made
the change is an incremental cost
are variable costs relevant
yes
are fixed costs relevant
no
what is a sunk cost
a non relevant cost that has already been paid in the past
historic
what is a committed cost
a non relevant cost that has been agreed and must be paid in the future
independent of current decision
what is a make or buy decision for a manufacturing business
internal production vs external supplier
what is a make or buy decision for a service business
own staff vs out-sourced labour
what are the assumption being made with a make or buy decision
fixed costs would continue and there is no scare resource for internal manufacture
only the variable costs would be saved
what are opportunity costs
they are represented by the forgone potential benefit from the best rejected course of action
