Using costs for decision making Flashcards
What are cost behaviours related to?
The level of activity
What are some examples of how activity is measured?
Production quantity, number of customers, units of time, a service supplied.
How do variable costs behave?
They vary in direct proportion to activity.
How do fixed costs behave?
They do not change in proportion to activity, they remain constant over a relevant range.
What does a step-fixed cost show?
Fixed costs which change to reflect stages in activity
What does a semi-variable (or mixed) cost show?
A fixed and variable part
Are all variable costs linear?
No linear assumption is not always realistic
What is 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 the margin of safety?
The difference between the expected sales and break-even.
What is CVP useful for?
Setting short-term goals
What assumptions are made in CVP?
- All costs and revenues have a linear relationship with activity level
- Fixed and variable are easy to seperate
- Production is the only factor to influence variable costs
- Inventory levels are constant
- Production capacity cannot be increased or decreased.
What are relevant costs?
Costs that change between alternatives, they change because a decision is made.
What is an example of a relevant cost?
Variable costs
What are examples of non-relevant costs?
Sunk costs, Committed costs, Fixed costs
What are opportunity costs?
The opportunity cost is represented by the forgone potential benefit from the best rejected course of action.
