W3 - Management Accounting & ST Decision Making Flashcards
What is accounting?
-Collecting, analysing & communicating financial information
-Allows managers to monitor, plan & control activities of the business
-Promotes informed decision-making
-Main Users: customers, competitors, employees, gov, community, supliers etc
Managers need information that is?
-Timely
-Frequent
Tailored and Suited to the Context
-Confidential
What are the three areas of management accounting?
-Planning
-Control
-Decision Making
What is management accounting?
The provision of info to help management: formulate policy, plan and control, make decisions, help perfomrance improvement, help efficient resource usage, safe guard assets
What types of problems might a management accountant be trying to solve?
-how many units of product to produce?
-pricing?
-priorities for current expenditure?
Short-term decisions
-Businesses are constantly making short-term decisions involving day-to-day operational running of the business
-In short-term decisions, it is important to only consider the relevant factors.
What are the classifications of costs?
-Direct & Indirect
-Variable & Fixed
Define Fixed cost
Costs that remain unaffected by changes in activity
Define Variable costs
costs that change in direct proprotion of level of activty
Contribution Analysis
-Useful to short-term decision-making
-If sales revenue is greaterthan VC, each product or service is making a contribution to FC
-If FC are overed, the excess = Profit
-Enables businesses to choose most profitable goods/services too produce in short term
Contribution per unit formula
Sales price - Variable costs
Total contribution formula
Contribution per unit x no. of units sold
Contribution margin formula
(Total Contribution/Total revenue) x100
If Contribution > FC =
Profit
If Contribution < FC =
Loss
If Contribution = FC =
Break-Even
What is the rule about products making a positive contribution?
The product is worth producing
Break-Even Point
-Profit equals zero
-The point at which the business maked neither a profit or a loss
-When sales are sufficient to pay total costs
Break-Even point formula
Units = Total FC / Contribution/Unit
Target Profitability formula
Units = FC + Target Profit / Contribution per Unit
What is the Margin of Safety?
How much is sold over and above the break-even point
Margin of Safety formula
Actual units sold - breaeven units / Actual units sold x100
