WEEK 1 Flashcards
CVP analysis can be used:
- break even point
- est. a target profit
- est. the profit impact when variable changes
Contribution margin
SP - Variable Costs
is the incremental profit earned on sale
For example, a product that sells for $20 and has related variable costs of $12 would have a CM of $8 ($20 – $12) and a CM ratio of 40% ($8 / $20).
Break-even point
Rev = costs
Break-even (units) = Fixed cost / CM per unit
Break-even (dollars) = Fixed cost / CM ratio
Costing
Product Costs
Period costs
Product Costs
all of the costs associated with the purchase or production of a product
***included as a cost of inventory and recorded as an asset until the product is sold.
Prime costs = DM + DL
Conversionn Costs = DL +MO to change into
Period costs
all costs not classified as a product cost = selling and admin costs
Variable Costs
Direct materials and direct labour are usually considered to be variable in nature (DL usually depends on product levels)
Step fixed costs
Step fixed costs are costs that are fixed up until a certain point
Mixed costs
Mixed costs are costs that possess both variable and fixed components
Cost function
relationship between cost behaviour and activity levels.
used to analyze past relationships or estimate future costs
Total cost (TC) = Variable cost (VC) × Activity level (X) + Fixed cost (FC)
TC = VC × X + FC
High-low method
- Select the high and low points of activity.
- . Determine the variable cost by calculating:
Change in total cost ÷ Change in activity level - Determine the fixed cost by either using the high or low activity level to solve the cost function.
- Determine the cost function.
Disads:
assumes that the high and low points of activity are reflective of normal activity.
uses very limited data to draw a conclusion on behaviour, which can lead to significant errors in expectations.
Account analysis:
estimate the cost function.
separate costs by behaviour using knowledge of the accounts
- look at cost behaviours
Regression analysis:
understanding of how the typical value of the dependent variable (for example, cost) changes when any one of the independent variables (for example, materials consumed or hours spent) is varied while the other independent variables are held fixed.
Used for prediction and forecasting
Traditional vs CM format of Income Statements
Traditional format Contribution margin format Sales $XX Sales $XX Cost of goods sold XX Variable costs XX Gross margin XX Contribution margin XX Selling and administration XX Fixed costs XX Net operating income $XX Net operating income $XX
Relevant Information for Short Term Decisions
Types of decisions: • make or buy • special orders • utilization of a constrained resource • adding or dropping a product
Relevant Info Tips
If a factor would differ between alternatives, then it is relevant. If a factor does not differ between alternatives, then it is irrelevant.
Revenues or costs that are the same for both alternatives are not relevant to the decision and only complicate the analysis.
INCLUDE ONLY THOSE THAT ARE DIFFERENT
Relevant Info Tips
If a factor would differ between alternatives, then it is relevant. If a factor does not differ between alternatives, then it is irrelevant.
Revenues or costs that are the same for both alternatives are not relevant to the decision and only complicate the analysis.
INCLUDE ONLY THOSE THAT ARE DIFFERENT
Unless otherwise stated, the goal of the quantitative analysis for a short-term decision is to maximize profit.
opportunity cost and sunk costs
affect decision making… duh!!!
opportunity cost and sunk costs
affect decision making… duh!!!
Make or buy/ outsourcing decision
a company should outsource when the cost to purchase is less than the incremental cost to source internally.
Do a quantitative and qualitative analysis and then CONCLUDE!
–> REPEAT STRONGEST PROS THAT SUPPORT RECOMMENDATION AND SAY WHY 1 ALT IS BETTER AND ADVICE FOR IMPLEMENTATION.
Special order decisions
When relevant costs are less than the special order price, it makes sense to proceed with the special order because it would increase net income.
EXCESS CAPACITY
forgoing the order is an op. cost
always remember the long term impact of these orders too.
Calc the incremental costs to see the lowest allowable SP.
Utilization of constrained resources
Calc the CM for each alternative and then choose the one with the highest CM and so forth.
- Find CM per hour is $/hr
- Find the order
- Allocate capacity
ADD or DROP
Does action INCREASE net income
quantitative = link to NI
