Week 2: Management Accounting Flashcards
How costs are split?
Sales( selling price * quantity ) XXX
Variable costs( VC * Q) (XXX)
Contribution Margin(CM/Unit * Q) XXX
Fixed Costs. (XXX)
Net Profit. XXX
What is the contribution margin and how is it achieved?
A business needs to cover its fixed costs each month. In order to do this, it sells inventory, it also incurs variable costs.
Therefore, it is only the difference between sales and variable costs(CM) that can be used to cover FC
CM - Difference between sales and VC and refers to the difference between sales and VC and refers to the contribution made from activity of a business to the fixed costs.
Contribution margin per unit
The difference between inventory selling price and the variable costs linked to its production and sale; it is the monetary contribution that each additional sale makes towards covering the fixed costs of the business.
Cost Volume Analysis
Where management considers the relationship between changing levels of activity and changing revenue, expenses and profit.
Profit
Contribution Margin
Contribution Margin Per Unit
Quantity sold * (Selling price per unit - Variable cost per unit) - fixed costs
Selling price per unit - Variable costs per unit
Quantity sold * (Selling Price Per Unit - Variable Costs per Unit)
How to find Quantity required to be sold in order to break even
Quantity(Breakeven units) = Fixed costs/Contribution Margin Per Unit
Selling Price to give breakdown
Selling Price per unit = (Fixed Costs/Quantity) + Variable Costs per unit
Quantity to be sold to achieve a target profit
Quantity = (Fixed Costs + Target Profit)/Contribution Margin per unit
Selling price per target profit
Price per unit = (Fixed Costs + Target profit/Quantity) + Variable Costs Per Unit
Assumptions for CVP analysis
— All variables (sales, variable costs, fixed costs), other than quantity remain constant over any given period.
— Total costs and revenues are linearly related to output
— Costs can be accurately split between variable and fixed
— Analysis applies to a given time period (relevant range) that is short term
What is shareholder value?
The present value of future cash flows generated by a business, which are available to the shareholders.
Relevant Costing
Relevant costs - future differential cash flow. Future cash flow that differs between alternatives. Costs that will be changed by a decision.
Future - Does not have to be in the immediate future, can be anytime in the future.
Differential - cash flows that differ when a decision is made
Cash flow - Cash is king
Irrelevant cost: That does not differ between alternatives and/or does not represent a future cash flow. Will not be changed by the decision under consideration.
Opportunity cost:
Sunk cost: A cost that has already been incurred (we exclude goods used in normal production as these can always be replaced)
Differential cost: A cost that differs between alternatives
How to Increase Cash and decrease Fixed costs?
- Sell product at discount to give incentive
Rent out assets - Reduce Salaries of staff
- Retrench Staff
- Negotiate reduction in rental payments
- Negotiate reduction in monthly loan payments
