Week 5- CVP Analysis and Budgeting Flashcards
What is cost information used to do?
- Determine the contribution of units to products
- Levels of production to achieve a target profit
- Determine break even points
- Set selling prices
- Set different selling prices for different marketing strategies
- Distinguish between different marketing strategies
- Decide on a make in house or buy in strategy
- Maximise short term profits when resources are scarce
Describe contribution
- The surplus that arises from the production and sale of one unit of product or service
- Selling price less the variable costs of production
- Contributes to meeting an entity’s fixed costs
Describe break even point
- The number of units of production and sales that will cover all the business’ costs both fixed and variable
- The point at which revenue from sales = all the costs of the business both fixed and variable
How do you calculate the break even point?
= Fixed cost / ( Selling price per unit - Variable cost per unit )
How do you calculate contributions?
Selling price per unit - Variable cost per unit
How do you calculate margin of safety?
= Sales - Break even
How do you calculate sales units?
= ( Target profit / Contribution per unit ) + Break even sales units
Describe margin of safety
An indicator of how much sales may decrease before a loss occurs
Describe CVP analysis
- A way of making presenting financial information for decision making
- A systematic method of examining the relationship between changes in activity (i.e. output) and changes in total sales revenue, expenses and net profit
- Studies the relationship between costs (both fixed and variable), sales levels, and profit
How do you calculate profit?
Profit = ( Unit selling price x Units sold ) - ( [Unit variable cost x Units sold] + Total fixed costs )
What are some assumptions of CVP analysis?
- All variables other than the particular under consideration remain constant
- A single product or constant sales mix is assumed
- Total costs and total revenues are linear functions of output
- Costs can be accurately divided into their fixed and variable elements
- The analysis applies only to a short term horizon
What are the 5 stages of the planning proccess?
- Identify objectives
- Search for alternative courses of action
- Gather data about alternatives
- Select alternative courses of action
- Implement the decisions
What are the 2 stages of the control process?
- Compare actual and planned outcomes
- Respond to divergences from plan
Describe budgets
- The expression of a plan in quantitative (often monetary) terms
Name 6 objectives of budgets
- Planning
- Communication
- Coordination and integration
- Control
- Responsibility
-Motivation