C Theory 2 (ACCA Study Hub) Flashcards
(132 cards)
1
Q
When total contribution = total fixed costs?
A
The breakeven point
2
Q
Fixed costs in CVP analysis?
A
Fixed costs remain fixed within the range
3
Q
Variable costs in CVP analysis?
A
Variable costs change proportionally with volume
4
Q
Unit selling price in CVP analysis?
A
Do not change with volume
5
Q
Costs and income in CVP analysis?
A
These are matched
6
Q
Sales mix in CVP analysis?
A
Only a single product or a constant sales mix of more than one product
7
Q
When can CVP be extended to multi-product situations
A
If a constant pre-determined sales mix is applied
8
Q
What is the C/S ratio used for?
A
To find breakeven revenue and revenue required to generate a target profit
9
Q
When revenue = 0 in a PV chart?
A
Where the company makes a loss equal to fixed costs
10
Q
X and Y axis for PV chart?
A
X = revenue, Y = profit
11
Q
Limitation of CVP analysis (fixed costs)
A
Fixed costs remain constant regardless of the production decision. In practice, fixed costs may not be truly fixed and may vary as output changes
12
Q
When may fixed costs change in CVP?
A
Fixed costs might be stepped in behaviour as production volume increases
13
Q
Limitation of CVP analysis (variable costs)
A
Variable cost per unit is constant, this may not be the case due to discounts
14
Q
Limitation of CVP analysis (selling price)
A
Selling price remains constant. An increase in sales volume can only be achieved by lowering the price
15
Q
Advantage of PV charts (relationship)
A
Multi-product PV charts enable the user to see easily the relationship between revenue and profit. Breakeven revenue can also be seen.
16
Q
Advantage of PV charts (products)
A
Identifying the most and least profitable products should lead to improved decision making
17
Q
Disadvantage of PV charts (breakeven revenue)
A
The conclusions about breakeven revenue are incorrect since PV chart assumes either a constant sales mix or assumes that products are sold in order of increasing C/S ratio
18
Q
Disadvantage of PV charts (profits)
A
Shows only profits plotted against revenue. It does not show variable costs or output in units
19
Q
Disadvantage of PV charts (dependancy)
A
Chart assumes that products can be sold in order of profitability, which ignores the possibility that sales of one product may depend on sales of another
20
Q
Issue with using opportunity costs (estimate)
A
How to estimate future costs/revenues and hence the benefit sacrificed
21
Q
Issue with using opportunity costs (alternative)
A
Identifying alternative uses to know what is the best alternative foregone
22
Q
Issue with using opportunity costs (non-financial)
A
As is true for any costing method, it ignores non-financial factors
23
Q
What is the minimum price that makes a contract worthwhile equal to?
A
The relevant cost
24
Q
Why might a business want to know the minimum price of a contract (negotiations)
A
It is useful for price negotiations to know the lowest price that can be tendered for a contract
25
Why might a business want to know the minimum price of a contract (under-utilised)
If a business has under-utilised resources during low season, it may be willing to take on additional contracts at this time
26
Relevant cost if the materials required have not already been acquired, it will be necessary to buy them for the contract
Current market price
27
Relevant cost if material is used regularly but cannot be replaced?
The contribution foregone
28
Relevant cost if material isn't used regularly but can be sold?
Scrap value foregone
29
Relevant labour cost if external hire?
External hire costs
30
Relevant labour cost if variable wage and idle capacity is available?
Variable labour cost
31
Relevant labour cost if variable wage, idle capacity isn't available but overtime is available?
Overtime cost
32
Relevant labour cost if variable wage, idle capacity isn't available and overtime isn't available?
Variable labour cost + contribution foregone from lost production
33
Relevant labour cost if fixed costs and idle capacity is available?
0
34
Relevant labour cost if fixed costs and idle capacity overtime aren't available?
Contribution foregone from lost production
35
Relevant labour cost if fixed costs and idle capacity isn't available and overtime is?
Overtime cost
36
Relevant cost if the asset is rented or hired?
The rental costs over the period of use
37
Relevant cost if the asset to be acquired for the contract?
The cost of acquiring the asset (including related costs, such as delivery and installation) would be relevant
38
Relevant cost if the asset is not used for other purposes?
The fall in realisable value that will arise if the asset is used for the contract
39
Relevant cost if the asset is already operating at full capacity?
Its deprival value
40
Non-financial reasons a contract could be reliable (knowledge)
Undertaking a new type of contract may develop the business's knowledge and experience
41
Non-financial reasons a contract could be reliable (reputation)
The contract may enhance the business's reputation
42
Non-financial reasons a contract could not be reliable (damage)
A profitable contract may be declined if there is a high risk of reputational damage
43
Non-financial factors for when making shut down decisions (redundancies)
If closing a division would result in redundancies, this could lead to poor morale among remaining employees.
44
Non-financial factors for when making shut down decisions (skills)
The permanent loss of resources and specific skills may mean that it will not be possible to take advantage of future opportunities.
45
Non-financial factors for when making shut down decisions (division)
Shutting down one division may affect demand for products produced by other divisions
46
Non-financial factors for when making shut down decisions (back to profitability)
It may be possible to bring a loss-making division back to profitability by developing new products or services
47
What are joint products?
Arise where the manufacture of one product makes the manufacture of other products inevitable
48
What is a by-product?
Produced with one or more main products but has a small relative sales value
49
What do joint products have?
Significant relative sales value
50
What is the split-off point?
Products produced are not separately identifiable until a particular stage in the production process
51
Once products have reached the split-off point (current)
It may be possible to sell the product immediately in its current state
52
Once products have reached the split-off point (processing)
The product may require further processing before it can be sold
53
Once products have reached the split-off point (selling)
The manufacturer may have a choice of selling the product immediately or processing it further
54
Advantage of outsourcing (competencies)
Outsourcing allows management to focus on the core competencies of the business without being distracted by managing peripheral areas
55
Advantage of outsourcing (specialist)
A specialist supplier may be able to supply goods or services of higher quality
56
Advantage of outsourcing (lower cost)
Many companies have discovered that some goods or services may be purchased for less than it would cost to provide them internally
57
Disadvantage of outsourcing (control loss)
The company relies on a third party to provide a reliable supply. Therefore, it loses control over a part of its business processes.
58
Disadvantage of outsourcing (confidential)
Outsourcing may mean trusting a third party with confidential information about goods or services
59
Disadvantage of outsourcing (job losses)
Outsourcing may demotivate the workforce if the decision to outsource is associated with job losses
60
When a factor of production is limited?
Contribution and profit will be maximised by concentrating production on the product(s) which make(s) "best use" of the scarce resource, up to maximum demand
61
Limitation of key factor analysis (objective)
A single objective of contribution/profit maximisation
62
Limitation of key factor analysis (constant)
It assumes constant variable cost per unit and constant total fixed costs; this may only hold over a narrow range of activity
63
Limitation of key factor analysis (one)
It deals with only one scarce resource; if there is more than one, linear programming must be used
64
Why is shadow price significant?
Companies may be able to obtain additional quantities of a scarce resource if they are prepared to pay a higher price
65
Assumption of linear programming?
Objective and the constraints may be expressed as linear equations
66
What is 0ABCD?
All possible combinations of x and y that can be produced and sold, given the constraints
67
Limitation to using graphical method for linear programming (two)
Only two "products" for graphical solution
68
Limitation to using graphical method for linear programming (dependent)
Solution is dependent on the quality of the input data. It must be complete, accurate and valid
69
Limitation to using graphical method for linear programming (quantifiable)
Only one quantifiable objective can be satisfied. Non-quantifiable objectives are not considered at all
70
What is slack?
The difference between maximum resources available and resources used at the optimal point. For binding constraints, the value of slack is zero
71
Low slack for a particular resource?
There is a danger that the resource could become a binding constraint if the availability of other scarce resources increases. Management may plan for additional supplies for the resource before it is needed
72
High slack for a particular resource?
Availability of the resource exceeds the amount used by a significant amount. May be possible to use the resource elsewhere in the business
73
Advantage of full cost pricing (simple)
Simple and cheap to operate.
74
Advantage of full cost pricing (fixed)
Appropriate where fixed costs are significant.
75
Advantage of full cost pricing (budget)
If the budget sales level is achieved, profit will be made
76
Disadvantage of full cost pricing (mark-up)
The size of the mark-up is arbitrary
77
Disadvantage of full cost pricing (profits)
It may not maximise profits
78
Disadvantage of full cost pricing (actual)
If actual sales are below budget, losses may occur
79
What does full cost pricing aim to achieve?
Prices cover all variable and fixed costs
80
Advantage of marginal cost plus pricing? (contribution)
Mark-up represents contribution, which is useful in short-term pricing decisions
81
Advantage of marginal cost plus pricing? (fixed costs)
Treats fixed costs by their nature and not using an arbitrary allocation
82
Disadvantage of marginal cost plus pricing? (recover)
It may lead to failure to recover fixed costs.
83
Disadvantage of marginal cost plus pricing? (long-term)
Where fixed costs are significant, because, in the long-term, fixed costs may also vary and not be sufficiently covered by mark-up
84
Advantage of ROI pricing? (price)
Links price to both short-term costs and long-term capital employed.
85
Advantage of ROI pricing? (performance)
Consistent with ROI as a performance measure.
86
Disadvantage of ROI pricing? (external)
Ignores external factors
87
Disadvantage of ROI pricing? (capital employed)
Problems in calculating capital employed (e.g. whether to use book values or replacement cost).
88
What are opportunity costs used to price?
One-off projects, special orders or tenders for contracts
89
Limitation of cost-based pricing (external)
They ignore external factors such as demand and competition
90
Limitation of cost-based pricing (profit)
They are unlikely to maximise profit, revenue or market share as mark-ups are subjective
91
Limitation of cost-based pricing (competitors)
They may result in prices completely different from those charged by competitors
92
What is marginal revenue?
The increase in total revenue resulting from selling one additional unit of a product or service
93
Effect of selling one more unit on revenue (increase)
An additional unit has been sold; this increases revenue
94
Effect of selling one more unit on revenue (all units)
To sell an extra unit, the price will have to be reduced for all units sold; this reduces total revenue
95
When marginal revenue is positive?
Effect on revenue of the extra quantity sold outweighs the impact of the fall in price
96
When marginal revenue is negative?
The fall in price has a more significant effect than the increase in quantity sold
97
What is marginal cost?
The increase in total cost from producing and selling one additional unit of a product or service
98
Why is the marginal cost usually constant?
It is generally assumed that the variable cost of each unit does not change, regardless of how many units are produced
99
When will marginal cost fall to a lower amount?
Where there are volume-based discounts on raw materials or components
100
Disadvantage of economist['s model (strategies)
Companies may have strategies other than profit maximisation (e.g. maximisation of market share or achieving a particular target profit)
101
Disadvantage of economist's model (curve)
The demand curve ignores exogenous variables (i.e. variables outside of the control of management which may affect price), such as market conditions.
102
Issue with increasing production (storage)
One of the implications of increasing production may be the need for increased storage space for raw materials and/or finished goods. Storage is a fixed cost, not a variable cost
103
Issue with increasing production (quality)
Increasing production may have consequences on the quality of the product (e.g. more defective items)
104
Advantage of expected value (information)
It reduces the information to one number for each choice
105
Advantage of expected value (average)
The idea of an average is easily understood
106
Disadvantage of expected value (probabilities)
The probabilities of the different possible outcomes may be difficult to estimate.
107
Disadvantage of expected value (correspond)
The average may not correspond to any of the possible outcomes
108
What is meant by perfect information?
The maximum amount a decision-maker would be willing to pay for advance information to know which outcome will occur
109
What is a decision tree?
Helps visualise and evaluate outcomes in the decision-making process
110
Is a decision point (rectangle) in control of management?
Yes
111
Is a outcome point (circle) in control of management?
No, probabilities are attached
112
What are risk seekers?
Seek the maximum possible return regardless of the probability of it occurring. As optimists, they consider the best-case scenario
113
What is risk neutral?
Those who consider the most likely outcome
114
What is risk averse?
Decision-makers dislike risk and make decisions based on the worst possible outcome
115
What is maximax?
Select the alternative with the maximum possible payoff (i.e., the highest return under the best-case scenario). The risk seeker's (i.e. optimist's) rule.
116
What is maximin?
Select the alternative with the highest return under the worst-case scenario. The pessimist's rule (i.e. risk averse).
117
What is minimax regret?
Select the alternative with the lowest maximum regret
118
What does sensitivity analysis calculate?
How responsive a decision is to changes in any of the variables used in making that decision
119
Advantage of sensitivity analysis (Decision)
It gives an idea of how sensitive the decision taken is to changes in any of the original estimates
120
Advantage of sensitivity analysis (Adapted)
It can be readily adapted for use in spreadsheet packages
121
Disadvantage of sensitivity analysis (Variable)
Sensitivity is usually only used to examine what happens when one variable changes and others remain constant.
122
Disadvantage of sensitivity analysis (Consuming)
Without appropriate software, it can be time consuming.
123
What is meant by simulation?
A mathematical model constructed to represent the operation of a real-life process or situation. Allows more than one variable to change at the same time
124
Advantage of simulation (outcomes)
It therefore provides more information about the possible outcomes and their relative probabilities
125
Advantage of simulation (sensitivity)
It overcomes the limitations of sensitivity analysis by examining the effects of all possible combinations of variables and their realisations
126
Disadvantage of simulation (time)
It can be very time consuming without a computer.
127
Disadvantage of simulation (decision)
It is not a technique for making a decision, only for getting more information about the possible outcomes.
128
What is a focus group?
A group of people are asked to give their opinion about a new product or service
129
What is market research?
The systematic gathering of information about customers, competitors and the market
130
Questions answered during market research?
Who are the customers? Who are the competitors? Where are they located? When is the best time to sell?
131
What is primary data?
The company collects its own original data
132
What is secondary data?
Already published data is used, such as published statistics
