Chapter 2 Flashcards
(18 cards)
What is a relevant cost?
A future incremental cashflow
What are the three tests that a cost has to pass to be relevant?
Future - Desicion made today cannot change the past. Past costs are referred to as sunk
Incremental - Only costs that are affected by decisions. Fixed costs are not relevant.
Cash flow - Factual and not based upon accounting convention
What is the relevant cost of material that is not currently in inventory?
Current purchase price
What is the relevant cost of material that is currently in inventory but NOT used elsewhere in the business?
Scrap/resale value of the material
What is the relevant cost of material that is currently in inventory but IS used elsewhere in the business and CANNOT be replaced?
If a scarce resource, we must consider the contribution it could have helped us earn elsewhere
What is the relevant cost of material that is currently in inventory but IS used elsewhere in the business and CAN be replaced?
Current purchase price is relevant
What is the relevant cost of labour for a job where labour is NOT at full capacity?
Zero
What is the relevant cost of labour for a job where labour IS at full capacity and we CANNOT hire more work or overtime?
Contribution (before labour cost) we would loose out on moving labour from one job to this one
What is the relevant cost of labour for a job where labour IS at full capacity and we CAN hire more work or overtime?
Hiring more staff or overtime cost
What is the relevant cost of machine and other non-current assets?
The lower of:
Replacement cost compared to the higher of Net realisable value and the economic value in the business
What is opportunity cost?
Is the benefit forgone by choosing one course of action instead of the next best alternative
How do you calculate contribution sales ratio:
Contribution / Sales
What is the units sold to breakeven formula?
Fixed costs / contribution per unit
What is the breakeven revenue?
Fixed costs / contribution sales ratio
What is the formula to find the margin of safety in units?
Budgeted sales units - breakeven sales units
What is the formula to find margin of safety %?
(Budgeted sales units - breakeven sales units) / budgeted sales units
What is the formula to find units sold to achieve target profit?
(fixed costs + target profit) / contribution per unit
