Chapter 3 Flashcards
1
Q
Pricing
(Two Ways)
A
- Market-Determined Price
- use product cost infomration and decide wheterh its cost strucutre will allow it to compete profitably
- Organization-Set Price
- organizations will often set a price that is an increment of its product’s cost
- Called cost plus pricing
2
Q
Cost Plus Pricing
A
- A pricing approach where an organzation sets a price that is an increment of its product’s cost
3
Q
Target Costing
A
- A tool used in product planning to focus efforts in product and process design on developing a product that has a good profit potential in view of market requirements
4
Q
Budgeting
A
- one of the most widespread uses of cost information
- a management accounting tool that projects or forecasts costs for various levels of production and ssales activity
5
Q
Variable Costs
A
- one that increases proportionally with changes in the activity level of some variable
- example: the acquisition and consumption of the wood creates a cost for wood that increases proportionately with the number of chairs made
6
Q
Cost Driver
A
- a variable that causes a cost
- example: a rocking chair
7
Q
Variable Cost Formula
A
Variable Cost
=
Variable cost/ unit of cost driver x Cost Driver Units
8
Q
Fixed Cost
A
- a cost that does not vary in the short run with a specified activity
- Depends on the amount of a resource that is acquired rather than the amount that is used
- Often _capacity-related costs _
- examples: depreciation, wages paid to production supervisors
9
Q
Total Cost
A
Variable Costs + Fixed Costs
10
Q
Cost-volume-profit (CVP) analysis
A
- using the concepts of variable and fixed costs to dentify the profit associated with various levels of activity
11
Q
Profit Equations
A
- Profit = Revenue - Total costs
- = Revenue - Variable Costs - Fixed Costs
- = Contriubtion Margin x Units produceds and Sold - Fixed Costs
12
Q
Contribution Margin
A
- The difference between the total revenue and total variable costs
13
Q
Contribution Margin Per Unit
A
- the contribution that each unit makes to coverning fixed costs and providing a profit
14
Q
Contribution Margin Ratio
A
- The ratio of contribution margin per unit to selling price per unit
- the fraction of each sales dollar that is available to cover fixed expenses and produce a profit
15
Q
Units Needed to be Sold Equation
A
- (Target Profit + Fixed Costs ) / (Contribution Margin Per Unit)
- Used to calculate the breakeven volume
16
Q
Required Unit Sales
(target profit as % of revenue)
A
- required unit sales = (fixed costs) / (contribution margin per unit - 20% x price per unit)
17
Q
Target Profit
(Including Taxes)
A
- target profit = [(contribution margin per unit x required unit sales) - Fixed Costs] x (1 - Tax rate)
18
Q
Required Unit Sales Including Tax Rate
A
- required unit sales = [(target profit/(1-tax rate) + fixed costs)]/ contribution margin per unit
19
Q
What-if Analysis
A
*
20
Q
Incremental Profit Formula
A
- Incremental Profit = Incremental Contribution margin - Incremental cost
- Example: spending extra money on advertising
21
Q
Two product CVP equation
A
- profit = rocking chair contribution margin x rocking chairs sales + kitchen chair contribution margin x kitchen chair sales - fixed costs
22
Q
Breakeven Point
A
- when the profit is 0
23
Q
The Bundle Apporach
A
- bundling the two products together in order to because illustrate the number sold
- example: 1 “bundle” is 20 rocking chairs and 80 kitchen chairs
- sell 3 bundles, 60 rocking chairs are sold and 240 kitchen chairs are sold
*
- sell 3 bundles, 60 rocking chairs are sold and 240 kitchen chairs are sold
24
Q
Assumptions Underlying CVP Analysis
A
- the price per unit and the variable cost per unit (therefore the contribution margin per unit) remain the same over all levels of production
- All costs can be classified as either fixed or variable or can be decomposed into a fixed and variable component
- Fixed costs remain the same over all contemplated levels of production
- Sales equal production
25
Mixed Cost
* a cost that has a fixed component and a variable component
* example: cell phone bill (fixed monthly rate, as well as how much data you use or w/e)
26
Step Variable Costs
* Increases in steps as quantity increases
* example: the total cost of supervisory salaries per 30 workers
27
Incremental Costs
* the cost of the next unit of production and is similar to the economist's notion of marginal cost
* generally defined as the variabl cost of a unit of production
* however, the variable cost per unit may change as production volume chagnes
* if the cost is a step vaiable, treating the cost as a variable cost will lead to estimation errors
28
Sunk Costs
* a cost that results from a previous commitment and cannot be recovered
29
Sunk Cost Phenomenon
* Referred to sometimes as the Concorde Effect or the COncorde Fallacy
* When sunk costs affect managerial decisions, even though they shouldnt
30
Relevant Cost
* A cost that will change as a result of some decision
* example: the extra money you will spend going to a concert you already have a ticket for
31
Avoidable Cost
* A cost that can be avoided by undertaking some course of action
* The most obvious avoidable costs are variable costs
32
Opportunity Cost
* The maximum value forgone when a course of action is chosen
* provide important insights at the individual product level
33
Make-or-buy Decision
* deciding whether to contract out for a product or service
* Focusing on if the costs avoided internaly are greater than the external costs that will be incurred
34
Examples of Internal Costs Avoided
* example: internal costs avoided
* all variable costs
* any avoidable fixed costs such as the cost of supervisory personnell who would be laid off or machinery that would be sold
35
Examples of External Costs Incurred
* The cost of purchasing the part
* Any transportation costs
* Any other costs involved in dealing with the outside supplier, ordering the product and receiving and inspecting it
36
Manufacturing Costs
(3 groups)
* Classified into 3 groups
* Direct Materials
* Direct Labor
* Manufacturing Overhead
37
Direct Material Costs
* Materials that can be traced easily to a unit of output and are of significant economic consequence of to the final product
38
Direct Labor Costs
* Those labor costst that can be traced easily to the creation of a unit of output
*
39
Manufacturing Overhead Costs
* All costs incurred by a manufacturing facility that are not direct materials costs or dierct labor costs
* example: materials that are not of significant economic consequence to the final product
40
Floor Price
* The minimum price that a company would normally consider for the order
* computing it exploits the relevant cost idea by considering the cost that will change as a result of taking the order
41
