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Finance > costs and cost volume analysis > Flashcards

costs and cost volume analysis Flashcards

1
Q

cost

A

sacrifice made in order to obtain a benefit

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2
Q

cost objective

A

any activity for which a separate measurement of costs is desired

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3
Q

product costs

A

manufacturing costs

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4
Q

period costs

A

non manufacturing costs

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5
Q

prime costs

A

direct materials and direct labour

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6
Q

conversion costs

A

direct labor, variable and fixed manufacturing overheads

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7
Q

indirect costs

A

overheads

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8
Q

what are overheads

A

Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service. Thus, overhead costs do not directly lead to the generation of profits - see definition of indirect costs

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9
Q

examples of period costs

A

marketing

admin

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10
Q

define manufacturing

A

transforming an raw material into a form that has greater value to the customer

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11
Q

define manufacturing costs

A

costs of producing the goods that can specifically (directly or indirectly) identified with merchandised purchased or produced for resale - cost of goods sold

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12
Q

direct materials

A

material costs that can be physically identified with a specific product - form large part of the manufacturing cost

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13
Q

direct labor

A

labor costs that can be specifically identified with the product

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14
Q

prime costs

A

sum of direct labor and direct materials

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15
Q

indirect materials (variable)

A

cannot be identified with any one individual product - used for the benefit of all products (cleaning materials, electricty)

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16
Q

indirect labor (variable)

A

indirect manufacturing costs

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17
Q

cost driver

A

factor within the organization that causes a fixed or variable manufacturing overhead to be incurred

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18
Q

fixed cost

A

remain constant over a wide range of activity for a specified time period - total fixed costs are constant for all levels of activity while fixed cost per unit decreases proportionally with the level of activity

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19
Q

variable cost

A

vary in direct proportion to the volume of activity. total var costs are linear as unit variable costs are constant

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20
Q

examples of fixed manufacturing overheads

A

factory rent
manager salary
insurance
annual depreciation

21
Q

examples of variable manufacturing overheads

A

indirect labout - security, cleaning, repairs
indirect materials
factory telephone
water and telephone

22
Q

non manufacturing costs are sub divided into…

A

marketing/selling costs

admin costs

23
Q

what is variable costing?

A

focuses on variable product costs - therefore only variable costs of production are used to calculate the costs of the product produced

24
Q

what is cost volume profit analysis

A

systematic method of examining the relationship between changes in

  • prices of products
  • changes per unit in variable costs
  • changes in total fixed costs
  • volume or level of activity
  • mix of products sold - and the resulting effect on the firm’s net profit
25
Q

what are the cost volume profit analysis assumptions

A

all other variables remain constant
a single product or constant sales mix
profits are calculated on a variable costing basis
total costs and total revenue are linear functions of output
the analysis applies to the relevant range only
costs can be accurately divided into their fixed and variable elements

26
Q

what is contribution margin

A

sales - all variable expenses

money left over after subtracting all variable costs - the money left over to pay off fixed costs and then for profit

27
Q

what happens if contribution margin isnt sufficient

A

a loss

28
Q

formula for contribution margin

A

selling price - variable costs

29
Q

contribution margin ratio

A

contribution margin per unit*100/selling price per unit

30
Q

what does it mean to break even

A

profit = 0
income = total costs
contribution margin equals fixed expenses

31
Q

calculate break even units

A

fixed expenses/contribution margin per unit

32
Q

calculate break even value

A

fixed expenses/contribution margin ratio

33
Q

equation method to calculate break even

A

salesX = variablecostsX+fixed costs+profit

34
Q

what is the degree of operating leverage

A

how sensitive the net operating income is to percentage changes in sales volumes

is a multiplier

35
Q

what happens if operating leverage is high and what if its low

A

high = small percentage increase in sales will produce a much higher percentage increase in net operating income

36
Q

a firm with high fixed costs…

A

will have a higher DOL as variable costs are lower resulting in a higher contribution margin

37
Q

what is the DOL dependent on

A

cost structures

38
Q

DOL is not constant…

A

it is at its highest close to the breakeven point and creases as sales and profits increase

39
Q

why does the DOL decrease as sales and profits increase

A

google it

40
Q

DOL formula

A

total contribution margin/net profit

41
Q

if sales volumes increase by x%, net income is expected to increase by

A

DOL*percentage increase

42
Q

if sales volumes decrease by x%, net income is expected to decrease by

A

DOL*percentage decrease

43
Q

what is the margin of safety

A

calculates the amount by which sales can drop before the firm makes a loss

44
Q

calculate margin of safety

A

actual sales - breakeven sales

45
Q

margin of safety percentage

A

margin of safety*100/actual sales

46
Q

target sales volume

A

total fixed costs+target profit/CM per unit

47
Q

target sales value

A

target sales volume*selling price per unit

48
Q

target sales value using CM ratio

A

total fixed costs+target profit/CM ratio

Finance (12 decks)

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