CVP Flashcards
(24 cards)
management accounting
process info for the purpose of internal decision making
management of resorces
retail businesses
buy and sell inventory w/ intention of selling at a profit
service business
provide services to clients
manufacturing business
convert raw materials into finished goods
manufacturing costs
aka product/service costs
treated as expenses
direct materials (raw materials CA on sofp), direct labour(work in process CA) ,indirect costs(manufacturing overhead) (work in processs on sofp, cost of goods sold on income statement)
cost behaviour
effect of changes in volume of prroduction on costs
changes in behaviour of cost due to changes in business activity
knowledge is essential for decision making
direct costs
easily and conveniently traced to a unit.
variable in nature
direct materials (raw materials)
direct labour (Salaries)
indirect costs
can’t be easily and conveniently traced to a unit.
variable or fixed
indirect materials (variable) (used for benefit of all products eg cleaning material not directly involved)
indirect labour (variable) (cant be traced to 1 product/service eg factory supervisor supervising diff segs)
indirect fixed costs (fixed)(doesnt change w increase/decrease in no. of goods produced/sold , relate to operation of business as a whole eg depreciation)
prime costs
= direct materials + direct labour costs
cost driver
factor (activity) that causes fixed & variable overheads (costs) to be incurred
drives cost of an activity
direct cause of a business expense
eg. machine/labour hours, beds occupied, containers loaded
behaviour of fixed costs
fixed costs per unit decreases when the number of units produced increases
total fixed costs are constant for all levels of activity
variable costs behaviour
vc per unit do not increase w/ increased production volume
tvc increase when num of units produced increases.
non manufacturing costs
operating expenses
period costs
marketing/selling costs
administrative costs
cvp
way to find out how changes in variable + fixed costs affect company profit
important for decision making
break even point
point at which neither profit nor loss is incurred.
total sales = total revenue
income = total costs (f+v)
CM = TFC
short term
setting of selling prices/product mix can be changed realtively quickly
company has incurred certain fixed costs to ensure it can carry out its basic operations. remain unchanged in short term.
therfore fixed costs irrelevant to short term decisions, variable costs relevant
long term
purchase of new plant/machinery, not easy to revise/change this decision
fixed costs must be met if a company is to survive
assumptions
ceteris paribus
single product/constant sales mix
profits calculated on variable costing basis
TC and TR are linear functions of output
contribution margin
sales revenue (or selling price) less variable expenses
used to contribute towards covering fixed expenses- if insufficient to cover entity experiences loss
net profit
fixed costs deducted from contribution margin
contribution margin ratio
% of CM to total assets
shows how much total CM will change if total sales revenue changes
= (CM/Selling price) x 100
% that will be contributed to profit once BEP exceeeded
break even units
all fixed costs/CM per unit
break even sales value
all fixed costs/ CMR as a decimal
