Formulae/Concepts Flashcards
High-low method?
1) unit variable cost (change in costs / change in units between both ALs)
2) FC = TC - VC (for HAL)
3) TC = FC + unit VC * X
Include units throughout!
CVP analysis?
Helps managers understand relationship between cost, volume + profit by focusing on: prices, volumes, per unit VCs andTFCs
Contribution margin?
Amount remaining from sales rev after variable expenses have been deducted
CM ratio?
CM/sales*100 (in terms of units)
Profit statement order?
Sales
Variable expenses
CM
Fixed expenses
Net profit
Stupid Victor Can’t Fix Nothing
Shortcut solution to calculate changes in NP?
Increase in CM (change in units in Q * unit CM)
Increase in expenses
Then the difference!
Difference between managerial + financial accounting?
Managerial = provides info. for managers who direct + control operations
Financial = provides info. for shareholders, creditors + other stakeholders (external parties)
Different types of costs + explain?
Direct = directly attributed to specific product/service, e.g. wages of workers, indirect = overhead costs, e.g. rent
Product = in prod. process, e.g. direct materials, period = e.g. sales + marketing expenses
Fixed = don’t change with prod., e.g. rent, variable = changes, e.g. direct materials
Differential = differences in costs between 2 decisions
Sunk = costs that can’t be recovered
Define break-even point + formulae?
Point where profit = 0 (no profit/losses)
BEP in units sold = fixed expenses/unit CM
BEP in total sales = fixed expenses/CM ratio
Define target profit + formulae for units sold to attain?
How many units to be sold to make a specific level of profit
(Fixed expenses + target profit)/unit CM
Contribution margin approach?
Units sold to attain target profit = (fixed expenses + target profit) / unit CM
The margin of safety?
Excess of sales over the break-even volume of sales, can be expressed as % of total sales
Total sales - break-even sales = MOS
Operating leverage?
A measure of how sensitive net profit is to % changes in sales, e.g. high leverage = small % increase in sales leads to much larger % increase in net profit
CM/net profit
Difference between absorption and variable costing?
Absorption = assigns both fixed + variable manufacturing costs to each unit of prod.
Variable = only assigns variable manufacturing costs to each unit of prod.
Advantages and disadvantages of variable costing?
A: easier to understand for management and forecast profits, removes effect of inventory from profit
D: difficult to assess profits (FC ignored), product pricing more difficult to deduce
