Theory/Terms

Question 1

Opportunity Cost

Answer 1

the value of the next best option

Question 2

Controllable Cost (Benefits)

Answer 2

a cost or benefit that a decision maker chooses to insure relative to nothing

ex: Stages is debating whether or not they should open on Sundays

Question 3

Relevant cost (benefit)

Answer 3

a cost or benefit that differs across decision options

ignore information that is irrelevant in the question

Question 4

Sunk Costs

Answer 4

= a past expenditure that cannot be changed

Question 5

Cost flows by type of cost

Answer 5

Total Cost 
   Product costs (COGS) 
      Variable manu.
           Direct Material
           Direct labour 
      Manufac. OH 
           Variable oh 
           Fixed oh
   Period Costs (expenses) 
      Selling and Admin. 
           Variable S&A
           Fixed S&A

Question 6

Prime costs

Answer 6

= the sum of direct materials & direct labour costs (the primary inputs into the production process)

Question 7

Conversion costs

Answer 7

= direct labour + manufacturing overhead costs

Question 8

Capacity costs

Answer 8

= variable oh + fixed overhead (aka MO)

Question 9

Traceability

Answer 9

the degree of which we can directly ralate a cost or revenue to a decision option
Direct cost/benefit
Indirect cost/benefit

Question 10

Direct cost/benefit

Answer 10

uniquely relates to a decision option (ex: raw materials)

Question 11

Indirect cost/benefit

Answer 11

not unique to a decision option - only portion (ex: salary of a plant manager; salary of a janitor for the plant)

Question 12

product cost

Answer 12

any cost associated with getting products and services ready for sale “inventoriable costs”

Question 13

period cost

Answer 13

any costs that are not period costs - costs related to selling the goods or the administration of the organization

Question 14

Income statement (basic structure)

Answer 14

revenue 
- COGS (product costs) 
--------------
Gross margin 
- Expenses (period costs) 
---------------
profit before taxes

Question 15

Income statement (contribution margin)

Answer 15

revenue 
- variable costs 
--------------
Contribution  margin
- fixed costs
---------------
profit before taxes

Question 16

Time and controllability

Answer 16

more costs and benefits become controllable over time

Question 17

fixed cost

Answer 17

a cost that does not change as the volume of activity changes

Question 18

variable costs

Answer 18

a cost that is proportional to the volume of activity (product materials)

Question 19

mixed costs

Answer 19

a cost that contains both fixed and variable components (utilities)

Question 20

Cost driver

Answer 20

the units we use to distribute the cost pool amount cost objects (labour hours, machine hours, materials used, etc.)

Question 21

Relevant range

Answer 21

the idea that fixed costs are only fixed costs for a certain range of operating levels (rent, a machine that has Max # of units)

Question 22

The high-low method

Answer 22

uses equation to estimate how much it will cost you at different quantities of production/usage/etc.

Question 23

the high low equation

Answer 23

b = cost of highest driver - cost of lowest driver / high driver - low driver

Question 24

what is profit

Answer 24

profit is a function of revenue, variable costs and fixed costs where both revenuer and variable costs are proportionate to volume

Question 25

profit before tax formula

Answer 25

revenues -variable costs - fixed costs [(selling price * volume) - (cost/unit * volume)] - fixed costs

Question 26

what is CVP used for

Answer 26

manipulating the profit before tax equation to make it do what you need it to with the information given from question

Question 27

revenue

Answer 27

revenue = sales price * number of units sold

Question 28

variable costs

Answer 28

variable costs = variable costs per unit * number of units sold

Question 29

Contribution margin

Answer 29

Contribution margin = total revenue - total variablee costs

Question 30

Contribution margin per unit

Answer 30

Contribution margin per unit = sales price - variable costs per unit

Question 31

Break even volume

Answer 31

the number of units one must sell in order to cover fixed costs (profit = $0)

Question 32

Break even revenue

Answer 32

the revenue ($) needed to cover fixed costs (break even revenue = breakeven volume * sales price)

Question 33

margin of safety

Answer 33

the amount by which expected revenues exceed breakeven revenues (expressed as a percentage). A measure a risk. High the percentage the better (100% means you have no fixed costs) (0% means you are operating at your BE point)

Question 34

equation for MOS

Answer 34

MOS = (Sales in Units - Breakeven Volume) / sales units = (revenues - breakeven revenues) / revenues