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Managerial basic equations midterm > Theory/Terms > Flashcards

Flashcards in Theory/Terms Deck (34):
1

Opportunity Cost

the value of the next best option

2

Controllable Cost (Benefits)

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

3

Relevant cost (benefit)

a cost or benefit that differs across decision options
(ignore information that is irrelevant in the question)

4

Sunk Costs

= a past expenditure that cannot be changed

5

Cost flows by type of cost

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

6

Prime costs

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

7

Conversion costs

= direct labour + manufacturing overhead costs

8

Capacity costs

= variable oh + fixed overhead (aka MO)

9

Traceability

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

10

Direct cost/benefit

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

11

Indirect cost/benefit

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

12

product cost

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

13

period cost

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

14

Income statement (basic structure)

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

15

Income statement (contribution margin)

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

16

Time and controllability

more costs and benefits become controllable over time

17

fixed cost

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

18

variable costs

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

19

mixed costs

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

20

Cost driver

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

21

Relevant range

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

22

The high-low method

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

23

the high low equation

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

24

what is profit

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

25

profit before tax formula

revenues -variable costs - fixed costs

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

26

what is CVP used for

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

27

revenue

revenue = sales price * number of units sold

28

variable costs

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

29

Contribution margin

Contribution margin = total revenue - total variablee costs

30

Contribution margin per unit

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

31

Break even volume

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

32

Break even revenue

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

33

margin of safety

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)

34

equation for MOS

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