ACCT 2020 Exam 3

additional profit formula

# above break-even * CM per unit

profit (NOI) weird formula

(CM ratio *sales) - FE

formula for break even in sales volume with target net income

(unit CM * quantity) - FE = target net income

What are the two reasons to isolate relevant costs

1) often the data is not as organized and it's not worth it to seek out irrelevant data 2) mingling relevant and irrelevant data could distract from what is actually important. and there is danger that it could be done incorrectly.

differential cost

A future cost that differs between any two alternatives. always relevant

DOL (degree of operating leverage)

CM/NOI

break even point in dollars

FC / CM ratio

VC ratio formula

VC / sales

avoidable cost

a cost that can be eliminated by choosing one alternative over another. ex. if choosing between going to movie theater or renting a movie, the cost of ticket would be the avoidable cost. relevant cost.

bottleneck

a step in a process that limits the total output because it has the smallest capacity

value chain

all activities from development to production to after-sales service

incremental cost

an increase in cost between two alternatives. example: standard or deluxe model of car. relevant cost

total cost approach

decision analysis method where all costs and benefits are considered whether they are relevant or not

first step in decision making is to ___________

define the alternatives

T/F: total cost approach and differential cost approach will yield different results

false. they should yield the same results because sunk or irrelevant costs will cancel each other out in the total cost approach

differential analysis

focusing on future costs and benefits that are not the same between alternatives.

sunk costs are _________ when making decisions

ignored

what should be focused on when doing a special order decision

incremental costs and benefits associated with the order. FMO is not affect by the order so they aren't relevant

Future costs and benefits that do not differ between alternatives are ___________________ to the decision-making process

irrelevant. example is if you plan to buy a pizza whether you go to the movies or watch a movie at home, the cost of the pizza is irrelevant when choosing where to watch the movie.

what is a disadvantage of allocating common fixed costs

it can make the product look less profitable than it actually is.

differential approach

method of decision analysis where it focuses solely on the relevant costs and benefits

what does a CVP graph tell us

the break-even point, and the profit area and loss area. x-axis is volume sold, y-axis is dollars

differential revenue

the future difference in revenue between two alternatives. relevant benefit

margin of safety in dollars and percent

total actual sales - BE sales (dollars) MOS (dollars) / total sales (percent)

volume trade-off decision

when a company doesn't have enough capacity to product all the products and the sales volumes demanded

vertically integrated

when a company is involved in more than one stage of the value chain

What is the opportunity cost for something that could be used for something else?

zero. if it couldn't be used for anything else then it's not zero.