Costs and Benefits in Decision Making

Contribution Margin Ratio

Contribution expressed as a percentage of sales revenue

Committed Cost

Cost incurred but not yet paid, must be paid eventually

Sunk Cost

Cost incurred in the past

Opportunity Cost

Cost incurred when one action prevents benefit from another

Outlay Cost

Cost involving spending money or transferring assets

Labour

Cost of labor in producing a product or service

Materials

Cost of materials in producing a product or service

Semi-fixed Cost

Cost that has an element of both variable and fixed

Fixed Cost

Cost that stays the same irrespective of volume

Variable Cost

Cost that varies with volume of activity

Non-measurable Costs and Benefits

Costs and benefits that cannot be measured in monetary terms

Sensitivity Analysis

Assessment of key variables affecting a decision

Break Even Formula

BEP = Fixed Cost / (Sales revenue per unit - Variable cost)

Risk

Chance something will not turn out as predicted

Margin of Safety

Extent to which planned volume lies above break even point

Sunk Cost Fallacy

Feeling obliged to pursue a course of action due to committed costs

Stepped Fixed Cost

Fixed cost that changes in steps as each new threshold level of output is reached

Profit Volume Charts

Graphical representation of contributions and profit at various activity levels

New Machine

Increases fixed cost and lowers variable cost

Benefits

Outcomes that help a business achieve its objectives

Contribution

Part of the break even formula that helps meet fixed cost and contributes to profit

Financial Statements

Prefer historic cost for verifiability

Historic Cost

Price originally paid for an asset

Operating Gearing

Relationship between total fixed and total variable cost

Costs

Sacrifice of resources

Contribution per Unit

Slope of profit volume chart, each additional unit sold decreases loss or increases profit

Total Sales Revenue

Sum of fixed cost and variable cost

margin of saftey

The extent to which the planned volume of sales lies above the​ break-even point

Target Profit

Total sales revenue = fixed cost + total variable cost + target profit

Relevant Cost of Labour

Varies based on spare or full capacity of business

Relevant Cost of Materials

Varies based on whether materials are intentionally held or need to be purchased

Monetary Value

Weighing costs and benefits in terms of money

Break Even Point

When revenue equals total cost