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.
