Management Acc Week 4

24 flashcards · Other · by Daniel F.

1. Cost structure

   the relative proportion of variable and fixed costs

2. Operating risk

   the volatility of operating income resulting from a company’s cost structure

3. steps of CVP analysis

   Profit function, contribution income statement, and CVP graph Computation of the break-even and target-profit points Assessment of operating risk Sensitivity analyses

4. Cost-Volume-Profit (CVP) analysis

   decision-making tool helping managers understand and explain the impact of changes in volumes, product mix, prices, unit variable costs, and fixed costs on the cost structure, operating income, and operating risks Assumtions: the price is constant; the unit variable cost is constant; fixed costs (net of fixed revenues) are constant; there is a single cost driver or the product mix is constant; there is no inventory (sales equal production).

5. profit function

   revenue function cost function

6. Product mix

   the relative proportion of each product of a company in the total sales volume or revenue

7. unit contribution margin UCM

   change in contribution margin, and therefore the change in profit, for every additional unit sold the contribution that each unit makes to first covering fixed costs and then, once fixed costs are covered, generating a profit UC = unit variable cost

8. contribution margin ratio CMR (IO without volumes)

   the increase in contribution margin and thus in profit for every additional euro of revenues. It is the fraction of each sales euro that is available first to cover fixed expenses and then, when this is done, to generate a profit

9. contribution margin CM

   the revenues (proportional to the units sold) minus the variable costs (also proportional to the units sold). This amount is contributing towards first covering fixed costs and then generating a profit

10. contribution income statement

    an income statement grouping costs by behavior (variable versus fixed) rather than inventoriability (manufacturing versus period). It highlights the contribution margin instead of the gross margin

11. derive P FC and VC from financial statement to build profit function

    P = (ΔQ/ΔP) FC = TC-VC VC = (ΔQ/ΔTC) = Q*UC

12. CVP graph

    cost line and revenue line loss, profit break even point

13. breakeven point

    sales volume/revenue where it = total costs

14. break even volume and revenue

    OR Qbe*P

15. target profit volume and revenue

    OR Qtp*P

16. multi-product break-even

    instead of UCM use weighted average, WUCM the sum of the products’ unit contribution margins weighted by their share of the total volume sold (we insist, on the volume!) Q/Q = percentage of the total sales volume due to the product d instead of CMR use weighted average, WCRM the sum of the products’ contribution margin ratios weighted by their share of the total revenues (we insist, on the revenues!) R/R = percentage of the total revenue due to the product d

17. margin of safety

    change in revenues necessary to break-even If positive, it is the amount of revenues the company can lose before reaching break-even if negative, it is the amount of additional revenues the company must earn to reach break-even and start making a profit

18. margin of safety ratio MSR

    the percentage of revenues a company can lose (must earn) to reach break-even

19. degree of operating leverage

    the elasticity of operating income to a change in revenues; it is a measure of how sensitive Operating Income is to changes in revenues operating leverage of 3 means that a 10% increase in revenues leads to a 3 x 10% = 30% increase in operating income the greater the operating leverage, the more responsive the operating income to a change in revenues, the greater the operating risk a firm with a low operating leverage is less vulnerable to economic downturns; however, it also reaps less benefit…

20. relation between operating leverage and cost structure

    for a given Operating Income, a more variable cost structure will have a lower contribution margin (right side is smaller) and fixed cost structures a higher contribution margin (right side is greater).

21. relation between margin of safety and operating leverage

    operating leverage is the inverse of the margin of safety ratio

22. Sensitivity analysis

    impact of different decisions on CVP

23. Unit Cost UC

    Material usage*material price

24. how to report and interpret variances

    report favorable or unfavourable interpret with caution after thorough investigation favorable variance might mean lower quality incorrect budgeted material price