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ExPress Notes
Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. The Nature and Purpose of Cost and Management Accounting Cost Classification, Behaviour and Purpose Business Mathematics and Computer Spreadsheets Cost Accounting Techniques Budgeting and Standard Costing Short-term decision-making techniques
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7 10 12 14 23 35
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ExPress Notes
ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows view again of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database
Everybody in the World has free access to ACCAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be
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ExPress Notes
an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.
Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Dont make any annotations on the ExPress notes at this stage.
Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage.
Work through in detail. Review each chapter after class at least once. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.
Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
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ExPress Notes
ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand.
ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it!
Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them.
Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticisms he or she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.
Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Avoid looking at them in detail, especially if the notes are very big. It will scare you.
Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc.
Leave at home.
Leave at home.
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Notes
Provide a base understanding of the most important areas of the syllabus only.
Notes
Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses
Notes
Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.
To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.
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ExPress Notes
Chapter 1
The qualities of good information can be summarized in the word ACCURATE: Accurate, Complete, Cost-beneficial, User-targeted, Relevant, Authoritative, Timely and Easy to use
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Responsibility centres
Cost Centres
Revenue Centres
Profit Centres
Investment Centres
Cost centres: Responsible for current expenses only Revenue centres: Responsible for revenues, but not current expenses other than marketing expenses Profit centres: Responsible for revenues and current expenses Investment centres: Responsible for revenues, current expenses and capital expenditure
The process of identification, measurement, accumulation, analysis, preparation, interpretation and reporting of information used by management to set targets, plan resource allocation, evaluate investment choices and monitor/control the operating performance and the orderly conduct of the business.
Differences in purpose and scope, compared to Financial Accounting Aimed at internal users (as opposed to financial accounting, which is aimed at external stakeholders) Focused on present and future performance (as opposed to financial accounting, which reports past performance) Not required by law and not regulated by accounting frameworks (as opposed to financial accounting, which is a legal requirement and is regulated by accounting frameworks)
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Focused on specific areas or activities (as opposed to financial accounting, which provides a holistic view of companys performance) Employs non-financial indicators as well financial, while financial accounting uses only financial measures.
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ExPress Notes
Chapter 2
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ExPress Notes
Direct costs: are costs that can be directly attributable to a product. Indirect costs: these are costs that cannot be directly attributable to a product.
Fixed costs: are costs that remain constant regardless of the volume of production. A variety of indirect costs are fixed. Variable costs: vary in proportion with the volume produced. Direct costs are by their nature variable in behaviour.
Although a variable cost increases with the level of activity, the variable cost per unit remains fixed, while a fixed cost per unit falls with a rise in the level of activity. Other types of costs: Mixed costs: these are costs that contain a fixed and a variable element. Step costs: costs that remain fixed within a defined range of production, but at a certain level of output increase in a significant way to a new (fixed) level.
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ExPress Notes
Chapter 3
Expected Value This is the average of possible outcomes weighted by the probability of each outcome. Profit/(Loss) 340 766 278 450 -230 Expected Probability Value 10% 20% 50% 18% 2% 100% 34.0 153.2 139.0 81.0 -4.6 402.6
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ExPress Notes
Regression analysis This is a statistical tool used to describe the relationship between two sets of variables. The correlation coefficient denoted by r -- measures the strength of the linear association between the variables. The range for r is: -1 < r < +1 The coefficient of determination measures the degree to which the variation in the dependent variable can be explained by the independent variable (x). It is denoted as r2 and its range is: 0 < r2 < 1 The use of spreadsheets is a basic skill that all accountants should possess.
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Chapter 4
Materials The ordering, receiving and issuing of materials from inventory must be controlled according to procedures and documented at all stages with forms appropriate to the purpose. The controls and procedures are designed to monitor inventory movements so as to minimise discrepancies and losses and theft. Economic Order Quantity This is a method which seeks to minimize the costs associated with holding inventory. To determine the total costs, the following data is required: Q = order quantity D = quantity of product demanded annually P = purchase cost for one unit C = fixed cost per order (not incl. the purchase price) H = cost of holding one unit for one year
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The total cost function is as follows: Total cost = Purchase cost + Ordering cost + Holding cost which can be expressed algebraically as follows: TC = PxD + C x D/Q + H x Q/2
It is this total cost function which must be minimized. Recognizing that: PD does not vary; Ordering costs rise the more frequently one places (during the year); and Holding costs rise the fewer times one places orders (due to larger quantities being ordered each time),
It follows that there is a trade-off between the Ordering and the Holding costs. The optimal order quantity (Q*) is found where the Ordering and Holding costs equal each other, i.e. C x D/Q = H x Q/2 Rearranging the above and solving for Q results in
Labour Direct labour refers to work which is directly involved in the manufacture of a product. Indirect labour (e.g. the supervisors salary or that of a security guard) forms part of overhead costs.
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ExPress Notes
Absorption Costing This is one method which seeks to make the link between overheads and (product) cost units. The diagram below provides a useful roadmap.
Total Production Costs
Direct Costs
Production A 1. Allocate
Production B
Service C
The focus (above) is production. Overhead costs that are not incurred at the time of production do not find their way into inventory. It is useful to think of production costs as being those that end up as part of the inventory (valuation) while other (non-production) costs are incurred outside, and normally after the product leaves inventory.
Contribution Contribution is defined as the difference between Sales revenue and the marginal cost of sales, or Contribution = Sales Variable costs (both production and non-production)
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ExPress Notes
Marginal costing A marginal approach to costing focuses on the variable (marginal) costs generated in a business and considers fixed costs as period costs. This allows the company to be able to quantify the amount by which its costs rise, if it produces/sells an additional unit of output. Example Below is data on a manufacturing company. Selling price (per unit): Cost card (per unit): Direct materials Direct labour Variable production O/Hs Total variable costs There is a variable selling cost of $2 per unit Year 1 (units) Budget (normal) production Actual Production Actual Sales Actual fixed production O/Hs Actual SGA costs 1,100 1,000 950 $16,500 $ 7,000 Year 2 (units) 1,100 1,100 1,150 $16,500 $ 7,000 120 45 18 9 72
Based on the above data, a profit and loss statement for the Years 1 and 2 is shown on the next page. Assume that the beginning inventory is zero.
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Profit/Loss (Marginal costing) Year 1 $ Sales (950/1,150 units) Less: Variable cost of sales Opening inventory Production costs: o Variable (1,000 x $72) (1,100 X $72) 72,000 0 3,600 114,000 Year 2 $ 138,000
79,200 0
Less: closing inventory (50 x $72) Less: Variable selling costs (950 x $2) (1,150 x $2) Contribution Less: Fixed production O/Hs Less: SGA costs Profit
(3,600)
Absorption Costing This method argues that focusing on marginal costs is potentially misleading in the longer run because fixed production costs have also to be covered. Accounting conventions require that fixed production costs be reflected in each unit produced.
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Revised cost card (Absorption costing) Cost card (per unit): Direct materials Direct labour Variable production O/Hs Fixed production O/Hs Total production costs Profit/Loss (Absorption costing) Year 1 $ Sales (950/1,150 units) Less: Variable cost of sales Opening inventory Production costs: o Variable (1,000 x $72) (1,100 X $72) Fixed (1,000 x $15) (1,100 X $15) 72,000 0 4,350 114,000 Year 2 $ 138,000 45 18 9 15 87
79,200
15,000
Less: closing inventory (50 x $87) Over/(under) absorption Gross Profit Less: Variable selling costs (950 x $2) (1,150 x $2) Less: SGA costs Profit
(4,350) 1,500
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Absorption Costing Revenue Less: Cost of Sales Variable/Fixed production costs Gross profit Less: Expenses Variable/Fixed non-production costs Net Profit
Marginal Costing
Job costing / Batch costing This refers to the calculation of costs associated with a specific job or customer order. This is appropriate in situations where each product or service is distinct, and possibly unique, in its delivery. Batch costing is similar to job costing; the distinction lies in the identification of costs with specific batches, which are numbered (separately identified) for this purpose.
Process Costing Process costing is a technique that applies to the mass production of a large number of identical products, moving through a series of processing stages. The accumulated costs of production can be averaged over the number of items produced. The average cost is determined by the following formula: Average cost per unit = Total cost of inputs Scrap value of rejected units No. of units of input Normal loss
The total cost of inputs refers to labour, materials and overhead costs of production. If losses occur along the way that necessitate the scrapping of defective units, then to the
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ExPress Notes
extent that these items fetch a scrap value, then that (scrap) value will reduce the total costs. Similarly, an accounting is made of the number of units introduced into a process with the expectation that a normal loss will be incurred. The number of good units emerging from a process will therefore be the number of units entering it, minus the expected number lost in processing. Abnormal gains and losses are accounted for as an adjustment to the accounts using the same value as the good output (deducted in the case of loss and added in the case of gains). Equivalent units (EU) This refers to the way in which partially-completed output (work-in-progress or WIP) is expressed. If an unfinished unit of product contains 35% of the labour and materials costs of a complete unit, then the unit has a degree of completion of 35% in terms of value. It is therefore considered to have an EU of 35%, which is normally expressed in monetary terms. Weighted average method The weighted average method makes no distinction between units that were started (but not finished) in a previous process and those started in the current process. Since all the units, when completed, are visually identical, processing costs are averaged over all the units. First-In-First-Out (FIFO) method The FIFO method does make a distinction between units that were started in a previous process and those begun in a current process. FIFO costing separates the costs that were incurred in the previous period from costs of the current period.
Joint products / By-products Joint products are two or more products that share a common processing path until the point of separation. Until they go their own (separate) ways, the costs of production during the joint processing cannot be physically distinguished. There are different methods used to apportion common costs to such products at the point of separation: Market value (based on expected sales price) Number of units (litres, tons, or some other objective physical measurement) Net realizable value = Final sales value Incremental processing costs
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ExPress Notes
By-products are goods which are incidental to the production process and which generate cash from sales, though the amount is modest in comparison to the overall revenues of the firm. The cash received for by-products can be viewed as a bonus that reduces production costs.
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ExPress Notes
Chapter 5
a) Communicate Objectives
b) Motivate Employees
b) Control Activities
b) Evaluate Performance
The master budget process Annual frequency, preferably revised on a regular basis (rolling budget) Based on organizations objectives, expressed in financial, quantitative and qualitative measures
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ExPress Notes
The operating budget sequence Sales budget Production budget Ending inventory budget Direct materials budget, Direct labour budget, Factory overhead budget Cost of Sales budget R&D budget, Marketing budget, Distribution budget, Customer service budget, Admin budget Pro-forma income statement
The financial budget sequence Capital budget Cash budget Pro-forma balance-sheet and pro-forma statement of cash-flows
Operating budgets These are budgets that quantify the revenues and costs relating to a companys activities at a disaggregated level, meaning that there is direct input from department and functional levels. They require both volume (e.g. units of output, quantities, hours, etc.) and price specifications. Operating budgets are modelled on what will emerge as the companys income statement. Examples include: Sales budget Production budget Direct material usage Direct material purchases Direct labour budget Factory overhead budget Selling & distribution budget
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The disaggregation of budgets referred to above allows the practice of responsibility accounting. Principal budget factor When a budget is prepared, management must identify any factors that will prevent the company from surpassing a certain level of activity. A bank, for example, may be constrained from developing an extensive branch network owing to the scarcity of suitably-skilled professional staff; or production may be constrained by the built capacity of the plant or by the level of demand for a companys products. In each of these cases, there is a limiting factor at work.
Fixed vs. flexible budgets Traditional budgets tended to be rigid, i.e. they were not subject to modification during the period to which they referred. Example A producer of office equipment has a budget for the coming year: Output: 1,000 Costs: Materials Labour Fixed O/Hs Total units 75,000 200,000 100,000 375,000
After 3 months, the company observes that sales are running ca. 20% higher than originally projected and it has therefore increased its production by a similar amount. In order to look back at what its budget would have been had the actual (higher) level of activity been anticipated, management can prepare a flexed budget; this is effectively a re-calibration of the original budget. It allows management to re-focus their efforts without losing time tracking artificial spending excesses according to the original budget. Output: 1,200 units Costs: Materials 90,000
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Prepare a flexed budget for an output level of 1,075 units. Based on the data (below), the variable cost of labour is $125 per unit, and the fixed cost of labour is $75,000 1000 75,000 200,000 100,000 375,000 1200 90,000 225,000 100,000 415,000
Absorption Costing This method argues that focusing on marginal costs is potentially misleading in the longer run because fixed production costs have also to be covered. Accounting conventions require that fixed production costs be reflected in each unit produced. Fixed Overhead Absorption Rate (FOAR) = Budgeted production O/H Budgeted level of production Year 1 (units) 1,100 $16,500 Year 2 (units) 1,100 $16,500
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ExPress Notes
Cost card (Absorption costing) Cost card (per unit): Direct materials Direct labour Variable production O/Hs Fixed production O/Hs Total production costs 45 18 9 15 87
Having established the OAR, we now have a basis on which the production department can keep track of the fixed overheads being generated as the manufacturing process proceeds.
The following data is from a manufacturing company Budget Production: Sales: Sales Price: 1,100 units 1,000 units $120 / unit
Actual results Production: 1,000 units Sales: 950 units Materials: 4,900 kg, $45,025 Labour: 3,100 hrs, $19,050 Variable O/Hs: $9,250 Fixed O/Hs: $17,000 Sales price: $115 / unit Cost card (per unit) Materials (5kgs x $9 per kg) Labour (3hrs x $6 per hr) Variable O/Hs (3 hrs x $3 per hr) Fixed O/Hs (3 hrs x $5 per hr) 45 18 9 15 87
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Variance calculations Sales volume variance (Absorption costing) Budgeted sales volume Actual sales volume Sales volume variance @ standard margin ($120-$87) 1,000 950 50 (A) $1,650 (A)
Sales volume variance (Marginal costing) Budgeted sales volume Actual sales volume 1,000 950
Sales price variance 950 units should have sold @$120 Actual revenues (950 units x $115) Sales price variance Material variances (i) Material price variance Materials used (4,900 kg) should have cost @ $9 Materials (4,900 kg) did cost Materials price variance 44,100 45,025 $925 (A) 114,000 109,250 4,750 (A)
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(ii)
Material usage variance 1,000 units should have used @ 5 kg 1,000 units did use Materials usage variance @ standard $9 Materials total variance: 5,000 kg 4,900 kg 100 kg (F) $900 (F) $ 25 (A)
Labour variances (i) Labour rate variance Labour (3,100 hrs) should have cost @ $6 Labour (3,100 hrs) did cost Labour rate variance (ii) Labour efficiency variance 1,000 units should have taken @ 3 hrs 1,000 units did take Labour efficiency variance @ standard $6 Labor total variance: Variable O/H variances (i) Variable O/H expenditure variance 3,100 hrs should have cost @ $3 3,100 hrs did cost Variable O/H expenditure variance 9,300 9,250 50 (F) 3,000 hrs 3,100 hrs 100 hrs (A) $600 (A) $ 1,050 (A) 18,600 19,050 $450 (A)
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(ii)
Variable O/H efficiency variance 1,000 units should have taken @ 3 hrs 1,000 units did take Variable O/H efficiency variance @ standard $3 Variable O/H total variance: 3,000 hrs 3,100 hrs 100 hrs (A) $300 (A) $ 250 (A)
Fixed O/H total variance (Absorption costing) Overhead actually incurred Overhead absorbed (1,000 units x $15) Fixed O/H total variance $17,000 $15,000 $ 2,000 (A)
This can be broken down into two components: (i) Fixed O/H expenditure variance Budgeted O/H should have cost (1,100 units x $15) 16,500 Actual O/H cost Fixed O/H expenditure variance (ii) Fixed O/H volume variance (Absorption Costing) Budgeted production Actual production Fixed O/H volume variance @ standard $15 1,100 units 1,000 units 100 units (A) $1,500 (A) 17,000 $500 (A)
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ExPress Notes
Interpreting variances Material price Favourable: Adverse: Material usage Favourable: Adverse: Labour rate Favourable: Adverse: Labour efficiency Favourable: More efficient production, motivated/better trained workers, better materials and/or equipment Poorly trained workers, deficient work organization, materials or equipment Low pay rates, cheap workers Wage inflation Better quality materials, more efficient processing Substandard material, waste, poor quality control, theft Unanticipated discounts received, better purchasing/negotiation, cheaper (substandard) materials Price inflation, poor purchasing, better quality materials
Adverse:
Overhead expenditure Favourable: Adverse: Cost savings, more efficient use of ancillary services Poor cost disciplines, complexity and bureaucracy
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Overhead volume Favourable: Adverse: Using production capacities beyond the level budgeted Under-utilization of production capacities
Inter-connections among variances As can be seen above, a factor causing a favourable variance may at the same time be the cause of an adverse variance in another part of the companys operations. It is managements responsibility to understand these relationships and to be able to anticipate, and if possible quantify, the impact of their actions on overall performance. At the same time, management needs to review standards for their relevance and usefulness, as well as apply common sense to the materiality and controllability of specific variances.
Reconciliation of budgeted profit and actual profit Operating statement Prepare a reconciliation between the profit budgeted and that realized. Budgeted profit (Absorption costing) Sales volume variance Sales price variance 1,650 (A) 4,750 (A) 26,600 Cost variances: Materials Price Usage Labour 900 F A 925 33,000
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Rate Efficiency Variable Expenditure Efficiency Fixed Expenditure Volume Actual profit 950 50
450 600
300
Operating Statement based on Marginal costing Budgeted contribution (Marginal costing) Sales volume variance Sales price variance 2,400 (A) 4,750 (A) 40,850 Cost variances: Materials Price Usage Labour Rate 450 900 F A 925 48,000
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Efficiency Variable Expenditure Efficiency Actual contribution Fixed O/Hs Budgeted Fixed O/Hs Expenditure variance Actual profit 50 950
600
300 2,275
16,500 500
(17,000) 22,525
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Chapter 6
Cost-Volume-Profit (CVP) Analysis The breakeven formula Total Costs = Fixed Costs + Unit Variable Cost x Number of Units Total Revenue = Sales Price x Number of Units If TC = Total Costs, FC = Fixed Costs, V = Unit Variable Cost, X = Number of Units, TR = Total Revenue, SP = Selling Price, C = SP V = Unit Contribution and CM%= C/SP = Contribution Margin,
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Then the break-even point (the output level at which TR=TC) is: In units sold: X = FC/C In dollar sales: TR = FC/CM%
Safety Margin = Budgeted Sales Break-even point (units/dollars) C is an important indicator, as it shows the contribution of each unit sold towards covering fixed costs. Therefore, in the short run, the firm may prefer to produce/sell below break-even in order to recover some of its fixed costs.
Relevant costs, incremental analysis and linear programming Relevant costs are costs expected to vary with the action taken o Past (sunk) costs are irrelevant o Fixed costs are irrelevant if there is idle capacity o Variable (marginal) costs are relevant o Opportunity costs (foregone benefits) are relevant Incremental analysis uses relevant costs in order to quantify the short-term effects of business decisions taken.
Applying incremental analysis in business decision-making Accept or reject a special order o Accept if selling price exceeds variable production cost and there is spare capacity Make (in-sourcing) or buy (out-sourcing) o Outsource least efficient activities if full capacity reached Capital budgeting
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Invest if marginal cost of investing is below marginal cost of not investing (marginal benefit foregone) Disinvestment o Divest if (marginal revenue generated + cost of resulting idle capacity + severance payments + restoration costs) fall below marginal cost of production + salvage value of assets o
Determining optimal mix of products where there are limiting factors It addresses the problem of maximizing or minimizing a linear function subject to linear constraints. The constraints may be equalities or inequalities.
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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