week 3 Accounting Management

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  • Created by: jmf00632
  • Created on: 04-03-20 17:48
what does cost volume profit examine?
• CVP examines the interrelationship between costs and volume on one hand and profits on the other at different levels of activity.
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what does cvp profit examine?
how costs and profit react to a change in the volume or level of activity, so that management can decide the ‘best’ activity level
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contribution
sales revenue - variable costs
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breakeven point is when....
a company dosent make a profit or a loss
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how to clac total cost
fixed cost + the total variable cost
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total variable cost
vcpu x the level of activity or number of units
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vcpu
per unit cost stays fixed and constant i.e. does not change within relevant range
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what does the concept of contribution mean?
it is a contribution towards your fixed cost once fixed cost have been recovered then your contribution will be equal to your profits
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margin of safety
It is the level of activity within which an organisation would operate profitably. It indicates the vulnerability of a business to a fall in demand, i.e., the amount by which sales can fall before profit turns to loss.
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operational gearing/ leverage
Operational gearing describes the relationship between fixed costs and total costs. It illustrates how well a company generates profit from its fixed costs. The more profit a company can earn on a constant level of fixed costs,
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continued
The more profit a company can earn on a constant level of fixed costs, the higher the operating leverage.
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Firms with a high proportion of fixed costs in their cost structures are said to be....
highly geared
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highly geared busines will experience....
firms which are hilghly gear will expeirecme higher proft (greater reward) when sales increase but will lose more (grester risk) when sales fall e.g. if both companies epxerinces a 50 percent decrease –
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target profit definition
• Sometimes an organisation wishes to know the level of output that needs to be sold in order to achieve a particular profit
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remember contribution......
– it is first contribution towards fixed costs and then towards profits.
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advantages of break even
• It is simple to understand • It is very useful for motivational purposes • It ignores the politics of managing fixed costs if you have no control over them
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Card 2

Front

what does cvp profit examine?

Back

how costs and profit react to a change in the volume or level of activity, so that management can decide the ‘best’ activity level

Card 3

Front

contribution

Back

Preview of the front of card 3

Card 4

Front

breakeven point is when....

Back

Preview of the front of card 4

Card 5

Front

how to clac total cost

Back

Preview of the front of card 5
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