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Fixed cost per unit in full absorption
(Current fixed MOH+ fixed MOH allocated to previous ivt)/units produced in current period
If production>sales, difference in NI is
Fixed cost per unit in full absorption*difference in units sold and produced
If production>sales, compare the full absorption costing and variable costing and explain
- Ending ivt increase, Variable costing over-count the costs that remains at ending iv t
- gives more cost and lower profit
If sales>production, compare the full absorption costing and variable costing and explain
- Ending ivt decrease, Variable costing neglects the costs that is taken from end ivt
- gives lower cost and higher profit
If sales>production, difference in NI is
fixed MOH allocated to previous ivt
negative consequences of special order
- customers demanding the same reduced price that was given to the “special” order
- If the company has limited production capacity, filling the special-order may create opportunity costs including lost revenue from regular sales, back-orders
Difference between excess capacity and full capacity
- If a company has excess capacity, increasing production will only increase the costs that vary with production.
- If a company is at capacity, production cannot be increased without incurring additional fixed costs.
- An avoidable cost is one that can be avoided by selecting a particular decision alternative.
- It is a relevant cost because it will differ between decision alternatives
Potential problems and solutions involved with outsourcing
Opportunity costs of keeping
revenue given up if the product is dropped
revenue from another product that could be produced if the item were dropped
Given a bottleneck, why should be focus on CM per constrained resource when prioritizing
fixed costs do not change in the short-run
using CVP graph, what will lower breakeven point
- increasing price-steeper revenue line
- lowering variable cost-flatter cost line
- lower fixed cost-shift up cost line
why is a company with a high proportion of fixed costs more vulnerable
- fixed costs are committed and don’t change when activity decreases.
- Variable costs can be matched up much more closely with changes in demand.
- When demand decreases, the company can reduce variable costs by reducing the purchase of raw materials, scaling back on direct labor, reducing utility consumption
To what firms is margin of safety important?
- businesses with heavy competition or demand fluctuations.
Why is a company with a high degree of operating leverage more risky
experience larger swings in profit as a result of changes in sales revenue
A sales mix shift to a product with lower contribution margin per unit will cause
- weighted-average contribution margin to decrease
- thus a higher breakeven
negative consequence of dropping a product line
- employee morale
- customer loyalty
- adversely affect complementary goods of the dropped product
a firm’s relevant range equals its
whether earning a certain level of profit is possible depends on
degree of operating leverage increases if
rely more on fixed cost
degree of operating leverage: in very large production and at breakeven
- approach 1
- approach infinity
fixed across a range of activity, then increase in a step-like fashion when a capacity constraint is reached.
When activity level decreases, per units cost(F, V, M) behaves as follows
- Fixed cost per unit increase.
- Variable cost per unit remains the same.
- Mixed cost per unit increases.
- if the linear assumption is valid
- any unusual patterns in the data, such as outliers.
- information about the appropriateness of the relevant range that has been set
difference between Full absorption costing and Variable costing
- Full absorption: requires that all manufacturing costs be treated as product cost, which means that fixed manufacturing overhead cost will be included in either cost of goods sold or inventory, depending on whether the product has been sold.
- Variable costing: expense all cost as incurred
Implication on cost structure for seasonal business
Fixed cost constitutes large proportion of total cost during low seasons