ACCT1101 Lecture Two

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ACCT1101 Lecture Two
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2010-09-10 00:00:29
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Study for mid-sem exam
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  1. What is a business plan?
    "An evolving report that describes a compaies goals and its current plans for acheiving those goals"
  2. Who uses a business plan?
    • Internal users - management (build and use)
    • Some external users - eg bank
  3. What is included in a business plan?
    • company description
    • marketing plan
    • description of operations
    • financial plan
  4. Why is planning important?
    • reduces uncertainty by defining goals (decrease risk of failure)
    • helps identify scope of operations and interrelate sections of the business (departments can cooperate and share resources)
    • serves as a benchmark (evaluate business performance)
    • used to obtain financing (bank loans, government grants)
    • evaluate and identify risk and potential return
  5. Business Plan Structure: Company description
    • how the business is organised
    • location
    • objectives
    • products/services
    • target customers - current and potential
  6. Business Plan Structure: Marketing Plan
    • evidence of demand
    • market research
    • strategy
  7. Business Plan Strategy: Operating Plan
    • how will the business develop and enhance products
    • relationships with suppliers and customers
  8. Business Plan Strategy: Financial Plan
    • identify capital requirements
    • sources of capital
    • projected financial performance
    • support with CVP analysis
  9. What is Cost-Volume-Profit analysis?
    • It shows how profit is affected by:
    • changes in sales volume (activity level)
    • selling prices of products
    • various costs of the company (fixed and variable)
  10. What is the purpose of CVP analysis?
    "To help managers predict the outcomes of decisions they make on profit" (good/bad? how to maintain or improve profit)
  11. Assumptions of CVP analysis: (4)
    • All costs can be divided into fixed costs and variable costs
    • Fixed costs remain the same regardless of activity levels
    • Variable costs can vary with activity level, but are constant per unit of output
    • Efficiency and productivity remain the same
  12. What is cost behaviour?
    "The behaviour of cost in response to specified drivers (eg volume of sales) for a time period"
  13. Cost behaviour: Fixed Costs
    • - TFC remains constant with changes in sales volume
    • - Unit cost changes

    eg. TFC = $1million if only sell one unit, unit cost = $1million if sell 2 units, unit cost = $500,000 etc
  14. Cost behaviour: Variable Cost
    • - VC changes in propertion to sales volume change
    • - Unit cost reamains constant

    • eg. variable cost per unit = $1 if 10 units sold, V = $10 if 20 units sold, V = $20
    • (V = total variable cost, vc = variable cost per unit)
  15. Cost behaviour: Total Costs
    Sum of the fixed costs and variable costs at the same volume

    TC = FC + V = FC + (vc*n)
  16. Issues re: Cost behaviour (8)
    • cost behaviours are specific to the situation (could be fixed or variable depending)
    • estimation = inaccuracies
    • need to remember relevant range
    • prices change for inputs and outputs
    • advancement of technology - adapt
    • cost drivers change
    • need to predict using info sytems to avoid human error
    • enhance reliability by using large observations/data
  17. How do you calculate Net Profit?
    Net Profit = Revenues - Expenses
  18. What is the Contribution Margin?
    "How much of the selling price will contribute towards covering fixed costs"
  19. Total contribution margin = ?
    TCM = R - V
  20. Unit contribution margin = ?
    UCM = p - vc
  21. Contribution margin ratio = ?
    CMR = TCM / Sales

    OR

    CMR = UCM / p
  22. What is the breakeven point?
    • where there is no profit and no loss
    • when the company earns back what it has initially paid
    • when total sales = total costs (R = TC)
  23. What are the conditions of the breakeven point? (3)
    • R = TC = FC + V
    • R - TC = $0
    • CM = FC
  24. What are the three CVP methods to calculate the breakeven point?
    • Graphical (Profit graph and CVP graph)
    • (Profit) Equation Method
    • Contribution Margin Method
  25. CVP Methods: Graphical (Profit Graph) - 4 steps
    • 1. FC line
    • 2. V line
    • 3. TC line
    • 4. Sales line (rate x volume)
  26. CVP Methods: Graphical (CVP Chart) - 2 steps
    • 1. FC line
    • 2. CM line
  27. CVP Methods: Profit eqaution method - what is the equation?
    q(BEP) = FC / (p - vc)

    • explanation:
    • q = (FC + Profit) / (p - vc)
    • at BEP, Profit =0
  28. CVP Methods: Contributin Margin method
    How do you calculate the BEP in units, sales, and with target profit?
    units: BEP(q) = FC / UCM where UCM = p - vc

    sales: BEP($) FC / CMR where CMR = TCM / sales or UCM / p

    target profit: target(q) = (FC + target Profit) / UCM
  29. What is a margin of safety?
    "The amount by which sales can fall before incurring a loss and can therefore measure the risk associated with business operations"
  30. How do you calculate the margin of safety? (2)
    MOS = sales ($) - BEP($)

    MOS ratio = MOS ($) / Total Sales ($)
  31. What is operating leverage?
    "A measure of the realtionship between profit and cost behaviour"

    "The use of FC to increase profit as sales increase"

    (higher operating leverage = higher risk and higher potential profits)
  32. How do you calculate operating leverage?
    Operating leverage = FC / TC

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