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Chapter 7.3: Finance Analysis (Finance Terms (Types of Inventory (Direct…
Chapter 7.3: Finance Analysis
Finance Terms
Cost Drivers
Level of activity which causes the variable costs to change
Fixed Costs
a constant cost whatever the amount of goods produced
Variable Costs
a cost that varies with the level of output.
Manufacturing
purchase materials and convert them into finished goods
manufacturing companies: develop, design, market and distribute its products
Merchandising companies
they purchase and sell without changing the initial product
Service Companies
provide services to customers
Types of Inventory
Direct Materials Inventory
Work in Process Inventory
Finished Goods Inventory
For Merchandizing sector, only for basic form of purchased products
Service-sector companies, no inventories
Cost-Volume-Profit (CVP) Analysis
the study of the effects of sales, cost and net income
Break-Even Point
Where revenue = expenses (NET INCOME IS ZERO)
Sunk Cost
A cost already occurred and is irrelevant to the decision making process
Ratio Analysis
The relationship between selected financial data like percentages, rates, or proportions
Finance Formulas & Calculations
Total Cost
Total Cost (Y) = F (Fixed Cost) + Variable Cost (Vx)
Contribution Margin
The difference between the revenue and variable costs
Contribution Margin (CM) = Selling Price (SP) - Variable Costs (VC)
Gross Margin = SP - Cost of Goods Sold
Contribution Margin (CM) = SP - (Acquisition Cost of Unit Sold + Variable Commission)
Net Income = Total CM - FC
Break-Even
Break-Even (Units) = No. of Units x Selling Price (SP)
Break-Even (Sales) = Fixed Costs/CM Percentage
Break-Even (N) = [Sales(N) - VC(N) - FC = Net Income (NI)]
Break-Even (Units) = Fixed Costs/ Unit Contribution Margin
Required Sales = (Fixed Costs + Target Profit)/ Contribution Margin Ratio
Target Net Profit
Target Net Income = Target Sales (TS) - VC - FC
Target Sales Volume (Units) = (FC + Target Net Income)/ CM (unit)
Target Sales Volume (Dollars) = SP x Sales Volume in Units
Target Sales Volume (Dollars) = (FC + TNI)/ CM (%)
Make or Buy Decisions
A strategic choice to produce an item internally ( in-house) or buying it externally (outside supplier).
Classification of Manufacturing Costs
Direct Materials Costs
Direct Manufacturing Labor Costs
Indirect Manufacturing Costs