ACCA PM Chapter 9 - SHORT-TERM DECISION MAKING - Relevant Costing | Make or Buy decisions

Relevant Costing

Incremental Costs mean extra, or additional costs - Relevant Costs.

Opportunity Costs -The value of a benefit sacrificed / Lose Contribution / Losing Income - Relevant Costs.

Sunk Costs - Already spent money - Not Relevant Costs.

Committed Cost - Not yet pay but will have to pay whether we do the contract - Not Relevant Costs



Make or Buy decisions

Where resources are limited, the firm should concentrate on making those products that give the greatest saving (over buying in) per unit of the scarce resource.

1. Calculate Savings per unit if we make ourselves.
2. Define the measurement (kg) of material
3. Calculate Savings per material (kg). To determine which saves more by order.
4. Finally, Calculate,
• which and how many products should the company make?
• which and how many should it buy?

Source: https://opentuition.com/acca/pm/acca-performance-management-pm-lectures/ 

ACCA PM Chapter 9 - SHORT-TERM DECISION MAKING - Shutdown Problems

Shutdown Problems


Calculate the effect on current profit to decide whether or not to close part of the business:

Stop Product A:

• Lose Contribution: (15000)
• Save Fixed Costs:  5000

Do Product B:

• Extra Contribution: 20000
• Extra Fixed Costs: (6000)

Effect on Current Profit: +4000

In conclusion, we should stop Product A and do Product B.

Source: https://opentuition.com/acca/pm/short-term-decision-making-shutdown-problems-acca-performance-management-pm/

ACCA PM Chapter 8 - COST VOLUME PROFIT ANALYSIS

Breakeven

Breakeven volume = Fixed costs / Contribution per unit.

Margin of Safety

Margin of Safety = (Budgeted sales - breakeven) / Budgeted sales x 100%

Contribution to Sales ratio

C/S ration = Contribution in $ / Sales in $

Breakeven Chart

Profit-Volume chart

Multi-Product CVP analysis
A company may produce several products, each with different CS ratios. The company could reach the breakeven position sooner if it were to sell the product with the highest CS ratio first.

Limitations of CVP analysis

• The selling price per unit is assumed to remain constant at all levels of activity
• The variable cost per unit is assumed to remain constant at all levels of activity
• It is assumed that the total fixed costs remain constant
• It is assumed that the level of production is equal to the level of sales (o.e. that there are no changes in the levels of inventory)

Source: https://opentuition.com/acca/pm/acca-performance-management-pm-lectures/

ACCA PM Chapter 7 - PRICING - Pricing strategies

Pricing strategies

Penetration Pricing
Charge low prices to gain market share with the intention of increasing later. (Example: Chocolate)

Price Skimming
Charge high price at first, reduce over time. (High-Tech).

Product-Line Pricing
Different versions of the same product at different prices. (Example: Cars)

Complementary Products
Example: Razor; holder (Free) and blades (Expensive).

Price Discrimination
Sell the same product to different markets at different prices.
Examples:
Coffee: Europe $10; Africa $6
Bus Ticket: Adults $5; Children $2

Volume Discounting
Give discount for large quantities.

Source: https://opentuition.com/acca/pm/acca-performance-management-pm-lectures/

ACCA PM Chapter 7 - PRICING - Optimal pricing – equations

Price\Demad Equation

P = a - bQ
where,
P = Selling Price
Q= Quantity Demanded at that Price
a= Theoretical Maximum Price. (The demand will be zero)
b= the change in price required to change demand by 1 unit (Gradient)

Optimum Selling Price

Steps:

1. Establish the demand function; (find a and b); b = change in price/change in quantity
2. Establish the marginal cost; Fixed overheads are ignored as they are not part of the marginal cost.
3. Establish the marginal revenue function: MR = a - 2bQ; using MC = MR.
4. Solve the MR function the determine the optimum quantity, Q.
5. Insert the value of Q from Step 4 into the demand function determined in step 1 and calculate the optimum price.
6. Calculate profit; (Revenue - Variable costs - Fixed costs = Profit).

Source: https://opentuition.com/acca/pm/acca-performance-management-pm-lectures/

ACCA PM Chapter 7 - PRICING - Optimal pricing – tabular approach

Optimal pricing – tabular approach

- Sometimes it is worthwhile to reduce the selling price and sell more if this resulted in a higher total profit.

Price elasticity of demand (PED) =

 % change in demand
---------------------------
   % change in price

Source: https://opentuition.com/acca/pm/acca-performance-management-pm-lectures/