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Notes For Week 2
Notes For Week 2
Under International Financial Reporting Standards (IFRS), the terms "costs" and
"expenses" are distinguished as follows:
Costs: These are the amounts incurred in the process of creating or acquiring
an asset. Costs are capitalized when they are expected to provide future
economic benefits to the entity. For example, the purchase price of inventory,
direct labor costs to manufacture a product, or the cost to acquire and install a
piece of equipment are all capitalized on the balance sheet as assets.
Expenses: These are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those relating to
distributions to equity participants. Expenses are recognized on the income
statement when the related economic benefits are consumed or expired, often
through the process of generating revenues. For example, costs of goods sold,
depreciation, and rent are recognized as expenses.
The main difference under IFRS is the point in time when a cost is recognized as an
expense. A cost is recognized as an expense when the related good or service is
consumed and contributes to the revenue-generating process, which is consistent
with the matching principle. If the cost is expected to provide future economic
benefit, it is treated as an asset until that benefit is realized.
1. Rate: A rate is a special type of ratio that compares two quantities of different
units, such as miles per hour (distance over time) or price per item (cost over
quantity). It expresses how much of one thing is observed or expected in
relation to another.
2. Ratio: A ratio is a comparison of two quantities of the same unit, showing how
much of one thing there is compared to another, like 2:3 or 2 to 3. Ratios do
not have units and simply show the relative sizes of the two quantities.
3. Percentage: A percentage is a ratio that compares a number to 100. It's a way
of expressing a part as a fraction of a whole where the whole is always 100. It
is denoted using the percent sign (%).
4. Proportion: Proportion refers to the fractional part of a whole. It’s similar to
percentage but doesn't necessarily relate to a fraction out of 100. It’s just one
part compared to the whole.
One is more detailed and foundational (equation), and the other is a shortcut
based on that foundation (formula).
Companies with low (high) fixed cost structures enjoy greater (lower)
stability in income across good and bad years (i.e. sales are high or low).
Why?
it's common for businesses with low fixed costs to have a higher proportion of
their total costs as variable, because variable costs are those that change with
production or sales volume. So, if fixed costs are low, any increase in
production or sales will lead to an increase in variable costs.
So, while companies with low fixed costs (e.g. consulting firm) can have higher
variable costs relative to their overall cost structure, it doesn't mean their
variable costs are high in absolute terms; it means that a larger percentage of
their total costs varies with sales volume.
Slide 6:
Before reaching the break-even point (where total CM equals fixed expenses),
every bicycle sold is contributing to covering fixed expenses. After reaching the
break-even point, every additional bicycle sold at the CM of $200 adds $200 to
the company's profit.
Slide 20:
Parallel means متوازي
Intersects means يتقاطع
Slide 33:
3129 sales, 756 VC, CM 2371
Slide 37:
Sales: 500*40=20,000
Variable costs: 300 per unit =300*40=12000
Slide 39:
Sales (500*580)– VC (310*580)
Sales 290,000 – VC 179,800 = CM 110,200
110,200-80,000= Profit 30,200
30,200-20,000= 10,200 increase in Profit
Slide 41:
Slide 43:
Sales commission becomes variable costs instead of fixed costs (not a period
costs because we categorising costs based on the behaviour of the costs to
the change in the level of activity)
Sales 500*575=Sales 287,500
VC (300+15)*575= VC 181,125
CM 287,500-181,125 = CM 106,375
FC 80,000 – 6000 (because part of FC becomes VC) = FC 74,000
Profit CM-FC=Profit 32,375
Slide 45:
500*150 = 75,000
Slide 67:
Unit sales to attain the target profit=Targeted profit +FC/CM per unit
= 2500+1300/(Price per unit (1.49) – VC (.36))
= 3,363 Cups
Slide 70:
CM ratio = CM (Sale 1.49*1300)-VC (0.36*1300)/(Sale 1.49*1300)
CM ratio = Sale 1937– VC 468 / Sale 1937
CM ratio = 0.758
Dollar sales to attain the target profit=Targeted profit +FC/CM Ratio
= 2500+1300/CM ratio 0.758
= 5,013 Dollar Sale
Slide 79:
Advantage: In good years, when sales are high, a company with a high fixed
cost structure will generally have higher income compared to companies with
a lower proportion of fixed costs. This is because once fixed costs are covered,
additional sales do not significantly increase total costs, leading to higher
profits.
Disadvantage: Conversely, in bad years, when sales are low, the income for a
company with a high fixed cost structure will be lower compared to
companies with a lower proportion of fixed costs. Since fixed costs must be
paid regardless of sales volume, low sales can quickly lead to losses as
revenues may not be sufficient to cover these fixed costs.
Slide 96:
How they calculated the last table? Based on percentages! 60% 40% and 45%
55% and 51.8% 48.2%