ACCT 410x – Chapter 19 Cost Volume Profit Analysis: Additional Issues – Flashcards
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classifies costs as variable or fixed and computes a contribution margin
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CVP Income Statement
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amount of revenue remaining after deducting variable costs
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Contribution Margin
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contribution margin divided by sales
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Contribution Margin Ratio
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fixed cost / contribution margin per unit = breakeven point in units fixed cost / contribution margin ratio = breakeven point in dollars
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Break-Even Point
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(fixed cost + target net income) / contribution margin per unit = required sales in units (fixed cost + target net income) / contribution margin ration = required sales in dollars
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Required Sales to Achieve Target Net Income
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actual (expected) sales - breakeven sales = margin of safety in dollars margin of safety in dollars / actual (expected) sales = margin of safety ratio
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Margin of Safety
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relative percentage in which a company sells its multiple products (EX: 80% shoes, 20% jeans)
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Sales Mix
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(unit contribution margin x sales mix percentage) + (unit contribution margin x sales mix percentage) = weighted average unit contribution margin
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Weighted-Average Unit Contribution Margin
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fixed costs / weighted average unit contribution margin = break even point in units
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Break-Even Sales for Mix of Two or More Products
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when a company has a large number of products
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When is it more useful to compute the break-even point in terms of sales dollars?
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multiply each division's contribution margin ratio by its percentage of total sales and then sum amounts
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Weighted Average Contribution Margin Ratio
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fixed costs / weighted average contribution margin ratio = break even point in dollars
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Break-Even Point in dollars
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relative proportion of fixed versus variable costs that company incurs; increase reliance on fixed costs increases company's risk
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Cost Structure
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extent to which a company's net income reacts to a given change in sales
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Operating Leverage
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measure of a company's earnings volatility and can be used to compare companies; contribution margin / net income = degree of operating leverage
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Degree of Operating Leverage
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full/absorption costing and variable costing
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What are the two approaches to Product Costing?
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all manufacturing costs are charged to product
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Full/Absorption Costing
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only direct materials, direct labor, and variable manufacturing overhead costs are treated as product costs; fixed manufacturing overhead costs are recognized as period costs when incurred
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Variable Costing
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under variable costing the fixed manufacturing overhead is charged as an expense in current period; absorption costing will show a higher net income number than variable costing whenever units produced exceed units sold because the cost of the ending inventory is higher under absorption costing than variable
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What is the difference between variable and absorption costing?
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income under absorption costing is higher than under variable costing
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Units produced exceed units sold - what are the effects on income from operations?
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income under absorption costing is lower than under variable costing
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Units produced are less than units sold - what are the effects on income from operations?
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income will be equal under both approaches
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Units produced are equal units sold - what are the effects on income from operations?
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management may be tempted to overproduce to increase net income; variable costing is often used internally to evaluate management decision making to avoid overproduction
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Problems with absorption costing?
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net income is unaffected by changes in production levels; consistent with CVP analysis; net income closely tied to changes in sales levels giving a more realistic assessment of a company's success or failure; presentation of fixed and variable cost components on variable costing income statement make it easier to identify costs and understand effect on business
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Advantages of variable costing?
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net income is unaffected by changes in production levels; consistent with CVP analysis; net income closely tied to changes in sales levels giving a more realistic assessment of a company's success or failure; presentation of fixed and variable cost components on variable costing income statement make it easier to identify costs and understand effect on business
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Advantages of variable costing?
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net income is unaffected by changes in production levels; consistent with CVP analysis; net income closely tied to changes in sales levels giving a more realistic assessment of a company's success or failure; presentation of fixed and variable cost components on variable costing income statement make it easier to identify costs and understand effect on business
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Advantages of variable costing?
