Cost-Volume Profit Analysis Ch. 18 – Flashcards

is the study of how specific costs respond to changes in the level of business activity. Some costs change; others remain the same. Helps management plan operations and decide between alternative courses of action. Applies to all types of businesses and entities. Starting point is measuring key business activities

Costs that vary in total directly and proportionately with changes in the activity level. Variable costs remain the same per unit at every level of activity. Graph begins at orgin y=vx

Costs that remain the same in total regardless of changes in the activity level. Per unit cost varies inversely with activity: As volume increases, unit cost declines, and vice versa Examples: Property taxes Insurance Rent Depreciation on buildings and equipment y=f

Costs that have both a variable cost element and a fixed cost element. Change in total but not proportionately with changes in activity level. y=vx+f

Mixed costs must be classified into their fixed and variable elements. High-Low Method uses the total costs incurred at both the high and the low levels of activity to classify mixed costs. The difference in costs between the high and low levels represents variable costs, since only variable costs change as activity levels change.

analysis is the study of the effects of changes of costs and volume on a company's profits. Important in profit planning Critical factor in management decisions as Setting selling prices, Determining product mix, and Maximizing use of production facilities.

A statement for internal use. Classifies costs and expenses as fixed or variable. Reports contribution margin in the body of the statement. Reports the same net income as a traditional income statement.

amount of revenue remaining after deducting variable costs. Contribution margin is available to cover fixed costs and to contribute to income.

Unit selling price- Unit variable costs

contribution margin per unit / Unit selling price ( % 40 of sales for every dollar increase in sales we 40cents in CM to cover fixed costs .

Process of finding the break-even point level of activity at which total revenues equal total costs (both fixed and variable). Can be computed or derived from a mathematical equation, by using contribution margin, or from a cost-volume profit (CVP) graph. Expressed either in sales units or in sales dollars

Fixed costs/ Contribution margin per unit

Fixed costs/ Contribution margin ratio

Level of sales necessary to achieve a specified income. Can be determined from each of the approaches used to determine break-even sales/units: from a mathematical equation, by using contribution margin, or from a cost-volume profit (CVP) graph. Expressed either in sales units or in sales dollars.

Required sales- variable costs- fixed cost

Fixed expenses+ Target net income/ contribution margin per unit

Fixed expenses+ Target net income/ contribution margin ratio

Difference between actual or expected sales and sales at the break-even point. Measures the "cushion" that management has if expected sales fail to materialize. May be expressed in dollars or as a ratio

actual sales- Break-even sales

Margin of safety in dollars / Actual(expected sales)

is the relative proportion of fixed versus variable costs that a company incurs. Higher fixed cost and lower variable costs= greater profits in good years and bad in bad years Lower fixed costs and Higher variable costs is more risky

measure of how sensitive net operating income is to a percentage change in sales -Extent that net income reacts to a given change in sales. -Higher fixed costs relative to variable costs cause a company to have higher operating leverage. -When sales revenues are increasing, high operating leverage means that profits will increase rapidly. -When sales revenues are declining, too much operating leverage can have devastating consequences.

Contribution margin/ Net income Provides a measure of a company's earnings volatility. Computed by dividing total contribution margin by net income.