CHAP 6 Flashcards
(36 cards)
3 types of costs
fixed
variable
mixed
variable
Vary in proportion to changes in activity base
When the base is units produced, direct materials and labor costs are normally classified as variable costs
fixed
Remain the same in total dollar amount as the activity base changes
When the activity base is units produced, many FOH costs such as straight-line depreciation are classified as fixed costs
mixed
high low method total fixed costs
have characteristics of both a variable and a fixed cost
Using the variable cost per unit and the fixed costs, the total equipment maintenance cost can be computed for various levels of production
high low method
Cost estimation methods
Find the highest point in units produced and subtract the lowest amount (units produced and total cost)
Variable cost per unit: difference in total cost/difference in units produced
total fixed costs
Subtracting total variables cost from the total costs for units produced
Fixed cost=total costs- (variable cost per unit*units produced)
The fixed cost is the same at the highest and lowest levels of production
variable cost behavior
Total amount
-Increases and decreases proportionately w/ activity level
Per unit amount
-Remains the same regardless of activity level
fixed cost behavior
Total
-Remains the same regardless of activity level
Per unit amount
-Increases and decreases inversely with activity level
cost volume profit relationships
Examination of the relationships among selling prices, sales an production volume, costs, expenses, and profits
useful for managerial decision making
contribution margin
The excess of sales over variable costs
Covers fixed costs.
Once the fixed costs are covered, any additional contribution margin increases operating income
contribution margin formula
Contribution margin= sales-variable costs
contribution margin ratio
- sometimes called the profit-volume ratio,
- indicates the percentage of each sales dollar available to cover fixed costs and to provide operating income
- most useful when the increase or decrease in sales volume is measured in sales dollars. In this case, the change in sales dollars multiplied by the contribution margin ratio equals the change in operating income
contribution margin ratio formula
Contribution margin ratio= contribution margin/sales
change in operating income
Change in operating income= change in sales dollars*contribution margin ratio
unit contribution margin
Useful for analyzing the profit potential of proposed decisions
Most useful when the increase or decrease in sales volume is measured in sales units.
In this case, the change in the sales volume multiplied by the unit contribution margin equals the change in operating income
unit contribution margin formula
Unit contribution margin=sales per unit-variable cost per unit
break even point
Level of operations at which a company’s revenues and expenses are equal
At break-even, a company reports neither an operating income nor loss
break-even point formula
Break-even sales (units)=fixed costs/unit contribution margin
break-even in sales dollars
Can also be computed with contribution margin ratio
unit contribution margin/unit selling price
break-even in sales dollars formula
Break-even sales (dollars)= fixed costs/contribution margin ratio
Changes in fixed costs affect break-even point by
Increases in fixed costs increase break-even point
Decreases in fixed costs decrease break-even point
Changes in unit variable costs affect break-even point as
Increases in unit variable costs increase the break-even point Decreases in unit variable costs decrease the break-even point
Changes in the unit selling price affect the break-even point as
Increase in the unit selling price decrease break-even point
A decrease in the unit selling price increases the break-even point
target profit
Sales required to earn a target or desired amount of profit is determined by modifying the break-even equation
