Flashcards in Chapter 21: Cost Volume Profit Analysis Deck (37):
What are the first steps in planning?
To predict the volume of activity, the costs to be incurred, sales to be made, and profit to be received.
What is cost-volume-profit?
Helps managers predict how changes in costs and sales levels affect income.
How is CVP computed?
By computing the sales level at which a company neither earns an income nor incurs a loss, called the break-even point. or sometimes called break-even analysis.
What kind of questions do CVP analysis answer?
What sales volume is needed to earn a target income?
Does a fixed cost remain unchanged in amount when the volume of activity varies from period to period within relevant range?
What is a variable cost?
Changes in proportion to changes in volume of activity. The variable cost per unit remains constant but the total amount of variable cost changes with the level of production. They include direct labor (if employees are paid per unit), sales commissions, shipping costs, and some overhead costs.
What is a mixed cost?
Includes both fixed and variable cost components.
Describe mixed costs in CVP analysis?
Mixed costs are often separated into fixed and variable components. The fixed component is added to other fixed costs, and the variable component is added to other variables costs.
What are scatter diagrams?
Display past cost and unit data in graphical form. Units are plotted on the horizontal axis and cost is plotted on the vertical axis. Each individual point on a scatter diagram reflects the cost and number of units for a prior period.
What is the high-low method?
Estimates the cost equation by graphically connecting the two cost amounts at the highest and lowest unit volumes.
How is the variable cost per unit determined?
As the change in cost divided by the change in units and uses the data from the high and low unit volumes. This results in a slope, or variable cost per unit.
How is fixed cost estimated?
By using knowledge that total cost equals fixed cost plus variable cost per unit x number of units.
Fixed Cost + (Variable cost x Units)
How are estimates from scatter diagrams seen?
Based on a visual fit of the cost line and are subject to interpretation.
How are estimates from the high-low method seen?
Use only two sets of values corresponding to the lowest and highest unit volumes.
How are estimates from least regression seen?
Use a statistical technique and all available data points.
What is contribution margin per unit?
The amount by which a product's unit selling price exceeds its total variable cost per unit. This excess amount contributes to covering fixed costs and generating profits on a per unit basis.
Sales price per unit - total variable cost per unit.
What is contribution margin ratio?
The percent of a unit's selling price that exceeds total unit variable cost, is also useful for business decisions. It can be interpreted as the percent of each sales dollar that remains after deducting the total unit variable cost.
Contribution margin per unit/sales price per unit
What is the break-even point?
The sales level at which a company neither earns a profit nor incurs a loss. It is applicable to nearly all organizations, activities, and events. Whether sales will at least cover total costs.
How can the break-even point be expressed?
In either units or dollars of sales.
What is the formula for break-even point in units?
Fixed costs/contribution margin per unit
What is the formula for break-even point in dollars?
Fixed costs/contribution margin ratio
What is a contribution margin income statement?
It differs from a conventional income statement, by separately classifying costs and expenses as variable or fixed. Also, it reports contribution margins (sales - variable costs). The contribution margin income statement format is used in this chapter's assignment materials because of its usefulness in CVP analysis.
What is margin of safety?
The excess of expected sales over the break-even sales level. The amount that sales can drop before the company incurs a loss. It can be expressed in units, dollars, or even as a percent of the predicted level of sales.
What is the formula for margin of safety?
Expected sales - break-even dales/expected sales
What is an important question that managers ask?
"What is the predicted income from a predicted level of sales?" To answer this, we look at four variables in CVP analysis. We use these relations to compute expected income from predicted sales and cost levels.
How is after-tax determined?
Management must apply the proper tax rate.
What is formula for dollar sales at target after-tax income?
Fixed costs + Target pretax income/Contribution margin ratio
What is the formula for unit sales at target after-tax income?
Fixed costs + Target pretax income/Contribution margin per unit
Does a fixed cost per unit decrease when volumes increases?
Example of a fixed cost?
Production supervisor's salary
Example of a mixed cost?
Sales rep's pay which includes salary plus commission.
Example of a variable cost?
Production line work's pay, which is an hourly wage.
When using the high-low method, the slope of the estimated line of cost behavior represents?
The variable cost per unit.
When preparing a scatter diagram, the estimated line of cost behavior crosses the vertical axis at the?
Amount of fixed costs.
Based on visual fit.
High-low method characteristic?
Uses only two sets of values and less precise because it uses the extreme points.