Chapter 5: Cost-Volume-Profit Flashcards Preview

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Flashcards in Chapter 5: Cost-Volume-Profit Deck (14):

Activity Index

  • Buisness Activity selected is called activity index
  • Should show a high correlation with cost!!!
  • Identifies the activity that causes changes in the behavior of costs
  • Allows costs to be classified as variable, fixed or mixed 


Variable Costs

  • Costs that vary in total directly and proporionately with changes in the activity level
  • Remain the same per Unit at every level of activity


Fixed Cost 

  • Costs that remain the same in total regardless of changes in the activity level within a relevant range 
  • Fixed cost per Unit cost varies inversely with activity: As volume increases, unit cost declines and vice versa 


Relevant Range 

Range = "Auslastung" 

Relevant Range = "Normalauslastung"

  • Range of activity over which a company expects to operate during a year 
  • Generally, a STRAIGHT LINE exist in the relevant range for both variable and fixed cost 


Mixed Costs

  • Costs that have both a variable element and a fixed element
  • Change in total but not proportionately with changes in activity level 
  • For the purpose of the CVP analysis, mixed cost must be classified into their fixed and variable elements -> HIGH-LOW METHOD 



  • Used to disaggregate mixed cost into fixed and variable cost  
  • Estimate Method


Maintenance Cost

Total Cost 

= Fixed Cost + Variable Cost*Activity Level 


Cost-Volume-Profit (CVP) Analysis 

  • Is the study of the effects of changes in costs and volume on a company's profit
  • 5 Components: 
  1. Volume or Level of activity 
  2. Unit selling prices 
  3. Variable Cost per Unit 
  4. Total fixed Costs
  5. Sales mix 


CVP Income Statement

  • A statement for internal users
  • Classifies Costs and expenses as fixed of variable 
  • Reports Contribution Margin in the statement


Contribution Margin 


  • Amount of revenue remaining after deducting variable costs 
  • Amount remaining to contribute to fixed cost AND to contribute to net income 


Sales Revenue 

- Variable Cost 

= Contribution Margin 

- Fixed Cost 

= Net Income 


Break Even Analysis

  • Process of finding the break-even point level of acitvity at which total revenues equal total costs (both fixed and variabel)
  • 3 Methoden:
    • Mathematical equation
    • By using Contribution Margin 
    • Graph


Target Net Income

  • Level of sales necessary to achieve a specified income 
  • Expressed either in sales unit or in sales dollars
  • 3 Methoden:
    • mathematical equation
    • by using Contribution Margin 
    • Graph 


Margin of Safety

  • Difference between actual or expected sales and sales at the break even point
  • Measures the "cushion" that a particular level of sales provides 
    • Tells us how far sales can drop before the company will operating at a loss


Cost Behavior Analysis

What happens to our cost if we increase/decrease our buisness acitivty