03 CVP-BEP Flashcards
Refers to how a cost will react to changes in the level of activity
Cost behavior
Most common cost behaviors
Variable
Fixed
Mixed
Cost that varies in total in direct proportion to the changes in the level of activity
Variable Cost
Variable cost per unit is always constant (T/F)
False - only in relevant range
Total fixed cost is always constant (T/F)
F - only in relevant range
Fixed cost per unit has a/an __________ relationship with number of units produced.
inverse
Fixed cost that is constant at a given level or period but significantly increases beyond that level or period
Step Fixed Cost
Method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit
CVP Analysis
Assumptions and limitations of CVP Analysis
- all costs are classifiable as either fixed or variable
- fixed costs remain constant within relevant range
- behavior of total revenues and total costs will be linear over the relevant range
- in case of multiple product companies, the selling prices, costs and sales mix sold will not change
- there is no significant change in the inventory level during the period under review
Factors affecting profit
Refers to band of activity within which cost behavior patterns are linear/valid
Relevant Range Assumption
Point where there is not profit nor loss
Breakeven
Cost behavior patterns are true only over a specified period of time
Time Assumption
How do you compute for breakeven in units?
Fixed Cost / CM per unit
How do you compute for breakeven in pesos?
Fixed Cost / CM ratio
Contribution margin at breakeven point is equal to ____________.
Fixed Cost
Contribution margin at margin of safety is equal to ____________.
Profit
Financial model that determines how output variables are affected by changes in input variables.
Sensitivity Analysis
Formula for cost indifference point
Differential Fixed Cost / Differential Variable Cost per Unit
Differentiate sensitivity and scenario analysis.
Sensitivity - one input is changed
Scenario - multiple inputs are changed
Level of volume at which total revenues, total costs and hence profits are the same under both cost structures
Indifference point
Assumptions for mix break-even
- Proportion of sales mix must be determined
- Sales mix is constant within relevant time period
Amount by which sales can be reduced without incurring a loss
Margin of safety
Measures how sensitive net operating income is to a given percentage change in sales
Degree of Operating Leverage
Formula of DOL
for 1 year: Total Contribution Margin / Operating Profit
for 2 yearPercentage in Profit / Percentage Change in Sales
