Accounting Test 2 Flashcards
What are variable costs?
Costs that are incurred for every unit of volum
Total variable costs change in direct or indirect proportion
Direct
Cost equation
Total variable costs(y)= Variable cost per unit of activity (v) * Volume of activity (x)
Fixed costs
Costs that do not change
Mixed costs
contain both variable and fixed components
Fixed costs are _____ proportional
inversely.
When volume increases then fixed cost per unit decreases
Key characteristics of variable costs
1) TOTAL variable costs change in DIRECT PROPORTION to changes in volume
2) The VARIABLE COST PER UNIT OF ACTIVITY(V) remains constant and is the slope of the variable cost line
3) Total variable cost graphs always begin at the origin
4) Total variable costs can be expressed as: y=vx where y=total variable cost, v=variable cost per unit, x=volume of activity
Key characteristics of fixed cots
1) TOTAL fixed costs stay CONSTANT over a wide range of volume
2) Fixed costs PER UNIT OF ACTIVITY vary INVERSELY with changes in volume:
- Fixed cost per unit of activity INCREASES when volume DECREASES
- Fixed cost per unit of activity DECREASES when volume INCREASES
3) Total fixed cost graphs are always flat lines with no slope that intersect the y-axis at a level equal to total fixed costs
4) Can be expressed as y=f
Total mixed costs increase as volume increases, but
NOT IN DIRECT PROPORTION TO CHANGES IN VOLUME.
Mixed costs per unit decrease as volume increases, but
NOT IN DIRECT PROPORTION TO CHANGES IN VOLUME
Key characteristics of mixed costs
1) TOTAL mixed costs increase as volume increases because of the variable cost component
2) Mixed costs PER UNIT decrease as volume increases because of the fixed cost component
3) Total mixed cost graphs slope upward but do NOT begin at the origin–they intersect the y-axis at the level of fixed costs
4) Total mixed costs can be expressed as a COMBINATION of the variable and fixed cost equations y=vx+f
High-low method
for determining cost behavior that is based on two historical data points; the highest and lowest volume of activity
How to find High-low
find highest and lowest VOLUME data points.
Rise over run.
Absorption costing
All manufacturing-related costs, whether fixed or variable, are absorbed into the cost of the product
Variable costing(contribution margin)
Only variable manufacturing costs are treated as inventoriable product costs
Contribution margin formula
Sales revenue-variable expenses=CM - Fixed expenses= Operating income
Absorption costing formula
Sales revenue-COGS=Gross profit -Operating expenses=Operating income
Contribution margin ratio
Unit contribution margin/sales price per unt
Contribution margin per unit
sales price per unit-variable cost per unit
Contribution margin ratio
Contribution margin/Sales revenue
Operating Income=
Sales revenue- Variable expenses- fixed expenses
Break even equation
Units in answer = units in denominator vs. sales in answer = ratio in denominator
Break even equation short cut
sales in units= fixed expenses+operating income /contribution margin per unit
sales in dollars= fixed expenses+operating income /contribution margin ratio
If the sales price goes down then…(B/E Point)
the unit contribution margin goes down then the volume needed to break even goes up
If the sales price goes up then…(B/E Point)
the unit contribution margin goes up and the volume needed to break even goes down
If the variable price goes up then…(B/E)
the unit contribution margin goes down then the volume needed to break even goes up
If the variable price goes down then…(B/E)
the unit contribution margin goes up and the volume needed to break even goes down
Break even is mix of products
(fixed expenses+operating income)/Weighted-average contribution margin per unit
Margin of safety in units=
expected sales in units-breakeven sales in units
Margin of safety in dollars=
Expected sales in dollars-breakeven sales in dollars
Margin of safety as a percentage
(margin of safety in units/dollars) / (expected sales in units/dollars)
Characteristics of High operating leverage
1) higer levels fixed costs and lower levels of variable costs
2) higher contribution margin ratios
3) For high operating leverage companies, changes in volume significantly affect operating income, so they face the following: Higher risk and higher potential for reward
Operating leverage factor=
contribution margin/operating income
Relevant costs
Expected future data, and differs among alternatives
Special orders
focus on relevant revenues, costs, and profits
use a contribution margin approach that separates variable costs from fixed costs
Price-takers
Product lacks uniqueness, heavy competition, pricing approach emphasizes target costing
Price-setters
Product is more unique, less competition, pricing approach emphasizes cost-plus pricing
Discontinue decisions
Does the product provide a positive contribution margin? Are there any fixed costs that can be avoided if we discontinue the product? Will discontinuing the product affect sales of the company’s other products? What could we do with the freed capacity?
