B2 Flashcards
Is the contribution approach GAAP?
No; it only treats variable overhead as a product cost; fixed overhead is seen as a period expense
Contribution Approach Formula
Revenue
CM
Net Income
Is the absorption approach GAAP?
Yes
The only difference between absorption approach and contribution approach?
- the treatment of fixed manufacturing overhead
* the difference will be in COGS
Quick way to calculate fixed manufacturing overhead left in inventory
- find the fixed overhead rate per unit
* multiply it by the number of units still sitting in EI
Production Greater than Sales vs. Sales Greater than Production
P>S = absorption costing will show a higher profit P<S = absorption costing will show lower profit since fixed overhead from prior period is now being expensed in addition
Tendency for managers using the absorption costing
*stockpile inventory
Total sales dollars at the BEP
= (total fixed costs)/(CM ratio)
BEP in units
= (total fixed costs)/(CM per unit)
Amount of profit following the break-even point
= units sold multiplied by the contribution margin
Margin of Safety
excess sales over breakeven sales
- expressed as a dollar or a percentage
- *(Margin of Safety $)/(Total sales)
Target Cost =
Market Price - required profit
Implications of Target Costing
- compromised quality in order to achieve cost level
2. increased marketing and downstream costs
Relevant Costs
- change as a result of selecting different alternatives
* incremental costs always change
Are opportunity costs relevant costs?
Yes
Are controllable costs relevant costs?
Yes
Are marginal costs relevant costs?
Yes
Special Order Decisions
*accept if rev > relevant costs
- Excess capacity
- *SP > VC
- Full capacity
- *SP > VC + opportunity cost
- OPPORTUNITY COST = CONTRIBUTION MARGIN
- (CM in $)/size of special order
Make vs. Buy
Relevant costs to make < cost to buy = make
Sell or Process Further
if incremental revenue > incremental cost = process further
- joint costs are ignored
- separable costs = relevant
Keep or Drop a Segment
- keep the segment if the lost contribution margin exceeds avoided fixed costs
- drop the segment if the lost contribution margin is less than avoided fixed costs
*CONSIDER THE NONFINANCIAL IMPACT!!!
Sensitivity Analysis
(delta TC)/(delta volume)
Linear Regression Formula
y = A + Bx
y = TC A = FC B = VC/unit
Coefficient of Correlation vs. Coefficient of Determination
Correlation: -1;0;1 (strength of linear relationship)
Determination: 0;1 (how much of a change in y can be explained by a change in x)