B4-M2 Projection and Forecasting Techniques 2

Question 1

what is absorption costing?

Answer 1

absorption costing absorbs fixed OH cost into the units produced. Those units placed in inventory can absorb some of the manager’s cost and raise profits. This method encourages larger inventories

It includes DM, DL, and all OH as inventorial costs

Question 2

what does breakeven analysis assumes?

Answer 2

Breakeven analysis assumes that all variable costs and revenues are constant on a per-unit basis and are linear over a relevant range. Fixed costs in total are constant

Question 3

what is cost-volume-profit (CVP) analysis?

Answer 3

CVP is used to forecast profits at different levels of sales and production volume. It is synonymous with breakeven analysis

• Only total variable costs are directly proportional to volume over the relevant range

Question 4

what is contribution margin?

Answer 4

CM = sales - total variable costs

sale price = total variable cost / (1 - CM %)

Question 5

what is gross margin formula?

Answer 5

Sales - COGS

The contribution margin ratio multiplied by the sales dollars yields the contribution margin. Since sales are assumed to be the same in each case, the highest ratio indicates the most profitable product

Question 6

which costing method will yield the lowest inventory value?

Answer 6

Variable costing produces the lowest inventory values since only variable costs are capitalized. Other methods will account for fixed costs in inventory and result in greater values than variable costing

Question 7

what is the difference between variable and absorption costing?

Answer 7

the difference is the manner in which fixed manufacturing costs are treated. Under variable costing, only variable costs are included in inventory. Hence, an increase in inventory indicates that a portion of the fixed costs associated with inventory under absorption costing are expensed under variable costing

Question 8

what is break even formula?

Answer 8

Selling price x units = fixed costs + units x (variable cost (DL + DM))

Total fixed costs / Contribution margin per unit

Breakeven point in dollars = Total fixed costs / Contribution margin ratio

Question 9

what is the formula to calculate sale volume for a target profit?

Answer 9

sales (units) = (fixed costs + pretax profit) / CM per unit

Question 10

what is rate of return formula?

Answer 10

EBIT / sales

Question 11

what is margin of safety?

Answer 11

It is the excess over break even sales