BEC 2 Flashcards
What is the formula for the contribution approach?
Revenue Less: Variable Costs = Contribution margin Less: Fixed Costs = Net Income
What is the contribution margin ratio formula?
Contribution margin ratio = Contribution margin / Revenue
What is the absorption formula?
Revenue Less: Cost of goods sold = Gross margin Less: Operating expenses = Net income
Explain the difference between the contribution approach and the absorption approach.
The difference is the treatment of fixed overhead. Under the absorption approach, fixed overhead is a product cost. Under the contribution approach, fixed overhead is a period cost.
Explain the difference between absorption costing net income and variable costing net income.
The difference depends on the change in inventory level during the period.
No change in inventory: Absorption income = Variable income
Increase in inventory: Absorption income > Variable income
Decrease in inventory: Absorption income < Variable income
What is the formula for breakeven point in units?
(Total fixed costs) / (Contribution margin per unit) = Breakeven point in units
What is the formula for breakeven point in dollars?
(Total fixed costs) / (Contribution margin ratio) = Breakeven point in dollars
What is the margin of safety formula?
Total sales (in dollars) - Breakeven sales (in dollars) = Margin of safety (in dollars)
Define opportunity costs evaluated in considering an opportunity when the firm is operating at capacity.
Opportunity cost at full capacity is defined as the net benefit given up from the best alternative use of the capacity.
How should management approach a special order decision?
Special orders require a firm to decide if a specially priced order should be accepted to rejected. When there is excess capacity, a special order should be accepted if the selling price per unit is greater than the variable cost per unit. If the company is operating at full capacity, the opportunity cost of producing the special order should be included in the analysis.
How should management approach a make or buy decision?
The decision to make or buy a component (also referred to as insourcing vs. outsourcing) is similar to the special order decision. Managers should consider only relevant costs and select the lowest-cost alternative.
How should management approach a sell or process further decision?
A sell or process further decision is made by comparing the incremental cost and the incremental revenue generated after the split-off point.
- If the incremental revenue exceeds the incremental cost, the organization should process further.
- If the incremental cost exceeds the incremental revenue, the organization should sell at the split-off.
How should management approach a keep or drop decision?
When deciding whether to keep or drop a segment, a firm should compare the fixed cost that can be avoided if the segment is dropped (i.e., the cost of running the segment) to the contribution margin that will be lost if the segment is dropped.
The segment should be kept if the lost contribution margin exceeds avoided fixed costs and dropped if the lost contribution margin is less than avoided fixed costs.
What is linear regression?
Linear regression is a method for studying the relationship between two or more variables. Linear regression is used to predict the value of a dependent variable [e.g., total cost (y)] corresponding to given values of the independent variables [e.g., fixed costs (A), variable cost per unit (B), and production expressed in units (x)].
Simple regression involves only one independent variable.
Multiple regression involves more than one independent variable.
Define currently attainable standards.
Currentyl attainable standards represent costs that result from work performed by employees with appropriate training and experience but without extraordinary effort.
