CH2 Flashcards
What costs can you differentiate?
- Variable
- Fixed
- Mixed
- Step
Define the total cost equation
● Total cost equation = Total fixed costs + (variable costs per unit x number of units sold)
Name three methods of estimating fixed and variable cost components
● High-low method
● Scatter diagrams
● Least-squares regression analysis
Why is least-squares regression analysis the best method?
● Uses all data points
● Does not rely on subjective judgment
Name three cautions regarding cost estimation!
● Not all data based on normal operating conditions
● Nonlinear relationships may exist
● Results should make sense
Name three manufacturing costs and explain them roughly!
● Direct materials: Cost of converting raw materials to finished goods
● Direct labor: Wages from production
● Manufacturing overhead: All other costs
How do you do a high-low cost estimation and what is it?
What is the manufacturing cost hierarchy? Also name an example for each hierarchy!
● Unit level activities - Cost of raw materials
● Batch level activities - Cost of processing sales orders
● Product level activities - Cost of product development
● Facility level activities - Cost of factory supervisor
How do you calculate the profit?
● Profit = Total revenue - total costs —> PI = R - Y
How do you calculate the revenue?
● Revenue = Sales price per unit * number of units sold —> R = pX
How do you calculate the total costs for a time period?
● Total cost (equation) = Total fixed costs + (variable costs per unit x number of units sold) → Y = a+bX
What is the expanded profit formula?
● PI = pX - (a +bX)
What value does the profit have with the break even point and with a profit of 1500 CHF?
● PI = 0 for break even point
● PI = 1500 for profit of 1500 CHF
What is the break-even point?
● Total revenue = total costs
How do you calculate the contribution margin per unit?
● Contribution margin per unit = Sales price per unit - variable costs per unit
How do you calculate the contribution margin ratio?
● Contribution margin ratio = Contribution margin per unit/Sales price per unit = 1 - Percentage of sales for variable costs
How do you calculate the break-even unit sales volume?
● Break-even volume = Fixed costs/ (Sales price per unit - variable costs per unit) = fixed costs/Contribution margin per unit
How do you determine the before-tax profit?
● Before-tax profit = After-tax profit/(1-tax rate)
How do you calculate the margin of safety?
● Margin of safety = Actual units sold - break even volume
What does operating leverage and how to calculate it?
● Measures the degree to which an organization’s costs are fixed
● Degree of operating leverage = Contribution margin/income before tax
What does a high degree of operating leverage signal?
● A lot of fixed costs
What are direct costs
- Direct Materials
- Direct Labour
- Manufacturing Overhead
What are indirect costs
- Marketing and/or Selling Costs
- General and Administrative Costs
CVP Assumptions
- All costs are classified as fixed or variable.
- The total cost function is linear within the relevant
range. - The total revenue function is linear within the
relevant range. - The analysis is for a single product, or multiple
product, where the sales mix is constant. - There is only one activity cost driver: unit or dollar
sales volume.
CVP Analysis
Cost Volume Profit Analysis
Contribution Income Statement
internal decision making purposes
Costs are classifiedaccording to behavior
▪ Variable
▪ Fixed
Functional Income Statement
financial reporting purposes
Costs are classified according to function
▪ Manufacturing
▪ Selling and administrative
What are relevant and irrelevant costs? What are sunk costs (roughly)?
● Relevant: Future costs that differ among competing decision alternatives
● Irrelevant: Future costs that DO NOT differ among competing decision alternatives
● Sunk costs: Past costs
Explain product and period costs!
● Product costs: All production costs necessary to get products ready to sell
● Period costs: All costs other than product costs
