Chapter 10 - Cost Volume Profit Analysis Flashcards
How do we treat fixed costs?
As a period cost and are charged in full in the period incurred.
How do we describe the marginal cost?
The extra cost to make and sell one more unit of product.
Why is marginal costing superior to absorption costing for decision making in organisations?
Because of the careful separation of fixed and variable costs.
How do you calculate Breakeven point in units?
Breakeven point in units = fixed costs / contribution per unit
What is the Breakeven point?
When you have no profit but no loss either
How do you calculate Breakeven point in revenue?
Breakeven point in revenue = Fixed costs / CS Ratio
How do you calculate C/S Ratio?
Contribution per unit / Selling price
OR
Total contribution / Total sales revenue
What does the CS ration represent?
How much contribution earned per $1 of sales
How do you calculate margin of safety in units?
Margin of safety units = Budgeted sales - breakeven sales
How do you describe margin of safety?
How much sales can decrease before loss occurs
How do you calculate margin of safety %?
Margin of safety % = (Budgeted sales - Breakeven sales) / Budgeted Sales
How do you calculate margin of safety in sales revenue?
Margin of safety in sales revenue = (Budgeted Sales - Breakeven sales) x Selling price
How do you calculate target profit units?
Target profit = (Fixed costs + Target profit) / Contribution per unit
What are the advantages of CVP analysis?
- Graphical representation can be easily understood by non-financial colleagues
- Profit/Loss at varying levels can be easily identified
- Margin of safety allows managers to review risk
What are the disadvantages of CVP analysis?
- Assume Fixed Costs remain constant in total and variable costs are the same per unit
- Assume sales price remains constant
- Assume production and sales are the same
- Ignores uncertainty estimates
