Chapter 3 Flashcards
What is CVP about
Decision making so that means comparing fixed vs variable costs
What is a variable cost
cost remains consistent on per unit basis
cost increases in total as units increase
what is a fixed cost?
a cost that remains constant in total
cost that decreases per unit as # of units sold increases
What is the operating income equation
OI = number of units sold X (Price/unit - VC/unit) - FC
what does changing the selling price per unit do
tests the price elasticity
- if you can change the price and the quantity sold increases then the change is a good idea
What are the variable costs in the CVP equations
- Direct Labor
- Direct Materials
3.VOH such as utilities, indirect materials and indirect labor - variable period costs (commisions)
what are the fixed costs in the CVP equation
Fixed period costs
Fixed Overhead such as rent or depreciation
what is the contribution margin
the price/unit - variable costs/unit
marginal benefit - marginal cost
how is contribution margin different from gross margin
gross margin includes fixed overhead components and excluded variable period costs
gross margin = price- cost/unit (all product costs)
contribution margin = price - vc/unit (all var. even period)
Why does financial reporting include fixed overhead/unit for gross margin purposes
- the matching principle (wants to match revenues with expenses)
- The going concern assumption (ex: if a company plans to be around in 10 years then the fixed OH becomes variable in nature
- Financial reporting is concerned with outside users (users want to know how much inventory is worth and companies don’t want outsiders knowing their variable costs)
what are CVP assumptions
- A linear demand curve (# of units sold doesn’t impact price per unit)
- Variable cost/unit doesn’t change with the # of units produced and sold
3, the fixed cost stays fixed within the # of units sold/produced (might change due to capacity issues)
how is VC unit different when using the CVP equation
The PDOH rate is not useful because OH is split and fixed OH is just considered a fixed cost
- Variable period costs are included
what are ways a company uses advertising may change the CVP equations
- it may advertise lower prices to increase quanity sold
- it may advertise luxury to justify high price
