Chapter 4 Flashcards
What are mixed costs?
Combo of variable and fixed costs (ex is salesperson with base salary plus commission)
What are 2 types of fixed cost?
Discretionary (mgmt can easily change) vs committed (mgmt can’t easily change)
What are step costs?
Costs that are fixed for a specific range (increases to higher level when upper bound of range is exceeded)
Ex is company adding a 3rd production shift
What are the typical cost estimation methods?
Account analysis (mgmt classifies fixed and variable costs………variable cost per unit and total fixed costs)
Scatter graphs (uses cost info from past periods to plot costs at specific activity levels)
High low method (uses cost info from past periods to connect straight line from lowest to highest activity level……..variable cost equals slope of the line, fixed cost is intercept of cost axis)
Regression analysis (estimates slope and intercept of a cost equation)
What is the profit equation?
Profit = sales price (x) - variable cost (x) - total fixed cost
And
Profit = (profit + total fixed cost) / contribution margin ratio
What is the margin of safety?
Difference between expected sales and break even sales
Projected / current sales - BEP sales level
What is the break even point?
Point where company doesn’t make a profit or a loss
X = (profit [$0] + TFC) / contribution margin per unit (sp - VC)
What is the contribution margin?
Difference between selling price and VC per unit
What is the contribution margin ratio?
Contribution of every sales dollar to covering fixed cost
CM Ratio = (SP - VC) / SP
What is the profit equation utilizing the contribution margin ratio?
Sales = (Profit + TFC) / CM Ratio
What is the break even point in units?
BEP in units = FC / Contribution Margin
What is operating leverage?
Measure of how revenue growth translates into growth in operating income (measures how volatile a company’s operating income is)
Operating leverage = CM / Profit
