Chapter 4: Cost-Volume-Profit Analysis Flashcards
Variable costs:
Costs incurred for every unit of activity. As a result, total variable costs change in direct proportion to changes in volume.
Fixed costs:
Costs that remain constant in total despite wide changes in volume.
Budget:
The quantitative expression of a plan.
What are the 3 types of costs?
- Variable Costs
- Fixed Costs
- Mixed Costs
Volume of activity:
The measure/degree of a business’ activity or action that affects costs
(e.g. number of units sold/produced, miles driven, phone calls placed)
Total Contribution Margin:
The amount that contributes to
- covering the fixed costs and then to
- providing operating income / profit.
Contribution Margin per Unit:
The amount that contributes to covering the fixed costs and then to providing operating margin/profit per unit
Contribution Margin Ratio:
The ratio of Contribution Margin to Net Sales Revenue
Cost-Volume-Profit Analysis:
A management tool that expresses the relationship among costs, volume, and prices and their effects on profit and losses.
What does CVP mean?
Cost-Volume-Profit analysis
Cost stickiness
The asymmetrical change in costs when there is a decrease in the volume of activity
Operating Leverage:
Predicts the effects that fixed costs have on changes in operating income when sales volume changes.
Degree of Operating Leverage (DOL):
The ratio that measures the effects that fixed costs have on changes in operating income when sales volume changes.
Degree of Operating Leverage =
Ontribution Margin / Operating income
