Chapter 5 Flashcards
costs that increase or decrease in total in direct porprtion to increases or decreases in the volume of activity
variable cost
Cost that do not change in total over wide ranges of volume
fixed cost
cost that have both fixed and variable components are called
mixed cost
A method of separating mixed and variable cost that requires you to identify the highest and lowest levels of activity over a period of time
high low method
First step in high low
- Identify the highest and lowest levels of activity and calculate the variable cost per unit. (High - low cost) divided by (high - low volume)
Second step in high low method
Calculate the total fixed cost. total mixed cost -(variable cost per unit * number of units)
Third step in high low
Create a formula. Total mixed cost = (variable cost per unit * number of units) + total fixed cost
A statistical method used to estimate relationships between a dependent variable and one or more independent variables
Regression analysis
The range of volume where total fixed costs remain constant and the variable cost per unit remains constant
relevant range
Cost that remains constant in ranges of activity and increases as ranges of activity increase
step cost
The amount that contributes to covering the fixed costs and then to providing operating income
Total Contribution margin = net sales revenue - variable cost
Contribution margin by individual unit
Unit contribution margin = Net sales rev per unit - variable cost per unit
The ratio of contribution margin to net sales revenue.
Contribution margin ratio = contribution margin / net sales revenue
An income statement the classifies cost by behavior (i.e. fixed or variable)
Contribution margin income statment
A planning tool that looks at the relationships among costs and volume and how they affect profits
Cost-volume-profit analysis (CVP)
What is the equation for CVP
Net sales - total costs = operating income
What is the equation for contribution approach to CVP
= (fixed cost +target margin)/contribution margin per unit
What is the contribution margin ratio approach to CVP
Determines break-even in terms of dollars rather than units. (fixed cost + target profit)/ contribution margin ratio
the operating income that results when net sales revenue minus variable and fixed costs equals managements profit goal
target profit
A what if technique that estimates profit or loss results if sales price, costs, volume, or underlying assumptions change.
Sensitivity analysis
Excess of expected sales over breakeven sales
Margin of safety
The proportion of fixed costs to variable costs
cost structure
Effects that fixed costs have on changes in operating income when sales volume changes
operating leverage
The ratio that measures the effects of fixed cost have on changes in operating income when sale
degree of operating leverage = contribution margin/operating income
The combination of products that make up total sales.
Sales mix
