Chapter 5: Cost-Volume-Profit

Question 1

Activity Index

Answer 1

• Buisness Activity selected is called activity index
• Should show a high correlation with cost!!!
• Identifies the activity that causes changes in the behavior of costs
• Allows costs to be classified as variable, fixed or mixed

Question 2

Variable Costs

Answer 2

• Costs that vary in total directly and proporionately with changes in the activity level
• Remain the same per Unit at every level of activity

Question 3

Fixed Cost

Answer 3

• Costs that remain the same in total regardless of changes in the activity level within a relevant range
• Fixed cost per Unit cost varies inversely with activity: As volume increases, unit cost declines and vice versa

Question 4

Relevant Range

Answer 4

Range = “Auslastung”

Relevant Range = “Normalauslastung”

• Range of activity over which a company expects to operate during a year
• Generally, a STRAIGHT LINE exist in the relevant range for both variable and fixed cost

Question 5

Mixed Costs

Answer 5

• Costs that have both a variable element and a fixed element
• Change in total but not proportionately with changes in activity level
• For the purpose of the CVP analysis, mixed cost must be classified into their fixed and variable elements -> HIGH-LOW METHOD

Question 6

HIGH-LOW Method

Answer 6

• Used to disaggregate mixed cost into fixed and variable cost
• Estimate Method

Question 7

Maintenance Cost

Answer 7

Total Cost

= Fixed Cost + Variable Cost*Activity Level

Question 8

Cost-Volume-Profit (CVP) Analysis

Answer 8

• Is the study of the effects of changes in costs and volume on a company’s profit
• 5 Components:

1. Volume or Level of activity
2. Unit selling prices
3. Variable Cost per Unit
4. Total fixed Costs
5. Sales mix

Question 9

CVP Income Statement

Answer 9

• A statement for internal users
• Classifies Costs and expenses as fixed of variable
• Reports Contribution Margin in the statement

Question 10

Contribution Margin

Answer 10

“Deckungsbeitrag”

• Amount of revenue remaining after deducting variable costs
• Amount remaining to contribute to fixed cost AND to contribute to net income

Sales Revenue

• Variable Cost

= Contribution Margin

• Fixed Cost

= Net Income

Question 11

Break Even Analysis

Answer 11

• Process of finding the break-even point level of acitvity at which total revenues equal total costs (both fixed and variabel)
• 3 Methoden:
  
  • Mathematical equation
  • By using Contribution Margin
  • Graph

Question 12

Target Net Income

Answer 12

• Level of sales necessary to achieve a specified income
• Expressed either in sales unit or in sales dollars
• 3 Methoden:
  
  • mathematical equation
  • by using Contribution Margin
  • Graph

Question 13

Margin of Safety

Answer 13

• Difference between actual or expected sales and sales at the break even point
• Measures the “cushion” that a particular level of sales provides
  
  • Tells us how far sales can drop before the company will operating at a loss

Question 14

Cost Behavior Analysis

Answer 14

What happens to our cost if we increase/decrease our buisness acitivty