chapter 6: CM income statement Flashcards
what are product costs for a merchandising business
inventory costs (COGS): total inventory costs
what are period costs for a merchandising business
operating costs (OPEX)
what are product costs for a service business
Cost of sales (COS):
Costs critical to delivering the service
what are product costs for a manufacturing business
Manufacturing costs (COGS):
Direct Labour
Direct Materials
Manufacturing Overhead
what are period costs for a manufacturing business
Non-manufacturing costs (OPEX)
what are period costs for a service business
Operating costs (OPEX)
which of merchandising product costs are variable and fixed
Inventory costs (COGS):
Total inventory costs - variable
which of merchandising period costs are variable and fixed
Operating costs (OPEX)
Variable OPEX
Fixed OPEX
which of manufacturing product costs are variable and fixed
Manufacturing costs (COGS):
Direct Labour - variable
Direct Materials - variable
Manufacturing Overhead
Variable manufacturing overhead
Fixed manufacturing overhead
which of manufacturing period costs are variable and fixed
Non-manufacturing costs (OPEX)
Variable OPEX
Fixed OPEX
which of service product costs are variable and fixed
Cost of sales (COS):
Variable COS
Fixed COS
which of service period costs are variable and fixed
Operating costs (OPEX)
Variable OPEX
Fixed OPEX
what should be the same in a GM and a CM income statement
total operating expenses
operating income line (EBIT)
what is the formula for variable and fixed costs
Total operating costs = variable costs + fixed costs
what are variable costs
Total costs varies based on amount sold, but cost per good does not change
All variable costs have this type of behaviour
what is mixed costs
- A combination of variable and fixed costs
- Total mixed cost is dependent on the proportion of variable to fixed cost
- Per unit mixed cost is also dependent on the proportion of variable to fixed cost
what are fixed costs
- Costs that remain constant, in total, regardless of the amount of goods/services produced/sold
- Total costs do not change (within relevant range), but affect the fixed cost per unit
what is relevant range
- The span of activity within which assumptions about cost behaviour hold true
- fixed cost will remain the same for only a certain volume of items
- At some point, the fixed costs will have to increase to support the increasing level of activity
what formula can mixed cost behaviour be expressed as
y = mx + b
y = total mixed cost
m = variable cost per unit of activity / slope of the line
x = units of activity
b = total fixed cost / vertical intercept
Formula for the cost model
what is the high-low method
- A method to determine how much of a mixed cost is variable vs. fixed, given limited data points
- Separates fixed and variable cost components in a mixed cost by comparing the total cost at the highest level of activity to the total cost at the lowest level of activity
what are the high-low method steps
- Among the data points available, identify the periods of highest and lowest levels of activity
- Using the levels, calculate variable cost per unit of activity (Δ cost ÷ Δ activity)
- Choose either level of activity (highest or lowest) and plug the information in the formula to solve for “b” (fixed costs)
- Present the formula for the mixed cost model
what is a contribution margin
- The difference between revenue and variable costs
- “Contribution” represents the amount of revenue that contributes to the coverage of fixed costs
- Leftover money after covering fixed costs is operating income
what is the formula for the CM income statement
Revenue - Variable Expenses = Contribution Margin (CM) - Fixed Expenses = Earnings Before Interest & Taxes (EBIT)/Operating Income - Interest & Taxes = Net Income/Loss
what is contribution margin ratio
- Contribution margin / sales
- How much is left over to contribute to the coverage of fixed costs
- If the ratio is 15%, for every $1 of sales, 15 cents is left over to cover fixed costs
who is the CM income statement for
used only by internal stakeholders
what is cogs
- An expense which is used to recognize the cost of inventory when it is sold to a customer
- Includes all costs to acquire the goods being sold (ex. Freight, overhead, shipping, discounts, etc.)
what is cogs like for a merchandiser
- all COGS are variable costs, but not all variable costs are COGS
Ex. sales commissions are variable, but they’re not COGS - The commissions would be included on the CM income statement as part of the variable expenses line item
what is cogs like for a manufacturer
- manufacturing overhead is a part of COGS
Includes both fixed and variable costs
Ex. factory property taxes are fixed costs of overhead & utilities are variable costs of overhead
how to make a CM income statement from reconstructing a GM income statement
- Starting with COGS - determine which costs are fixed vs variable
- Then look at operating expenses - determine which costs are fixed vs variable
- Reallocate and ensure operating income hasn’t changed
are marketing costs fixed or variable
fixed
are factory/machinery insurance expenses fixed or variable
fixed
are accountant salaries fixed or variable
fixed
are shipping charges fixed or variable
variable, sometimes can be fixed (depends)
