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MGMT 202: Managerial Accounting > Chapter 8: Cost-Volume-Profit Relationships > Flashcards

Chapter 8: Cost-Volume-Profit Relationships Flashcards

1
Q

Cost-volume-profit (CVP) analysis is one of the most powerful tools ____ have

A

managers

It helps them understand the interrelationships among cost, volume, and profit in an organization

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2
Q

Characteristics of a contribution margin income statement

A

DIffers from the costing income statement

Ideal tool to explore how profits will change when different operating decisions are made

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3
Q

Preparing a contribution margin income statement

A

Step 1: Calculate the product cost for each speaker
Step 2: Compute the variable cost of goods sold
Step 3: Compute the variable selling and administrative expense
Step 4: Determine the total fixed cost
STep 5: Putting it all together

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4
Q

Step 1: Calculate the product cost for each speaker

A

Product cost must only include the variable cost of manufacturing (Direct materials, Direct labour, variable manufacturing overhead)

DOES NOT INCLUDE: Selling or administrative cost

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5
Q

Step 2: Compute the variable cost of goods sold

A

Start by computing ending inventory

beg. inv) + (Production) - (Quantity Sold) = (Ending inv

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6
Q

When the variable cost per unit is unchanged between periods or there are no inventories, then the variable cost of goods sold can be calculated directly as:

A

(Variable COGS) = (Variable product cost per unit) x (Units sold)

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7
Q

Step 3: Compute the variable selling and administrative expense

A

Example from text: The variable selling and admin cost per speaker sold is $30.

The total cost for 400 speakers would be $30 x 400 = $12,000

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8
Q

Step 4: Determine the total fixed cost

A

The total manufacturing fixed cost (FMOH) and the fixed selling and general and administrative cost (FSG&A) is:
FMOH + FSG&A = $25000 + $10000 = $35000

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9
Q

cost–volume–profit analysis (Look at CVP analysis)

A

A tool that helps managers understand the interrelationships between cost, volume, and profit.

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10
Q

CVP analysis

A

Short-form for cost–volume–profit analysis, a tool that helps managers understand the interrelationships between cost, volume, and profit.

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11
Q

contribution margin

A

The amount available to cover fixed expenses and then provide profits for the period.

Difference between sales revenue and variable expenses

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12
Q

Unit contribution margin

A

Expressed on a per-unit basis

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13
Q

Contribution margin ratio (CM Ratio)

A

Expressed as a percentage of sales

Contribution margin / sales * 100

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14
Q

Contribution margin is used ______ to cover fixed expenses, and then whatever remains goes towards ______

A

First

Profits

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15
Q

If the contribution margin is not sufficient to cover the fixed expenses, then what?

A

A loss occurs for the period

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16
Q

Break-even point (BEP)

break even point

A

The level of sales at which profit is zero.

Defined as the point where total sales equal total expenses (variable or fixed)

Or

The point where total contribution margin equals total fixed expenses.

Once BEP has been reached, NI will increase by the amount of the unit CM for each additional unit sold

If neither # units nor price/unit are available: BEP$ = FC / CMR

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17
Q

Once the break-even point has been reached,

A

net income will increase by the amount of the unit contribution margin for each additional unit sold

Example: If 351 speakers are sold, we can assume net income for the month is $100

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18
Q

contribution margin (CM) ratio

A

The contribution margin as a percentage of total sales.

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19
Q

CM ratio =

equation

A

Contribution margin / sales

Example: $40,000 / $100,000 = 40%

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20
Q 
CM ratio (Single product company) = 
(equation)
A

Per unit contribution margin / per unit sales revenue

Example: $100 / $250 = 40%

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21
Q

CM ratio explained

A

For each dollar increase in sales, total contribution margin will increase by 40 cents (= $1 sales x CM ratio of 40%)

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22
Q

The impact on contribution margin of any given dollar change in total sales can be computed in seconds by simply applying the CM ratio to the dollar change

A

FOr example: If Auto Blast plans a $30,000 increase in sales during the coming month, management can expect the contribution margin to increase by $12,000
($30,000 increased sales x CM ratio of 40%)

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23
Q

The contribution format income statement can be expressed in equation form as follows

A

Profit = (Sales - Variable Expenses) - Fixed expenses

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24
Q

When a company has a single product

A

Sales = Selling price per unit x Quantity sold = P x Q

Variables expenses = Variable expenses per unit x Quantity sold = V x Q

Profit = (P x Q - V x Q) - fixed expenses

25
Q

CVP graph (aka break-even chart)

A

A graph that highlights cost–volume–profit relationships over wide ranges of activity

26
Q

Breakdown of CVP graph

A

Unit volume is on the horizontal 9X) axis)

Dollars are on the vertical (y) axis

27
Q

How to draw a CVP graph

A

1) Draw a line parallel to the volume axis to represent total fixed expenses (in the example FC were $35,000)

2) Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected (in example, Robert chose a volume of 600 speakers)
After the point has been plotted, draw a line through it back to the point where the fixed expenses line intersects the dollar axis

3) Again, choose a volume of sales and plot the point representing total sales dollars at the activity level you have selected (example: Robert chose a volume of 600 speakers, sales at that level is 150,000. Draw a line through this point back to the origin

28
Q

Break even on a CVP graph

A

When the two lines cross on the graph

29
Q

Assumptions of CVP analysis

A

1) Selling price is constant - the price of product / service will not change as volume changes
2) Costs are linear and can be accurately divided into variable and fixed elements
- The variable element is constant per unit
- The fixed element is constant in total over the entire relevant range
3) In multi-product companies, the sales mix is constant
4) In manufacturing companies, inventories do not change - the number of units produces = the number of units sold

30
Q

Management levers

A

Unit variable costs
Fixed costs
Selling price

31
Q

Example 1: Increase in fixed cost, leading to an increase in sales volume

A

Background: $10,00 increase in advertising will increase sales by 30%, making sales go from $100,000 to $130,000

Lever: fixed cost

32
Q

incremental analysis

A

An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision.

33
Q

Example 2: Increase in unit variable costs, leading to an increase in sales volume

A

Management want to use higher-quality parts, increasing VC from $150 to $160 (lowering contribution by $10 per speaker), they think doing this would increase sales by 20%

Lever: Variable cost

34
Q

Example 3: Increase in fixed cost, decrease in selling price, leading to an increase in sales volume

A

Manager wants to cut selling price by $20 per speaker, making a speaker $230 and increase advertising by $15000 per month. Apparently sales will increase by 50% to 600 speakers per month

Levers: Sales price and fixed cost

35
Q

Example 4: increase in variable cost per unit and decrease in fixed cost, leading to an increase in sales volume

A

Commission of $15 per speaker rather than salary. THis change will increase monthly sales by 15% to 460 speakers

Lever: Variable cost and fixed cost

36
Q

Break-even point can be computed using 2 methods

A

1) Equation method

2) Contribution margin method

37
Q

Equation method

A

A method of computing the break-even point that relies on the equation Sales = Variable expenses + Fixed expenses + Profits.

38
Q

Equation method equation

A

Sales = Variable expenses + Fixed expenses + Profits

If breaking even profits always = 0!!!!!!!!!

39
Q

contribution margin method

A

A method of computing the break-even point in which the fixed expenses are divided by the contribution margin per unit

40
Q

contribution margin method equation

A

Break-even point in units sold = Fixed expenses / Unit contribution margin

41
Q

Variation of CM ratio, this finds the break-even in total sales dollars, rather in units sold

A

Break-even point in total sales dollars = FIxed expenses / CM ratio

42
Q

The contribution margin approach

A

Unit sales to attain target profit = (Fixed expenses + Target profit) / Unit contribution margin

43
Q

After tax income (ATI) =

equation

A

(1-t) x before-tax income (BTI)

44
Q

Before-tax income (BTI) =

A

ATI / (1-t)

45
Q

margin of safety

A

The excess of budgeted (or actual) sales over the break-even volume of sales.

46
Q

Margin of safety equation =

A

Total budgeted (or actual) sales - Break-even sales

47
Q

Margin of safety percentage =

%%%%

A

Margin of safety in dollars / Total budgeted or actual sales

48
Q

Cost structure

A

Refers to a relative proportion of fixed and variable costs in an organization

49
Q

Lever

A

A tool for multiplying force.

50
Q

operating leverage

A

A measure of how sensitive net income is to a given percentage change in sales. It is computed by dividing the contribution margin by net income.

51
Q

If operating leverage is high:

A

A small percentage increase in sales can produce a much larger percentage increase in net income

52
Q

degree of operating leverage (DOL)

A

A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net income.

53
Q

degree of operating leverage equation =

A

Contribution margin / net income

54
Q

The number from the degree of operating leverage equation says that net income grows x times faster as its sales

A

A operating leverage of 4 means the net income grows four times as fast as its sales

55
Q

Fundamental Mathematical Formula:

A

% Change = (New – Old) / Old

percentage change

56
Q

Advantages of Variable Costing and the Contribution Approach

A

Variable costing combined with the contribution approach, creates many advantages for internal reports:
Enabling CVP analysis
Explaining changes in net operating income
Supporting decision making

57
Q

Net Operating Income from the Contribution Margin (“Variable Costing”) approach will not necessarily equalNet Operating Income from the Gross Margin (“Absorption Costing”) approach

A

Because … Costs will hit the Income Statement at different times

58
Q

Absorption Costing:

A
  • all product costs (both fixed and variable) are assigned to products.
  • Both the COGM and COGS will consist of both fixed and variable costs of manufacturing
59
Q

Variable Costing:

A
  • Only manufacturing costs that vary with output are treated as product costs (DM, DL & variable MOH)
  • Both the COGM and COGS will consist of only variable costs of manufacturing.
  • Fixed manufacturing costs are treated as period costs and expensed during the accounting period

MGMT 202: Managerial Accounting (11 decks)

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