Exam 2 (Ch. 6-8) Flashcards
Absorption Costing
The costing method where products “absorb” both fixed and variable manufacturing costs.
Account Analysis
A method for determining cost behavior that is based on a manager’s judgment in classifying each general ledger account as a variable, fixed, or mixed cost.
Committed Fixed Costs
Fixed costs that are locked in because of previous management decisions; management has little or no control over these costs in the short run.
Contribution Margin
Sales revenue minus variable expenses.
Contribution Margin Income Statement
Income statement that organizes costs by behavior (variable costs or fixed costs) rather than by function.
Cost Behavior
A behavior that describes how costs change as volume changes.
Cost Equation
A mathematical equation for a straight line that expresses how a cost behaves.
Curvilinear Costs
A cost behavior that is not linear (not a straight line).
Discretionary Fixed Costs
Fixed costs that are a result of annual management decisions; fixed costs that are controllable in the short run.
Fixed Costs
Costs that do not change in total despite wide changes in volume.
High-Low Method
A method for determining cost behavior that is based on two historical data points: the highest and lowest volume of activity.
Mixed Cost
Costs that change, but not in direct proportion to changes in volume. Mixed costs have both variable cost and fixed cost components.
Outliers
Abnormal data points; data points that do not fall in the same general pattern as the other data points.
Regression Analysis
A statistical procedure for determining the line that best fits the data by using all of the historical data points, not just the high and low data points.
Relevant Range
The band of volume where total fixed costs remain constant at a certain level and where the variable cost per unit remains constant at a certain level.
Scatterplot
A graph that plots historical cost and volume data.
Step Costs
A cost behavior that is fixed over a small range of activity and then jumps to a different fixed level with moderate changes in volume.
Variable Costs
Costs incurred for every unit of activity. As a result, total variable costs change in direct proportion to changes in volume.
Variable Costing
The costing method that assigns only variable manufacturing costs to products. All fixed manufacturing costs (fixed MOH) are expensed as period costs. Also known as direct costing.
Breakeven Point
The sales level at which operating income is zero: Total revenues = Total expenses.
Contribution Margin
Sales revenue minus variable expenses.
Contribution Margin Income Statement
An income statement that groups costs by behavior rather than function; it can be used only by internal management.
Contribution Margin Per Unit
The excess of the unit sales price over the variable cost per unit; also called unit contribution margin.
Contribution Margin Ratio
Ratio of contribution margin to sales revenue.
Cost-Volume-Profit (CVP) Analysis
Expresses the relationships among costs, volume, and profit or loss.
Indifference Point
The volume of sales at which a company would be indifferent between alternative cost structures because they would result in the same total cost.
Margin of Safety
Excess of expected sales over breakeven sales; the drop in sales a company can absorb without incurring an operating loss.
Operating Leverage
The relative amount of fixed and variable costs that make up a firm’s total costs.
Operating Leverage Factor
At a given level of sales, the contribution margin divided by operating income; the operating leverage factor indicates the percentage change in operating income that will occur from a 1% change in sales volume.
Sales Mix
The combination of products that make up total sales.
Sensitivity Analysis
A “what-if” technique that asks what results will be if actual prices or costs change or if an underlying assumption changes.
Unit Contribution Margin
The excess of the unit sales price over the variable cost per unit: also called contribution margin per unit.
