exam 3 Flashcards
what is the loneral behavior within relevant range?
Range of activity over which a company expects to operate during a year.
mixed costs
Costs that have both a variable cost and a fixed component.
Change in total but not proportionately with changes in activity level.
high low method - equation for unit variable costs
change in total cxosts as high versus low activity level / high minute low activity level = unit variable costs
computation of fixed costs
Determine the total fixed cost by subtracting the total variable cost at either the high or the low activity level from the total cost at that activity level.
what are the basic components/ assumptions of the high low method
The behavior of both costs and revenues is linear throughout the relevant range of the activity index.
Costs can be classified accurately as either variable or fixed.
Changes in activity are the only factors that affect costs.
All units produced are sold.
When more than one type of product is sold, the sales mix will remain constant.
what is sales mix?
Sales mix is the relative percentage in which a company sells its products.
If a company’s unit sales are 80% printers and 20% P Cs, its sales mix is 80% to 20%.
Sales mix is important because different products often have very different contribution margins.
what is cost structure
Cost Structure is the relative proportion of fixed versus variable costs that a company incurs.
May have a significant effect on profitability
Company must carefully consider its cost structure.
variable costing product costs consist of :
Direct Materials
Direct Labor
Variable Manufacturing Overhead
difference between absorption and variable costing is
absorption costing/ product costs( fixed manufacturing overhead)
- both variable and fixed manufacturing costing are product costs
variable costing/ period costs(fixed manufacturing overhead)
- product costs consist of - direct materials, direct labor, variable manufacturing overhead
t or f—-If a problem gives you that variable costs are 60% of sales then the CMR is 40%
t
can contribution margin be expresses in total or as per-unit amount?
yes
Can contribution Margin can be expressed as the percentage of sales left after variable costs
yes
t or f —- Under the Variable costing model Fixed MOH is an expense in the current operating period
t
what is cost behavior analysis
the study of how specific costs respond to changes in the level of business activity
- changes in the level or volume of activity of activity should be correlated with changes in costs
- activity level selected us called activity or volume index
what is an activity index
identifies the activity that causes changes in the behavior of costs
allows costs to be classified as variable, fixed, or mixed
what are variable costs
costs that vary in total directl and proportionately with changes in the activity level
- unit variable costs remain the same at every level of activity
- ex- activity level increases by 10% total variable costs increase by 10% so on so on etc
what are fixed costs
costs that remain the same in total regardless of changes in the activity level within a relevant range
- unit fixed costs vary inversely with activity: as volume increases unit cost declines so on so on etc
what are examples of fixed costs
property taxes, insurance, rent, supervisor salaries, depreciation on buildings and equipment
what is relevant range
range of activity over which a company expects to operate during the year
- relationship between variable costs and changes in activity level is often curvilinear
- for levels of activity and fixed cost the relationship is nonlinear
what are mixed costs
costs that have both a variable cost and a fixed cost component
- change in total but not proportionately with changes in activity level
what are the types of variable costs
- direct materials, direct labor, indirect materials
what are the types of fixed costs
depreciation, and rent
what are types of mixed costs
maintenance and utilities
what is the high low method
a method that uses the total costs incurred at the high and the low levels of activity to classify mixed costs into fixed and variable components
- the difference in costs between the high and low levels represents variable costs, since only the variable cost component can change as activity levels change
negative is that it only considers the highest and lowest not the middle
what is cost volume profit- CVP
the study of the effects of changes in costs and volume(quantity) on a companies profits
- important in profit planning
critical factor in management decisions like setting sales prices, determining product mix, and maximizing use of production facilities
what are the basic componenets of the cost volume profit analysis- CVP
- volume or level of activity
-unit selling price - unit variable costs
- total fixed costs
- sales mis
what are the 5 assumptions of cost volume profit analysis
- behavior of both costs and revenues is linerr throughout the relevant range of activity indexz
- costs can be classified accurately as either variable or fixed
- changes in activity are the only factors that affect costs
- all units produced are sold
- when more than one type of product is sold, the sales mix will remain constsnt
what is the cost volume profit analysis - CVP- income statement
- statemtnt for internal use
- classifies costs as fixed or variable
- reports contribution margin in the body statement
- reports the same net income as a traditional income statement
what is contribution margin?
the amount of revenue remaining after deducting variable costs
what does the contribution margin ratio do ?
shows the percentage of each sales dollar available to apply toward fixed costs and profits
what is break even in mathematical equation
occurs when total sales equal variable costs plus fixed costs, net income in zero
what is target net income
the level of sales necessary to achieve a target income expresses in sales units or sales dollars
what is the margin of safety?
the difference between actual or expected sales and sales at the break even point
- tells us how far sales can drop before the company will operate at a loss
- measures the “cushion” that a particular level of sales provides
- expressed as dollars or as a ratio
- the higher the dollars or percentage the greater the margin of safety
what is the sales mix with limited resources?
an approach used to identify and manage constraints so as to maximize the contribution margin given the constraint
what must a company continually do when doing salex mix with limited resources?
- identify its constraints
- find ways to reduce or eliminate them where appropriate
