M2 Projection and Forecasting Techniques: Part 2 Flashcards
type of analysis used by managers to forecast profits at different levels of sales and production volume
Cost-Volume-Profit Analysis (CVP)
AKA Break-even analysis
Contribution Ratio Formula
Contribution Margin / Revenue
*Contribution margin = R-VC / R
Biggest difference between absorption and variable costing?
Absorption = GAAP (external)
-Fixed manufacturing overhead is included in product costs/inventory under absorption method so NI could be higher
-Less reliable than variable
*If all production is sold every period, both methods produce the same operating income
Formula for breakeven point in units
Total fixed costs / Contribution margin per unit
Formula for breakeven point in dollars
Unit price * breakeven point (units)
OR
Total Fixed costs / contribution margin RATIO
Formula for required sales volume for target profit
Sales (units) = (FC + pretax profit) / Contribution margin per unit
Formula for required sales DOLLARS for target profit
Sales dollars = Variable costs + fixed costs + Pretax profit
OR
Sales = Fixed cost + pretax profit /
Contribution margin ratio
Formula for setting sales price based on assumed volume
Sales price per unit = (FC+VC+Pretax profit) / # units sold
Excess of sales over breakeven sales
FORMULA?
Margin of Safety
margin of safety (dollars) = total sales (dollars) - breakeven sales (dollars)
OR as a percentage:
Margin of safety (dollars) / total sales
Technique used to establish the product costs allowed to ensure both profitability per unit and total sales volume
Target costing
Target cost formula
Market price - required profit
Which costing method will yield the lowest inventory value?
Variable
Formula to calculate the number of units needed to achieve a desired profit above breakeven
Sales (Units) = Pretax profit / contribution margin per unit
Under the absorption method, if units produced exceed the units sold, net income will be XXX?
HIGHER
