Managerial Accounting: Ch 18 Flashcards
variable costs
costs incurred for every unit of activity (DM and DL)
fixed costs
costs that do not change in total even when the activity level changes - fixed cost per unit of activity changes with level of activity
mixed costs
contain both variable and fixed components
relevant range
band of volume where total fixed costs and variable costs per unit remain constant. cost behavior may change if they are making decisions outside the range of volume where you normally expect to operate
step costs
fixed over a small range of activity and then jump to a new fixed cost level
total variable cost
variable cost per unit of activity (v) x volume of activity (x)
total fixed cost
fixed amount over a period of time (f)
total mixed cost
vx + f
high low method
one way to estimate the cost equation for the data in a scatterplot
low data point in high low method
data for the period with the lowest volume
high data point in the high low method
data for the period with the highest volume
steps in the high low method
- identify the highest and lowest volume
- find slope of the mixed cost line (variable cost component)
Slope = Variable cost per unit (v) =
cost (high) - cost (low)
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volume (high) - volume (low) - vertical intercept - where the line intersects the y axis
total mixed cost (low) = [v x volume (low)] + fixed costs or
total mixed cost (high) = [v x volume (high)] + fixed cost (f) - write the cost equation using the costs determined
y (total mixed cost) = vx + f
regression analysis
uses all datapoints to determine the cost equation - because all data points re considered, the impact of any outliers should be less making this the most accurate method
dependent variable in regression analysis
amount you want to predict is based on the amounts of the independent variables
independent variable in regression analysis
activity that is expected to explain the cost (cost driver)
difference between absorption costing and variable costing
how they expense fixed MOH
absorption costing method
revenue - COGS (product cost) = gross profit - selling and admin expense (variable and fixed) = operating income
variable costing method
revenue - variable costs (DM, DL, VOH, and S&A) = contribution margin - fixed costs (fixed MOH, S&A)
four key assumptions of cost volume profit (CVP) analysis
- managers can classify each cost as fixed or variable and determine the fixed and variable components of mixed costs
- costs are linear within the relevant range
- units produced are sold (inventory levels will not change)
- the sales mix of products remains constant
sales mix
the proportion of sales that come from different products
contribution margin
the revenue that is left over to contribute to fixed costs and operating income after paying for variable costs
contribution margin =
sales revenue - variable costs
contribution margin per unit =
contribution margin per unit (%) / selling price per unit
(it is good when contribution margin is higher as it means that sales prices can be higher)
breakeven point
the sales point at which operating income is zero - anything below is a loss, anything above results in profit
contribution margin income statement approach:
sales revenue - variable expenses - fixed expenses = operating income or (sales price x units sold) - (VC per unit x units sold) - fixed expenses = operating income for units sold
sales in units =
(fixed expenses + operating income) / contribution margin per unit
sales in dollars =
(fixed expenses + operating income) / contribution margin ratio
breakeven point in units =
fixed expenses / weighted average contribution margin per unit
weighted average contribution margin per unit =
(number of units x contribution margin per unit for each product) / total units for all products
breakeven point in dollars =
fixed costs / weighted average contribution margin ratio
weighted average contribution margin ratio =
(number of units x contribution margin per unit for each product) / (number of units x selling price per unit for each product)
margin of safety
how far expected sales are from the breakeven point acting as a cushion or buffer - larger margin of safety means lower operating risk
margin of safety units =
expected or actual sales units - breakeven sales units
margin of safety dollars =
expected or actual sales - breakeven sales
margin of safety ratio =
margin of safety / expected or actual sales
operating leverage
refers to the mix of fixed and variable costs incurred by the firm - high operating leverage indicates relatively more fixed costs, low is more variable costs - higher operating leverage means more risk
operating leverage factor =
contribution margin / operating income
percent change in operating income =
operating leverage x percent change in sales
