Midterm#2 Flashcards
The Traditional Format Income Statement is vital in performing a Cost-Volume-Profit (CVP) Analysis.
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Sales less Variable Costs equals Gross Margin or Gross Profit.
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The Contribution Margin is a critical concept in understanding CVP analysis.
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Breakeven is achieved when Sales less Variable Costs equals zero.
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Fixed Costs are used to determine contribution margin.
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Contribution margin can be determined using total sales and total variable expense amounts as well as sales per unit and variable costs per unit amounts.
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Net Operating Income increases or decreases at the rate of contribution margin.
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The higher the contribution margin, the faster net operating income grows.
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Changes in fixed costs impact contribution margin.
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The contribution margin ratio can be determined by dividing Sales per unit by CM per unit.
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Net Operating Income is usually achieved after CM is greater than zero.
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CM per unit is equal to Sales per unit less Variable Expenses per unit.
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When a company has fixed costs, the company’s net operating income is zero when CM is zero.
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The CM ratio can be computed by dividing the contribution margin per unit by the sales price per unit.
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The CM ratio can be computed by dividing the total contribution margin by total sales.
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The CM ratio can be computed by dividing sales per unit less variable expenses per unit by sales per unit.
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Given a constant Sales level, a decrease in Variable Expenses will result in an increase in CM.
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An increase in fixed costs typically results in an decrease in net operating income.
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In considering the CVP graph, a decrease in the sales price would result in a lower breakeven point.
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In considering the CVP graph, a decrease in variable costs would result in a lower breakeven point.
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When determining target profit in terms of units, the CM per unit is used for both the equation and formula methods.
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When determining breakeven in sales dollars, the CM per unit is used for both the equation and formula method.
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When determining target profit in terms of sales dollars, you can used the equation method to solve for “Q”.
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The margin of safety is the excess of budgeted or actual sales over the breakeven point.
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Operating leverage is the impact on net operating income given a percentage change in sales.
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Variable Manufacturing Overhead Costs is the key difference between Absorption Costing and Variable Costing.
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Variable Costing treats all Manufacturing Costs as product costs.
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Absorption Costing uses the traditional income statement format.
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Unit Product Costs under the Variable Costing approach include fixed manufacturing costs.
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Selling and administrative expenses are period costs under both the Absorption and Variable Costing approaches.-
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When units produced are greater than those sold in a given year, the company’s cost of goods sold will be less under the Absorption Costing approach.
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When units produced are less than those sold in a given year, the Variable Costing Approach will show a lower net operating income than the Absorption Costing Approach.
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Segment Margin equals sales minus variable expenses.
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Common costs are allocated among segments before determining segment profitability in the long run.
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Traceable costs are costs that are identifiable by a segment.
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Segment Breakeven determination involves the use of allocated common costs.
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Break Even Point
Level of sales at which profit is 0
Contribution Margin Ratio (%) equation form
Contribution Margin Divded by Sales
Cost Volume Profit Graph
graph representation of the relationships between organizations revenue, costs, and profits on one side, and its sales volume on other side
Degree of Operating leverage (%)
Contribution Margin Divided by Net operating income
Incremental Analysis
analytical approach that focuses only on those costs and revenues that change as a result of a decision
Margin of safety
excess of budgeted or actual dollar sales over the break even dollar sales
Operating leverage
Percent increase in sales x degree of operating leverage which gets you the percentage of how much net operating income increases
Sales Mix
Relative proportions in which a company’s products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.
Target Profit Analysis
estimating the level of sales needed to achieve a desired target profit.
Variable expense ratio in equation form
variable expenses divided by sales
Contribution format Income statement in equation form
Profit = (Sales - Variable expenses) - Fixed expenses
Sales equation form
Sales = selling price per unit x Quantity sold . (P x Q)
Variable expenses equation form
Variable expenses = variable expenses per unit x Quantity sold (VxQ)
Unit CM
Selling price per unit - variable expenses per unit (P-V)
Unit CM in equation form
Profit = (P x Q - V x Q) - Fixed expenses
CM ratio per unit
Contribution Margin per unit - selling price per unit
Unit sales equation method (BREAK EVEN ANALYSIS)
Profit = Unit CM x Q - fixed expenses
Unit Sales formula method PER UNIT (BREAK EVEN ANALYSIS)
fixed expenses divided by CM per unit
Dollar Sales equation method (BREAK EVEN ANALYSIS)
Profit = CM ratio x Sales - fixed expenses
Dollar Sales formula method (BREAK EVEN ANALYSIS)
Fixed expenses divided by CM ratio
Target Profit Analysis - Equation method (Unit)
Profit = Unit CM x Q - fixed expenses
Target Profit Analysis - Formula Method (Unit)
Target profit + fixed expenses divided by CM per unit
Target Profit Analysis - Equation Method (Dollar Sales)
Profit = CM ratio x Sales - fixed expenses
Target Profit Analysis - Formula Method (Dollar Sales)
Target profit + fixed expenses divided ny CM ratio
Margin of safety equation
total sales minus break even sales
Margin of safety percentage
margin of safety divided by sales
Margin of safety units
margin of safety divided by price of unit
Absorption Costing
method that includes all manufacturing costs such as direct materials, direct labor and fixed manufacturing costs as unit product costs. Also uses the traditional income statement
Common fixed cost
costs that support one business segment but not traceable in whole or in part to any one of the business segments
Segment
part or activity of an organization about which managers seeks cost, revenue and profit data (department)
Segment Margin
Sales - Variable expenses - traceable fixed costs
Traceable fixed cost
cost that can be incurred because of the existence of a particular business segment and would dissapear if segment was eleminated
Variable costing
costing method that includes variable dm, dl, and mo as product costs, and fixed mo as period cost
If units produced equal units sold
No change in inventory and absoption NOI would equal variable NOI
If units produced are greater than units sold
inventory increases, absorption NOI would be higher than variable
If units produced are less than units sold
inventory decreases, absorption NOI would be lower than variable NOI
What costing is better used for CVP analysis?
Variable costing, since it categorizes variable and fixed
What is variable costing only affected by
change in unit sales
What is absorption costing affected by
changes in unit sales and units of production
Companywide break-even point
company’s traceable fixed expense + common fixed expense divded by company’s overall CM ratio.
Segment break even point
traceable fixed expense divided by CM ratio (for that segment)
What makes up a value chain
R&D, Product Design, Manufacturing, Marketing, Distribution, Customer Service
What are the 3 tools for segmented income analysis ?
- Review the Segment Margin. 2. Compute the CM ratio for each segment. 3. Determine the degree of operating leverage
