Planning Techniques Flashcards
Cost Volume Profit (CVP)
used by managers to forecast profits at different levels of sales and production volume.
Assumptions: All costs are:
- variable or fixed
- volume is only factor
- behave in linear fashion
- remain constant over the relevant range
- show greater variability over time
Breakeven Point
Point at which revenues equal total costs
Contribution Approach
Sales-variable costs-fixed costs = profit
Used instead of GAAP
Uses variable costing (direct costing)
Absorption Approach (GAAP)
does not segregate fixed and variable costs
Revenue-COGS (fixed and variable) = Gross Margin
Gross Margin - Operating Expenses (SG&A) = Net Income
Variable Costs include:
DL, DM, Variable MOH, shipping and packaging, variable selling expenses
Fixed Costs include:
Fixed OH, Fixed SG&A
Unit Contribution Margin
Sales/Unit- VC/unit
unit sales price - unit variable cost
Contribution Margin Ratio
Contribution Margin / Revenue
Contribution margin expressed as a percentage of revenue
Difference between Absorption and Contribution Approach
Treatment of fixed factory overhead. SG&A is period cost in both methods
Absorption - FFOH = product costs and included in inventory value
Contribution - FFOH = period cost and is expensed in the period incurred
Difference between Absorption and Contribution Approach (Effect on Income)
If production = sales there is no difference
Production > Sales
AC - portion of FMOH included in inventory
DC or CC - FMOH is period cost
Sales > Production
AC - FMOH carried from previous period as part of beg inv and charged to cost of sales
DC or CC - FMOH is period cost
Margin of Safety
Excess of sales over breakeven sales
Margin of Safety %
Margin of safety in dollars / total sales
Target costing
used to establish the product cost allowed to ensure both profitability per unit and total sales volume
Target Cost
Market price - required profit
Transfer Price
the price charged for the sale/purchase of a product internally
price set will determine the per unit revenue for the selling division and the per-unit cost of the purchasing division
Negotiated Price
selling division won’t accept a price lower than the variable cost to produce and sell the product, and the purchasing division will not accept a price higher than the market price
Market Price
price may even be reduced by the selling division due to cost savings
Arms Length
transfer prices must approximate the prices for comparable transactions between unrelated parties who are acting on their own free will
- nature of the goods, services, or property
- contractual terms
- economic conditions
- functions performed
- risks assumed
