Planning Techniques

Question 1

Cost Volume Profit (CVP)

Answer 1

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

Question 2

Breakeven Point

Answer 2

Point at which revenues equal total costs

Question 3

Contribution Approach

Answer 3

Sales-variable costs-fixed costs = profit

Used instead of GAAP
Uses variable costing (direct costing)

Question 4

Absorption Approach (GAAP)

Answer 4

does not segregate fixed and variable costs

Revenue-COGS (fixed and variable) = Gross Margin
Gross Margin - Operating Expenses (SG&A) = Net Income

Question 5

Variable Costs include:

Answer 5

DL, DM, Variable MOH, shipping and packaging, variable selling expenses

Question 6

Fixed Costs include:

Answer 6

Fixed OH, Fixed SG&A

Question 7

Unit Contribution Margin

Answer 7

Sales/Unit- VC/unit

unit sales price - unit variable cost

Question 8

Contribution Margin Ratio

Answer 8

Contribution Margin / Revenue

Contribution margin expressed as a percentage of revenue

Question 9

Difference between Absorption and Contribution Approach

Answer 9

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

Question 10

Difference between Absorption and Contribution Approach (Effect on Income)

Answer 10

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

Question 11

Margin of Safety

Answer 11

Excess of sales over breakeven sales

Question 12

Margin of Safety %

Answer 12

Margin of safety in dollars / total sales

Question 13

Target costing

Answer 13

used to establish the product cost allowed to ensure both profitability per unit and total sales volume

Question 14

Target Cost

Answer 14

Market price - required profit

Question 15

Transfer Price

Answer 15

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

Question 16

Negotiated Price

Answer 16

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

Question 17

Market Price

Answer 17

price may even be reduced by the selling division due to cost savings

Question 18

Arms Length

Answer 18

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