section 13 Flashcards
CVP
cost volume profit
understanding how a company’s various costs behave with changes in sales volume allows a company’s management to understand
the effect any changes in sales volume will have on profits
a company’s relevant range in the context of CVP analysis refers to a company’s
range of reasonably anticipated production/sales volume for a period of time
variable costs per unit vary…and are fixed…..
in total and are fixed per unit within the relevant range
as the vol of units sold decreases within the relevant range, the fixed cost per unit sold
increases
as the vol of units sold increases within the relevant range, the variable cost per unit sold typically
remains the same
in doing simple CVP analysis it is necessary that every cost of a company
be designated as either variable or fixed
in simple CVP analysis all costs must be designated as either
perfectly fixed or variable
what is a contribution margin?
sales revenues
—
variable costs (product or period)
what is the variable cost ratio?
% of sales revenues
what is contribution margin per unit?
sales price per unit
—
variable cost per unit
what is contribution margin ratio?
contribution margin as a percentage of total sales revenue
margin of safety
the amount of decreased revenues that could be incurred before a business turns unprofitable
variable cost ratio
VC
divided by
SR
the scatter-graph method refers to an approach used to
determine fixed and variable components of a mixed cost
with changes in manufacturing volume, direct material costs for a manufacturing company would most commonly behave as
variable costs
when performing basic CVP analysis, variable costs are assumed to be
constant on a per unit basis within the relevant range
fixed costs per unit decrease with
increases in the volume of production
mixed costs are costs which have both
a fixed and variable cost component
the scattergraph method is an approach which can be used to determine both the
total fixed cost component and the variable cost per unit component of a mixed cost
contribution margin equals
net sales revenues
minus
total variable costs (product and period)
CVP analysis is a useful tool when seeking to understand the effects of
product pricing, costs of operations and the volume of sales on a business profitability
The slope of Sales Revenue =
the sales price per unit
variable cost
a cost that varies in total with changes in volume
the slope of total variable costs =
the variable cost per unit
a perfectly variable cost has a
fixed or constant variable cost per unit
examples of variable costs
direct materials
direct labor
sales commissions
T/F there are perfectly variable costs in the real world
false
what is a relevant range?
the range of vol that is reasonably anticipated for operations
what is the intersection of sales revenues and total cost?
the break even point
2 different formats of the income statement are:
GAAP income statement
Contribution margin income statement
a GAAP income statement is used for
financial accounting
Contribution margin income statement is used for
managerial accounting
a contribution margin income statement shows
the product and period costs in terms of being fixed or variable
sales revenues minus variable costs =
contribution margin
contribution margin is the
difference between sales revenues and variable costs
contribution margin shows profits before
fixed costs are applied
What is operating income?
revenues minus total costs
in CVP analysis, estimated future costs
are prospective budgeted costs
t/f cvp analysis can be used with historical info
true
what is a variable cost ratio?
variable cost as a % of sales revenue
what is contribution margin ratio?
contribution margin as a % of sales revenue
margin of safety
the amount of decreased revenues that could have been incurred before breakeven or becoming unprofitable
