Test 2 Flashcards
Absorption costing equation
Sales -COGS =Gross Margin -S & A Expenses =Net Op. Income
Variable costing equation
Sales -Var Expenses =Contribution Margin -Fixed Expenses =Net Op Income
Absorption COGS includes
DM, DL, VOH, FOH
In absorption costing, all manufacturing costs are treated as
product costs
In absorption costing, all S & A costs are treated as
period costs and expensed as incurred
Absorption costing holds FOH in ______ account until
inventory, until units are sold
In absorption costing, if units produced is greater than units sold, a portion of the FOH is
“deferred” until units are sold
In absorption costing, if units sold is greater than units produced, a portion of FOH is
“released” through COGS`
In variable costing, FOH is NOT
included in the cost of each unit
In variable costing, FOH is treated as
period cost and expensed as incurred
In variable costing, S & A costs are treated as
period costs and expensed as incurred
In variable costing, Net Income will only change if
of units sold changes
Advantages of Variable Costing
- enables CVP analysis
- easier to explain changes in Net Income- no deferred costs
- Supports decision making- easy to see how selling one more unit would affect Net Income
Disadvantages of Variable Costing
- Not GAAP, not required
- Confusing to use 2 systems
- Expensive to maintain 2 systems
CVP analysis helps to
- Find break-even point
- Determine # of units sold to reach target profit
- See how changes in selling price & or sales will affect profit
CVP assumptions
- Selling price remains constant
- Costs can be broken into fixed and variable
- Product mix remains constant
Contribution margin ratio
contribution margin per unit/sales per unit
Profit=
Profit= (unit contribution margin x quantity) -fixed expenses
Profit in number of units sold=
Profit= (Unit CM x Quantity) - Fixed costs
Profit in dollars of sales=
Profit= (CM Ratio x Quantity) - Fixed Costs
Margin of Safety=
total budgeted sales - break even sales
Margin of safety percentage=
margin of safety (in dollars)/ total budgeted Sales
Degree of Operating Leverage=
Contribution margin/ net operating income
Percentage change in net operating income=
degree of operating leverage x percentage change in sales
