Test 3 Flashcards
BREAK EVEN POINT
DOLLARS
FIXED COST / CM RATIO
** TO GET CM RATIO = CM / SALES PRICE PER UNIT
BREAK EVEN POINT
UNITS
FIXED COST / CM PER UNIT
** TO GET CM = SALES PRICE - VC PER UNIT
COMPUTE
FIXED COST
USE HIGH LOW METHOD
FC = HIGH COST - ( VC X HIGH UNITS)
WAYS TO GET CONTRIBUTION MARGIN (CM)
SALES PER UNIT - VC PER UNIT
OR
SALES / VARIABLE COST = 0.00
SO YOU WILL THEN CALCULATE ( 1 - 0.00 )
CONTRIBUTION MARGIN
INCOME STATEMENT
AKA VARIABLE INCOME STATEMENT
TAKES COMPONENTS OF TRADITIONAL INCOME STMT AND SPLITS THEM INTO VC AND FX
CAN HELP MANAGEMENT MAKE DECISIONS REGARDING SHORT TERM PRICING
A CHANGE THAT RESULTS IN A HIGHER CONTRIBUTION MARGIN
WILL CAUSE THE BREAK EVEN LEVEL TO DECREASE
3 ASSUMPTIONS MADE IN CVP ANALYSIS
SALES PRICE AND VARIABLE COST WILL REMAIN CONSTANT AS VOL. INCREASES
FIXED COST WILL DECREASE AS VOL. INCREASES
ADVANTAGES OF VARIABLE COSTING
DATA THAT ARE REQUIRED FOR CVP CAN BE TAKEN FORM THE CM FORMAT INCOME STATEMENT ALL THINGS BEING EQUAL
PROFIT NOT AFFECTED BY CHANGING INV.
PROFITS TEND TO MOVE IN SAME DIRECTION
LIMITIATIONS
USING VARIABLE COSTING
GAAP MATCHING PRINCIPLE
ALMOST ALWAYS USED FOR EXTERNAL REPROTING
ACCEPTABLE IN IRS
WHEN PRODUCTION IS
EQUAL
TO SALES
NO INVENTORIES ON HAND AT BEG OR END
ZERO IS REPORTED USING ABSORP. OR VARIABLE
NO DIFFERENCE IN AMOUNT OF NET INCOME
PRODUCT COST UNDER
ABSORPTION COSTING
TENDS TO BE HIGHER B.C FIXED OH COST ARE INCLUDED IN PRODUCT COST
WHEN ITS REPORTED INCOME IS IDENTIACAL UNDER BOTH ABSORPTION AND VARIABLE
WHEN PRODUCTION = SALES
AND
NO BEG FINISHED GOODS INVENTORY
VARIABLE COST
VARY IN TOTAL BUT ARE FIXED IN PER UNIT
TO COMPUTE:
CHANGE IN COST / CHANGE IN UNITS
FIXED COST
REMAIN THE SAME IN TOTAL BUT DECREASE IN PER UNIT AS ACTIVITY INCREASES
*INVERSE RELATIONSHIP*
