ACCT 2123 Exam 2

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for

fixed overhead costs

When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

greater than

unit product cost (absorption)

DM + DL + V MOH + F MOH

target profit analysis

Estimating the level of sales needed to achieve a desired target profit.

break even (units)

FC/CM per unit

break even (sales)

FC/CM ratio

target profit (units)

TP + FC / CM per unit

target profit (sales)

TP + FC / CM ratio

margin of safety

The excess of budgeted or actual dollar sales over the break-even dollar sales

Break even point

The level of sales at which profit is zero

sales mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

profit

(CM ratio X expected sales) - FC

variable cost

1 - CM ratio or VC/sales

absorption costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.

variable costing

A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.

traceable fixed cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.

common fixed cost

A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments.

cost volume profit graph

A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand

operating leverage

A measure of how sensitive net operating income is to a given percentage change in unit sales

Degree of Operating Leverage

A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income.

CM ratio

A ratio computed by dividing contribution margin by sales

variable expenses ratio

A ratio computed by dividing variable expenses by sales.

segment margin

A segment's contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs.

incremental analysis

An analytical approach that focuses only on those costs and revenues that change as a result of a decision.

segment

Any part or activity of an organization about which managers seek cost, revenue, or profit data.

profit

CM per unit X Q - FC

degree of operating leverage

CM/NOI

unit product cost (variable)

DM + DL + V MOH

margin of safety (percentage)

Margin of safety in dollars / Total budgeted (actual) sales in dollars

margin of safety (sales)

Total Sales - Break Even Sales

CM

is the amount remaining from sales revenue after variable expenses have been deducted.

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

less than

When the number of units produced is greater than the number of units sold, variable costing net operating income will be

less than absorption costing net operating income

COGS

unit product cost X units sold

Which of the following costing approaches is best suited for cost-volume-profit analysis?

variable

Absorption costing income statements ignore

variable and fixed cost distinctions