accounting ch. 21
Relevant range
A fixed cost is fixed only within certain limits. If you change those limits, then A FIXED COST WILL CHANGE. (the name for "limits" is Relevant Range)
mixed cost example
Renting a car. the flat rate per day is the fixed cost, the rate for every mile you drive is the variable cost
income statement contribution margin OLD format
Sales -COGS (factory cost) Gross Profit -Sell & administrative (office) Net income
income statement contribution margin NEW format
Sales -Variable cost (factory + office cost) Contribution Margin -Fixed cost (factory + office cost) Net Income
Sales Mix
When a company sales more than one product, the company keeps careful records of each products sales because they want to know which products are selling and which ones aren't.
multi product company
a company that produces several different products
contribution margin ratio + variable cost ratio
always equals 100%
As production decreases, the TOTAL spent for material and labor will decrease,
but the cost PER UNIT stays the same
margin of safety(MOS)
by what amount would your sales have to decrease before you would begin to lose money?
CM per unit is
company produces one unit for $20. the cost of material and labor required to make one unit is $12 20-12 sales price - variable cost
high low method step six
compute the fixed cost. go to either the month with the highest number or go to the month with the lowest production
high low method step one
compute the variable cost per unit. to do so, go to the month that produced the largest number of units
If the sales price increases and all cost remain the same, what will happen to BEP?
decrease
high low method step five
divide step #3 by step #4
for two units, in computing the BEP,
divide the fixed cost by the weighted average contribution margin. (WACM)
mixed cost
fixed + variable.
high low method step two
go to the month that produced the least number of units
break even in DOLLARS
how many dollars of revenue will have to be earned in order to break even
Break even IN UNITS:
how many units will have to be sold in order to break even
operating leverage example
if a company sales increased by 10%, what would happen to income from operations? would it increase by 10%, 20%, or 5% or none of the above.
margin of safety can be asked in 3 ways
in units, dollars, and percent of current sales
if a cost (either fixed or variable) increase and the sales price per unit stays the same, what will happen to the BEP?
increase
when the company sends their income statement to the people OUTSIDE the company (creditors, investors, etc.) the must use _____ formal
net income old format
The ___ format is used by people INSIDE the company when trying to answer questions such as: "if our sales increase by 10%, by what amount will our net income increase?"
new
fixed cost
remains the same whether production increases or decreases. ex: rent, property tax, insurance
high low method step eight
subtract variable cost , we'll be left with fixed
high low method step four
take the difference between the two "units produced" figures
high low method step thee
take the difference between the two total cost figures
high low method step seven
take the total cost, subtract the variable cost, the remainder
the contribution margin ratio is 40% that means
that the contribution margin is 40% of the sales price
If the variable cost ratio is 60% that means
that the variable cost is 60% of the sales price
COGS take place in
the FACTORY, and some of those cost are variable and some are fixed
Selling and Administrative cost take place in
the OFFICE, and some of these cost are fixed and some are variable
Activity Base example
the amount of money you spend for gas is determined by the number of miles you drive. The amount of money a company spends for material is determined by the number of units produced
contribution margin ration
the contribution margin divided by the sales price
As production increases, the TOTAL spent for material and labor will increase, but
the cost PER UNIT stays the same
As production increases, total fixed cost stays the same but
the cost per unit goes down (the same amount of cost is being spread over more units so the cost per unit decrease)
As production decreases, the total fixed cost remains the same but
the cost per unit increases (the same amount of cost is being spread over fewer units, so the cost per unit increases)
contribution margin
the difference between the sales price and the VARIABLE cost
Activity Base
the item that determines how much money you will spend for something is called the activity base, and it can be just about anything.
Variable cost ratio
the variable cost divided by the sales price
break even point (BEP)
there is some level at which total sales will exactly equal total cost, resulting in a net income of zero. Can be computed in UNITS and DOLLARS
operating leverage tells you
what would happen to net income if sales changed, either increased or decreased
variable cost
will increase or decrease as production increases or decreases. Material and labor cost
Relevant Range example
your landlord raises your rent, the rent didn't change because you produced more units - it changed because the relevant range was changed. (the landlord got greedy)