ACCT 2210- Exam #2- Chap.5

Calculation for profit at any sales volume

#Units sold in excess x contribution margin

Break-even point is the level of sales at which

total revenue equals total costs

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

Percentage Change in Net Operating Income

Degree of Operating Leverage x % Change in Sales

Operating Leverage Equation

Degree of Operating Leverage= CM / Net Operating Income

Other Names for Variable Costing

Direct Costing, Marginal Costing

Dollar Sales to Break Even

Dollar Sales to Break Even= Fixed Expenses / CM Ratio

Target Profit Analysis

Estimating what sales volume is needed to achieve a specific target profit

Manufacturing Overhead in Deferred

Fixed MO in Ending Inventories - Fixed MO in Beginning Inventories

What is usually plotted as a horizontal line on the CVP graph?

Fixed expenses

Incremental Analysis

Focuses on only costs and revenues that change as a result of a decision

Other Name for Absorption Costing

Full Costing

Sales Mix and Break Even Point

If sales mix changes, most likely break even point does too

Profit Graph

Simpler version of a CVP graph- Linear

Margin of Safety

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

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

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

CVP Assumptions

1. Selling price is constant 2. Costs are linear and can accurately be divided into fixed and variable components 3. In multi-product companies, the product mix remains constant

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

Operating Leverage

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

Segment

A part of an activity or data which managers would like cost, revenue, or profit data

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

With regards to interpretation, what are the important area that appear on a CVP graph?

Break even point, loss area, and profit area

Change in Contribution Margin

CM ratio x Change in sales

Units Produced < Units Sold

Inventories Decrease, Absorption Costing < Variable Costing

Units Produced > Units Sold

Inventories Increase, Absorption Costing > Variable Costing

Units Produced = Units Sold

No change in inventories, absorption costing = variable costing

The profit graph is based on the following linear equation:

Profit= Unit CM x Q - Fixed Expenses

Simple profit equation (Equation Method)

Profit= Unit CM x Quantity - fixed expenses

Sales and Production Relationship with Net Income

Sales are directly related to rise and fall of net income. Production level has no effect

Best gauge of the long-run profitability of a segment

Segment Margin

Contribution Margin Ratio

Total contribution margin / Total sales

Formula Method Equation

Unit Sales to Break Even= Fixed Expenses / Unit CM

Once the break-even point has been reached, net operating income will increase by the amount of the ___ for each additional unit sold.

Unit contribution margin

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

Variable

Variable Expenses Ratio

Variable Expenses / Sales

Absorption costing income statements ignore

Variable and fixed cost distinctions

Cost Volume Profit Graph

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

The contribution format income statement enforces...

behavior of costs

When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ___ the net operating income using the absorption costing method

is equal to

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

is greater than

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

is less than

Contribution margin equals

sales - variable cost - fixed cost

5 factors of CVP analysis

selling prices, sales volume, unit variable costs, total fixed costs, mix of products sold

Break-even point

the level of sales at which profit is zero

Cost-Volume_Profit (CVP) Analysis

the study on the effects of changes in costs and volume on a company's profits

What is represented on the X axis of a CVP graph?

unit volume