Chapter 3 Cost Accounting
How do you calculate revenues needed to earn target operating income?
(Fixed costs + Target operating income) / contribution margin percentage
In general, whenever there are fixed costs, the degree of operating leverage _____ as the level of sales _____ beyond the break even point.
decreases increases
What is operating leverage?
describes the effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin.
What is the breakeven point in bundles?
fixed costs / contribution margin per bundle
How do you find the breakeven number of units?
fixed costs / contribution margin per unit
The contribution margin can be calculated by adding ___ ___ and the ____ ____?
fixed costs and the target operating income
What is the contribution margin method?
(contribution margin per unit*Quantity of units sold) - Fixed costs = operating income
How do you calculate the quantity of units required to be sold?
(fixed costs + target operating income) / Contribution margin per unit
What are some differences in calculating the contribution margin and the gross margins of companies?
1.) Fixed costs are deducted from revenues in the gross margin. Variable costs are not deducted from the revenue. (Gross margin) 2.) Fixed costs are not deducted from revenues in the contribution margin. Variable costs are deducted from revenues (Contribution margin)
Briefly describe the steps to find the breakeven point of sales mixes?
1.) find the contribution margin of the bundle (use ratio) 2.) find breakeven point in bundles (FC/Contr.Marg.per.Bundle) 3.) multiply the breakeven point in bundles by the ratio 4.)you get the total number of units to break even and multiply each by their own price respectively
What are 2 characteristics of the CVP relationship in the service company? Example of a consulting firm
1.) the percentage drop in consultants hired exceeds the percentage drop in the recruiting budget because of fixed costs. 2.) The manager can adjust recruiting activities to hire 6 consultants by adjusting fixed costs or compensation per consultant.
What are two ways to find break even revenues?
Breakeven number of units * selling price Fixed costs / Contribution margin percentage
How to find the number of bundles required to be sold to break even?
Breakeven revenues / revenue per bundle
What is the margin of safety (in units)?
Budgeted (or actual) sales quantity - breakeven quantity
What are the two ways to calculate the operating income?
Contribution margin - fixed costs (Contribution margin percentage * revenues) - fixed costs
What is the degree of operating leverage?
Contribution margin / operating income
What must equal what in order to break even?
Contribution margin must equal fixed costs
How do you find the contribution margin percentage for the bundle?
Contribution margin of the bundle / revenue of the bundle
The degree of operating leverage at a given level of sales helps managers calculate what?
Helps them calculate the effect of sales fluctuations on operating income.
What is sensitivity analysis?
Is a "what if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved of if an underlying assumption changes.
What does the contribution margin measure?
It indicated how much of a company's revenues are available to cover fixed costs.
What is the margin of safety? and what is the equation for it?
It is the amount by which budgeted (or actual) revenues exceed breakeven revenues. Budgeted ( or actual) revenues - Breakeven revenues
What does a high margin of safety signify?
It means less likely to suffer a loss
What does a high degree of operating leverage mean?
It means that there is a larger ration of fixed cost to variable costs, and results in a higher breakeven point.
What is the margin of safety percentage?
Margin of safety in dollars / budgeted (or actual) revenues
What is gross margin?
Revenues - COGS
How do you calculate contribution margin per unit?
Selling price - variable cost per unit
How do you calculate the target operating income using the target net income?
Target net income / (1 - tax rate)
What is the break even point (BEP)?
The break-even point (BEP) is the point at which cost or expenses and revenue are equal.
What is the gross margin percentage?
The gross margin / revenues
What is a sales mix?
The quantities (or proportion) of various products (or services) that constitute a company's total unit sales.
What are 4 ways to calculate contribution margin?
Total revenues - total variable costs contribution margin percentage * revenues contribution margin per unit * # of units sold fixed costs + target operating income
The _____ ____ increases because the sales mix has shifted toward the ____ ____ ____ ____.
breakeven quantity lower contribution margin product
Decreasing the price will reduce the ____ ____ and if fixed costs do not change, the ___ ___ will also be reduced.
contribution margin operating income
How do you calculate the contribution margin percentage?
contribution margin / revenues
What is one way to find fixed costs?
contribution margin per unit * breakeven quantity of units
What does the gross margin measure?
how much a company can charge for its products over and above the cost of acquiring or producing them.
How do you use CVP analysis for service and non profit organizations?
instead of measuring on output that is appropriate Example, airline industry, the measure of output is the passenger miles
In general, for any given total quantity of units sold, a shift in sales mix towards the units with ______ _____ _____ decreases ______ ____.
lower contribution margins operating income
What is one way to find revenues?
operating income + total costs
What is net income?
operating income plus non operating revenues (interest revenues) minus non operating costs (interest cost) minus income taxes
How do you find the target operating income (has to do with equation method)?
revenues - variable costs - fixed costs
What is the equation method?
revenues - variable costs - fixed costs = Operating income