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)