Accounting Chapter 5 Notes

High-low method step 1

identify the highest and volume level (may not be the highest or lowest level of costs)

Deficiency of high-low method

ignores all data points except the highest and lowest resulting in less preceision

Cost equation is useful to?

predict future cost levels at different volumes

CMR is interpreted as what?

proportion of each sales dollars remains after deducting total unit variable costs

In break-even analysis, a composite unit is treated as a unit of a?

single product

Multi-product CVP treats his composite unit as a?

single product

Variable cost per unit remains _____ but the total amount of _____ changes with the level of _______.

- constant - variable cost - production

The fixed cost per unit of output ______ as volume______. (and vice versa)

- decreases - increases

Margin of safety is the amount that sales can ______ before the company incurs a _____.

- drop - loss

When companies sell more than one _____ or _____ , estimate _______ point by using a _______.

- product - service - break-even point -- composite unit

Sales mix is the _____ (proportion) of the _____ ______ for various products.

- ratio - sales - volumes

Using sales mix, determines the ______ of a composite unit by x the ________ x _________ and then adding the _______.

- selling price - sales mix ratio - the selling process of each product - totals for all of the products

To determine how many units of each product must be sold to break even, x _______ in the composite (sales mix) by the ________.

- the number of units of each product - break-even point

Determine the CM per composite unit by subtracting the ______ from the _____ of the composite unit.

- total variable price - total selling price

Margin of safety can be express in?

- units - dollars - % of predicted level of sales

CVP uses what 4 main components?

1. number of units sold 2. sales price per unit 3.variable costs per unit 4.fixed costs in total

What does Identifying Cost Behavior mean?

CVP analysis

Break-Even Point

Sales level at which company neither earns a profit nor incurs a loss.

What is contribution margin ratio?

The % of a unit's selling price that exceeds total unit variable cost.

Total fixed costs remain unchanged in the amount?

When volume of activity varies from period to period within a relevant range.

Composite Unit

a specific number of units of each product in proportion to their expected sales mix.

High-low method step 3

compute the estimated fixed costs total costs = fixed costs + variable cost per unit x # of units

High-low method step 2

compute the slop (variable cost per unit) using the high low volume levels

Fixed costs per unity decrease as production increases. This drop is know as?

economies of scale

When included in a CVP analysis, mixed costs are often separated into?

fixed and variable components

Break-even point can be expressed either in?

units or dollars of sales

Variable costs change in proportion to changes in?

volume of activity