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