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36 Cards in this Set
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Variable Cost

a cost whose total dollar amount varies in direct proportion to changes in the activity level. It is variable with repect to an activity base. They are constant at a per unit basis, but they increase on a total basis.


Activity Base

is a measure of whatever causes the incurrence on a variable cost


Relevant Range

a range of activity within which the assumptions make about cost behavior by the manager are valid


Fixed costs

Remain constant in total dollar amount within the relevant range of activity. Decreases on a per unit basis, but they remain constant at a total basis, within a relevant range. Changes in planned activities are the ones that mostly change the amount of fixex costs that will be incurred throughout the year.


Mixed Costs

This is a cost that contains both variable and fixed cost elements.


y=a+bx

y=total mixed cost or total cost
a=total fixed cost (vertical intercept of line) b=variable cost per unit (slope of the line) x=level of activity 

Scatter Graphs

used in order to analyze mixed costs. costs observed at various levels of activity are plotted on the graph, cost is on the vertical axis, and the level of activity is on the horizontal axis


Drawbacks of scatter graph

are that the placement of the regression line is subjective. Each person will fit the regression line differently from another.


HighLow Method

Used to analyze mixed costs, identify the period with the lowest level of activity and the period with the highest activity.


Variable Cost=

Change in cost / change in activity


Fixed Cost=

Total CostVariable Cost element


Pros and Cons of HighLow Method

Beneficial because it is simple to use everyone gets same answer
Drawback is that is relies only on two points. inaccurate data 

Independent variable

the activity, x, horizontal axis, it causes variations in the dependent variable


Dependant Variable

Cost, y, vertica axis, is called dependent because the cost incurred during the period depends on the level of activity for the period


LeastSquares Regression

More objective and precise approach to estimating the regression line. Uses mathematical formulas to fit the regression line. Takes all the data into account when estimating the cost formula. Computes the regression line that minimizes the sum of the squared errors (the distance from the line to the plotted pts squared)


Pros/Cons of LeastSquares Regression

Advantage the most accurate method out of the three
Drawback extremely complicated unless have software 

Cost Volume Profit Analysis

Most powerful managerial tool. Aids in understanding the interrelationship between cost, volume, and profit in an organization by focusing on the interactions between five elements. Vital tool should be used when making business decisions


Five elements of Cost Volume Profit Analysis

Prices of products, volume or level of activity, per unit variable costs, total fixed costs, and mix of products sold


Contribution Margin

the amount remaining from sales revenue after variable expenses have been deducted. the amount available to cover fixed expenses and to provide profits for the period


CM per unit=
CM%= 
=Sales Revenue per unit  Variable cost per unit
=CM per unit / Sales Revenue per unit 

BreakEven Point

is the level of sales at which the company's profit is zero, can be found by the equation method or the CM method


CVP Graph

highlights CVP relationships over wide ranges of activity, givs managers a perspective that can be obtained in no other way


Breakeven on CVP

where total revenue and the total expenses line cross


Profit area on CVP

the area between the total revenue line, the total expenses line, above the break even point


Margin of Safety

the excess of budgeted (or actual) sales over the breakeven volume of sales. the amount by which sales can drop before losses begin to be incurred.


Margin of Safety $$ =
Margin of Safety (units)= Margin of Safety%= 
Actual SalesBreak Even Sales
Actual UnitsBreak Even Units Acutal SalesBreak even sales / Actual Sales 

Operating Leverage

a measure of how sensitive net income is to percentage change in sales. actas as a multiplier. if the OL is high, a small percentage increase in sales can produce a much larger percentage increase in net inceome


Degree of operating leverage=

Contribution Margin
=  Net Income 

Degree of operating leverage

a measure, at a given level of sales, of how a percentage change in sales volume will affect profits


% increase in net income=

Degree of operating leverage X % increase in sales


Sales Mix

refers to the relative proportions in which a company's products are sold. Managers try to achieve the mix that yields the greatest amt of profits


Absorption Costing

treats all costs of production as product costs, regardless of whether they are variable or fixed.


The cost of a unit of product under the absorption costing method

consists of direct materials, direct labor, and both variable and fixed OH


Variable costing

treats fixed MFG OH as a period cost, not a product cost.


Production > Sales

Inventory Increases
Absorption Net Income > Variable Net Income 

Production < Sales

Absorption Net Income < Variable Net Income
