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36 Cards in this Set

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  • Back
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=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.
High-Low 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 Cost-Variable Cost element
Pros and Cons of High-Low 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
Least-Squares 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 Least-Squares 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=

=Sales Revenue per unit - Variable cost per unit

=CM per unit / Sales Revenue per unit
Break-Even 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
Break-even 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 break-even 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 Sales-Break Even Sales

Actual Units-Break Even Units

Acutal Sales-Break 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