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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. 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= CM%= =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