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37 Cards in this Set
- Front
- Back
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variable cost per unit
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remains constant
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variable cost
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increases as you use more
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total fixed cost
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always remains constant`
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fixed cost per unit
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decreases are more units are produced
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mixed costs
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contain both variable and fixed components
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step costs
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total cost increases to a new higher cost for the next higher level of activity; total cost remains constant w/in a narrow range of activity
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curvilinear cost
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increases as an activity increases, but in a nonlinear manner
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the linearity assumption and the relevant range
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a straight line closely approximates a curvilinear var. cost line w/in the relevant range
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methods for analyzing costs
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scatter diagram
high-low method y = a + bx y = total cost a = fixed cost b = unit var. cost x = # of units |
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scatter diagram method
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draw a line through plotted points so that about an equal number of pts. fall above and below the line
slope = change in cost/change in units |
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high-low method
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1. unit var. cost = (change in cost)/(change in units)
2. fixed cost = total cost - var. cost -or- fixed cost = total cost - (VC/unit * # of units) 3. total cost = fixed cost + var. cost |
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cost-volume-profit analysis
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objective: to determine the effects that changes in selling prices, costs, and/or volyme will have on SR profits
uses: CVP analysis can be used to analyze a number of situations such as changes sales price, changes VC, or changing FC |
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contribution margin
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amt. by which rev. exceeds var. costs of producing the revenue
(sales rev. - VC = CM) goes to cover FC after covering FC, any remaining CM contributes to income |
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break even units computation
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BE units = (fixed costs)/(unit contribution margin)
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break-even sales $$ computation
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BE$ = (fixed costs)/(CMR)
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CMR computation
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(sales price - VC)/(sales price)
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calculation break-even for multi-product companies
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BE$ = FC/CMR
use WACMR: (total combined CM/total combined sales) |
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margin of safety
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excess of current sales over the break even volume of sales
margin of safety = total sales - break-even sales can also be expressed as a percentage of sales |
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calculating sales volume needed for desired income
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add desired income to the numerator of a B/E equation
BE units = (FC + desired income)/(unit CM) BE $ = (FC + desired income)/(CM ratio) |
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CVP analysis assumptions
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1. linearity in the rel. range (unit sales price is constant, unit VC is constant)
2. total FC is constant 3. in multi-product, product mix is known and doesn't change) 4. all costs may classified as fixed or VC |
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CM income statements
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based on cost-behavior
CM = amt. by which rev. exceeds var. costs sales less: var. exp. = CM less: fixed exp. = net income |
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differential analysis
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analyzing costs and rev. for different alternatives
ex: making pricing decisions, accepting or rejecting special orders, deciding whether to take make of buy products, adding or eliminating products, processing or selling joint products |
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relevant costs and revenues
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future costs and revenues that differ among alternatives
- ex: difference in rev., difference in cost, non-monetary advantages, disadvantages, |
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sunk costs
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past costs that cannot be changed by a current decision -- irrelevant decision making
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committed costs
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long-term and cannot be reduced in the short-term (ex: depreciation of buildings and equipment)
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discretionary costs
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may be altered in the ST by current managerial decisions (ex: advertising, research and development)
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opportunity costs
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the potential benefit given up when on alternative is selected over another; not recorded in records, but are relevant in decision making
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pricing decisions
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obj.: to select a price for a product that maximizes income
fixed costs usually can't be changed, so income is greatest when CM is maximized |
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special orders
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involve the opportunity to sell a product to a new mkt. on a one-time basis
FC are usually unchanged by special orders, so any special order price in excess of VC will increase income |
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examples of VC for special order problems
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direct material, direct labor, variable O/H
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adding or eliminating products or segments
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distinguish b/t avoidable and unavoidable costs; eliminate the product only if avoidable costs are greater then lost revenues
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avoidable costs
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stop when a product is eliminated
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unavoidable costs
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continue when a product is eliminated
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joint products
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two or more products produced from a common input
joint costs = the costs of processing prior to the split-off point split of point: point in process where joint products can be recognized as different processes JPs should be processed beyond the split-off point only if the differential revenue exceeds the differential cost |
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applying differential analysis to quality
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diff. costs undertaken to improve quality are usually less then the benefits gained from producing high-quality products
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unitized fixed costs
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for product costing purposes, FC is sometimes divided into by some activity measure assigned to individual units of product; the result is to make FC appear to be variable
- can lead to suboptimal decision making - usually wise to consider FC in total instead of in units - beware of these costs in decision making |
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allocated fixed costs
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common procedure to allocate FC to operating depts. or segments; the result is to make a segment seem unprofitable when it is actually making a contribution to payment of common fixed exp. and profit
- determine which costs will be avoided if a certain cost is selected - beware of these costs and instead find avoidable costs |
