Accounting 322

• What is the activity base?

  A measure of what causes the incurrence of a variable cost
• What is a true variable cost?

  A variable amount that correlates with an exact dollar amount in reference to portion used
• Total variable cost 


  proportional to the activity level with relevant range
• Per unit Variable cost 


  Remains the same over a wide range of activities
• What is a relevant range?

  A straight light closely an aproximation of varible cost
• What is a total fixed cost?

  A cost that remains the same even when activity levels change
• Fixed cost per unit

  FIxed cost goes down as activity levels go up
• What is marginal cost?

  The additional cost caused by producing one more unit of output
• Total cost = fixed cost + variable cost per unit x quantity of output
• what is the equation for mixed costs?


  Y = a +bX
• what are the methods for analyzing mixed costs?

  High-low method, scattergraph method, and least squares regression method.
• All three methods of analyzing mixed costs provide slightly different estaminets
• Least square regression provides the most accurate estimate because it used all the data points
• What is the contribution format?

  A format that separates costs into fixed and variable components to determine the contribution margin.
• What is CVP analysis?


  Cost-Volume-Profit (CVP) analysis is a tool used to analyze how changes in costs, volume, and prices affect a company's profitability.
• What is the break-even point?


  where zero profit is reached
• Cost volume profit analysis


  The effect of change of costs and volume on a companys profit
• CVP is a critical factor in management decisions and profit planing
• What are CVP assumptions?

  • opportating in relevent range
  • all costs are fixed or variable
  • selling price and VC are constant
  • TFC is constant
  • Constant contribution margins
• What is a CVP income statement?

  A statement for internal use

  • classifies cost and expenses and FC or VC
  • Reports contribution margins
  • Reports the same income as income statement
• contribution margin formula


  Sales-variable cost
• Formula for total costs

  FC + VC*#units solds
• what is a contribution margin?


  the amount remaining from sales revenue after variable expenses have been deducted
• Contribution margins are used to cover fixed expenses first.

  Remained contributes to net operating income
• Formula for contribution margins 


  Sales - VC
• Formula for CM per unit

  Selling price per unit - VC per unit
• CM Ratio

  CM per unit / selling price per unit
• What is a break-even point?


  The level of activity at which revenue = total cost
• alternate forms of break-even

  Contribution margin = FC

  Break-even unit sales = FC / CM per unit
• What is the margin of safety?


  The amount by which the budgeted or actual sales revenue exceeds breakeven sales revenue

  • the amount that sales can drop before loss is incurred
• Margin of safety in dollars

  Total sales $ - Breakeven sales $
• The margin of safety ratio

  Margin of safety / sales

  Or

  Safety margin in unit/sales units
• Target operating profit

  Operating profit = target dollar amount
• CM must cover fixed costs and target profit
• TOP unit sales formula

  Fixed cost + target profit / CM per units = Unit sales
• Sales dollar ratio

  FC + target profit / CM ratio
• What is NIBT

  Net income before tax
• What is the formula for unit sales with tax?

  (FC + (Net income/(1-t))/ CM per unit
• What is cost structure?


  The expenses and costs incurred by a business in order to operate and produce goods or services.
• what are the pros and cons of a high fixed-cost structure?

  • Income will be high in good years
  • Income will be lower in bad years