Chapter 20: Cost-Volume-Profit Analysis

Flashcards for Chapter 20: Cost-Volume-Profit Analysis, covering key concepts and definitions.

Cost Behavior

The manner in which a cost changes as a related activity changes.

Activity Bases (or Activity Drivers)

Activities that cause the cost to change.

Relevant Range

The range of activity over which the changes in the cost are of interest.

Variable Costs

Costs that vary in proportion to changes in the activity base.

Fixed Costs

Costs that remain the same in total dollar amount as the activity base changes.

Mixed Costs

Costs that have characteristics of both a variable and a fixed cost.

High-Low Method

A cost estimation method that separates mixed costs into their fixed and variable components.

Cost-Volume-Profit Analysis

A management tool used to examine the relationships among selling prices, sales and production volume, costs, expenses, and profits and is useful for managerial decision making.

Contribution Margin

Sales Revenue - Variable Costs

Break-Even Point

The quantity sold when profit is equal to 0.

Target Profit Quantity

The quantity to be sold when profit is at a specified level.

Contribution Margin Ratio

The contribution margin as a percentage of sales.

Contribution Margin

The excess of sales over variable costs.

Mathematical Approach to Cost-Volume-Profit Analysis

The mathematical approach to cost-volume-profit analysis uses equations to determine sales necessary to either break even or acheive a target profit.

Cost-Volume-Profit Chart

A graph that shows sales, costs, and related profit or loss for various levels of units sold.

Profit-Volume Chart

A chart that plots only the difference between total sales and total costs (or profits).

Sales Mix

The relative distribution of sales among the products sold by a company.

Operating Leverage

The relationship between a company’s contribution margin and operating income

Margin of Safety

Indicates the possible decrease in sales that may occur before an operating loss results.