Cost-Volume-Profit & Incremental Analysis Vocabulary

Vocabulary flashcards covering key terms, formulas, and decision concepts from Chapters 18 and 20 on cost behavior, CVP analysis, and incremental analysis.

Cost Behavior Analysis

Study of how specific costs respond to changes in the level of business activity.

Activity Index

Measure that identifies the activity causing cost behavior changes and allows classification as variable, fixed, or mixed.

Variable Cost

Cost that varies in total directly and proportionately with activity level, but remains constant per unit.

Fixed Costs

Costs that remain constant in total within the relevant range, causing per-unit cost to vary inversely with volume.

Relevant Range

Activity span within which cost behavior assumptions about variable and fixed costs are valid.

Mixed Costs

Costs containing both variable and fixed elements; change in total but not proportionately with activity.

High-Low Method

Technique that separates mixed costs into variable and fixed portions using cost data at highest and lowest activity levels.

Variable Cost per Unit (High-Low)

(Change in total cost between high & low activity) ÷ (High activity – Low activity).

Total Fixed Cost (High-Low)

Total cost at either high or low level minus total variable cost at that level.

Cost-Volume-Profit (CVP) Analysis

Study of how changes in costs and volume affect a company’s profit.

CVP Income Statement

Internal statement classifying costs as fixed or variable and showing contribution margin.

Contribution Margin

Revenue remaining after deducting variable costs.

Unit Contribution Margin

Unit Selling Price – Unit Variable Cost.

Contribution Margin Ratio

Unit Contribution Margin ÷ Unit Selling Price (or CM ÷ Sales).

Break-Even Analysis

Process of finding sales level where total revenues equal total costs.

Break-Even Point in Units

Fixed Costs ÷ Unit Contribution Margin.

Break-Even Point in Dollars

Fixed Costs ÷ Contribution Margin Ratio.

Target Net Income

Desired profit level used to compute required sales volume.

Sales in Units for Target Profit

(Fixed Costs + Target Net Income) ÷ Unit Contribution Margin.

Sales in Dollars for Target Profit

(Fixed Costs + Target Net Income) ÷ Contribution Margin Ratio.

Margin of Safety

Excess of actual or expected sales over break-even sales.

Margin of Safety in Dollars

Actual (expected) Sales – Break-Even Sales.

Margin of Safety Ratio

Margin of Safety in Dollars ÷ Actual (expected) Sales.

Decision-Making Process

Considers both financial (revenues, costs, profitability) and nonfinancial (employee turnover, environment, image) factors.

Incremental Analysis

Approach that isolates financial data changing under alternative actions to aid decisions.

Relevant Costs & Revenues

Costs and revenues that differ between decision alternatives.

Opportunity Cost

Potential benefit lost by selecting one alternative over another.

Sunk Cost

Cost already incurred that cannot be changed and is irrelevant to future decisions.

Special Order

One-time order at a major price concession, evaluated by incremental analysis when capacity exists.

Make-or-Buy Decision

Choice to manufacture components internally or purchase externally, considering opportunity cost.

Repair, Retain, or Replace Equipment

Decision comparing incremental costs/benefits; book value is sunk, trade-in or disposal value is relevant.

Unprofitable Segment Elimination

Decision rule: retain segment unless fixed costs eliminated exceed contribution margin lost.