Accounting Final

Cost-Volume-Profit (CVP) Analysis

Evaluates how sales volume prices and costs impact operating income

Fixed Costs

Expenses that stay the same in total regardless of changes in production volume

Variable Costs

Expenses that change in direct proportion to production volume shifts

Mixed Costs

Expenses containing both a permanent flat base fee and a usage-based rate

Step Costs

Expenses that stay flat for a bit but jump to a higher tier at specific triggers

Contribution Margin

The amount of sales revenue left over after covering all variable costs

Margin of Safety

The cushion between actual sales volume and the break-even point

Operating Leverage

How sensitive net income is to a percentage change in sales volume

Traditional Income Statement

An income format organized by product versus period costs for GAAP reporting

Contribution Income Statement

An internal income format organized by variable versus fixed cost behavior

Variable Costing

An internal reporting method where only variable manufacturing costs are tied to the product

Absorption Costing

A GAAP-required method where both variable and fixed manufacturing costs are tied to the product

Inventory Distortion

When managers overproduce items to artificially lower current expenses under absorption costing

Master Budget

A comprehensive set of interconnected departmental budgets for a future period

Static Budget

A budget plan fixed at a single projected volume level before the period starts

Flexible Budget

A budget that dynamically recalculates costs based on actual volume levels achieved

Favorable Variance

An efficiency result where actual revenues are higher or actual costs are lower than planned

Unfavorable Variance

An efficiency result where actual revenues are lower or actual costs are higher than planned

Materials Price Variance

A metric tracking whether the purchasing department bought raw materials over or under budget

Materials Quantity Variance

A metric tracking whether the production floor used more or less material than standard

Labor Rate Variance

A metric tracking whether the company paid more or less per hour for labor than expected

Labor Efficiency Variance

A metric tracking whether workers took more or less time to make products than standard

Relevant Cost

A future cost that differs between choice alternatives

Sunk Cost

A past cost that cannot be recovered and should always be ignored in decisions

Opportunity Cost

The lost benefit or foregone profit given up by choosing one alternative over another

Avoidable Cost

An expense that can be completely eliminated by choosing a different course of action

Make or Buy Decision

A management evaluation comparing internal manufacturing costs against external outsourcing vendor quotes

Special Order

A short-term manufacturing request priced below normal rates that requires idle facility capacity

Constraint

A limited resource or bottleneck that caps the maximum production capacity of a company