Accounting topic 2 flashcards

Variable cost behavior

An increase in production or sales will result in an increase in variable costs. A decrease in production or sales will lead to a decrease in variable costs, as these costs fluctuate directly with the level of activity.

Fixed cost behavior

Fixed costs are constant over a period at all levels of business activity. They are not dependant on the level of productivity.

Contribution Margin

Is the amount left over after subtracting the variable costs from the sales. It shows how much sales income is left over to cover fixed costs and contribute to profit.

Break even point

Is the level of sales at which total revenues equal total costs, resulting in neither profit nor loss.

Margin of safety

Is the amount by which is budgeted or actual sales exceed the Break even point. The buffer is the margin of safety. It shows how far sales can decrease before a loss occurs.

Differential analysis

Is a process that uses relevant to evaluate available. (The cost benefits that are different for each course of action.)

Differential analysis examples~

1. Relevant costs.

2. Differential costs.

3. Avoidable costs

4. Opportunity costs.

5. Relevant income

6. Differential income.
   

Qualitative factors examples

1. Customers

2. Employees

3. competitors

4. Legal constraints

5. Suppliers.