Managerial Accounting - Chapter 5

Volume

the MEASURE/DEGREE of an activity related to business action that AFFECTS COSTS; ex: number of units sold or produced.

Variable Costs

a cost that increases/decreases in TOTAL in direct proportion to increases/decrease in volume of activity; TOTAL fluctuates, PER UNIT remains constant.

Fixed Costs

a cost that remains the same IN TOTAL regardless of changes over wide ranges of volume; PER UNIT fluctuates, TOTAL remains constant. Changes inversely as volume increases/decreases. Ex: rent, salaries, property tax, and depreciation.

Mixed Costs

a cost that has both fixed and variable components; ex: sales compensation. TOTAL increases as volume increases.

High-low Method

separates mixed costs into their variable and fixed components using the highest and lowest activity levels.

High-low Method Steps

1. Identify the highest and lowest activity periods

2. Calculate Variable cost per Unit = (Highest $ - Lowest $)/(Highest Volume - Lowest Volume)

3. Calculate Total Fixed Cost = Total Mixed Cost - (Variable Cost per Unit * # of units)

4. Total Mixed Cost = (Variable Cost per Unit * units produced during Period) + Total Fixed Cost

Regression Analysis

a statistical method estimating relationships between 1 dependent variable and 1/more independent variables; use Excel. More accurate than High-low Method

Relevant Range

the range of volume where total fixed costs and variable costs per unit REMAIN CONSTANT. TOTAL fixed costs and PER UNIT variable costs are constant within specific ranges.

Contribution Margin

amount that covers fixed costs and produces operating income

Contribution Margin Formula

= Net Sales Revenue - Variable Costs

Unit Contribution Margin Formula

= Net Sales Revenue per Unit - Variable Costs per unit

Contribution Margin Ratio

the ratio of contribution margin to net sales revenue.

Contribution Margin Ratio Formula

= Contribution Margin / Net Sales Revenue

Contribution Margin I/S

groups costs by behavior (variable/fixed) and highlights contribution margin.

Cost-Volume-Profit (CVP) Analysis

a planning tool that expresses the relationship among costs, volume, and prices, as well as their effects on profits/losses.

CVP Analysis Assumptions

1. The price per unit does NOT change as volume changes

2. Managers classify costs as variable, fixed, or mixed

3. Change in volume affects costs

4. Fixed costs NEVER change

5. Units produced = units sold

Breakeven Point

the sales level at which operating income is 0, total revenues = total cost. Therefore, target profit = 0.

Breakeven Point Equation Approach

(Net Sales Revenue - VC) * Units Sold = Fixed Costs

Breakeven Point Required Sales in Units

= Fixed Costs / Unit Contribution Margin

Breakeven Point Required Sales in Dollars

= Fixed Costs / Contribution Margin Ratio

Target Profit Equation Approach

(Net Sales Revenue - VC) * Units Sold = Fixed Costs + Target Profit Required Sales in Units =(Fixed Costs + Target Profit)/Unit Contribution Margin

Target Profit Required Sales in Dollars

=(Fixed Costs + Target Profit)/Contribution Margin Ratio

Sensitivity Analysis

"what-if" technique that ESTIMATES profits/loss results if sales price, costs, volume, or underlying assumptions CHANGE

Cost Stickiness

the asymmetrical change in costs when volume of activity decreases.

Margin of Safety

the excess of expected sales over breakeven sales; the amount sales can decrease before the company incurs an operating loss.

MOS in Units

= Expected Sales in Units - Breakeven Sales in Units

MOS in Dollars

= MOS in Units * Sales Price per Unit

MOS as a Ratio

= MOS in Units / Expected Sales in Units

Cost Structure

the proportion of fixed costs to variable costs

Operating Leverage

PREDICTS the effects of FIXED COSTS on changes in operating income when sales volume changes.

Degree of Operating Leverage

the RATIO that MEASURES the effects of FIXED COSTS on changes in operating income when sales volume changes.

Sales Mix

combination of products that make up total sales

Sales Mix in Units

a fraction representation of = Number of Specific Product Sold / Total Products Sold

Weighted-Average Contribution Margin per Unit

= Total Contribution Margin / Total Sales Mix in Units

Breakeven Point Items Packaged

=(Fixed Costs)/Weighted-average Contribution Margin per Unit

Breakeven Point Required Units for Each Product

= BP Items Packaged * Sales Mix for Each Product

Target Profit Items Packaged

=(Fixed Costs + Target Profit)/Weighted-average Contribution Margin per unit

Target Profit Required Units for Each Product

= TP Items Packaged * Sales Mix for Each Product