Cost-Volume-Profit Analysis and Incremental Analysis

Flashcards covering key concepts and terminology related to Cost-Volume-Profit analysis and Incremental Analysis in accounting.

Variable Costs

Costs that vary directly and proportionately with activity level, such as direct materials and direct labor.

Fixed Costs

Costs that remain constant in total regardless of activity changes, such as rent and insurance.

Mixed Costs

Costs that contain both variable and fixed components, such as utility bills.

High-Low Method

A method used to separate mixed costs into fixed and variable components.

Contribution Margin (CM)

The amount remaining from sales after variable costs have been deducted (Sales - Variable Costs).

Unit Contribution Margin

The contribution margin per unit, calculated as Unit Selling Price - Unit Variable Cost.

Break-Even Point (BEP)

The level of sales at which total revenues equal total costs, resulting in zero profit.

Target Sales in Units

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

Margin of Safety

The difference between actual sales and break-even sales.

Incremental Analysis

An analysis focusing on relevant revenues and costs that change between options when making decisions.

Relevant Costs

Costs that are directly relevant to a particular decision and will change depending on the option selected.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Sunk Costs

Costs that have already been incurred and cannot be recovered; they should be ignored in decision-making.

Make or Buy Decision

A decision-making process to determine whether to produce internally or purchase from an external supplier.

Repair, Retain, or Replace Equipment

Evaluation process considering the cost of new equipment versus savings from maintenance and upkeep.

Eliminating a Product Line

The process of deciding to remove a product if it does not increase net income.