16SU 2071 Q3 Study Guide with Sample Questions.pdf

16SU 2071 Q3 Study Guide with Sample Questions.pdf -...

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Hillsborough Community College 16SU 2071 L | Study Guide for Quiz 3 1 Chapter 20 This chapter contains updated coverage of strategy and strategic uses of cost information. There is a shift to the “essentials” of cost-volume-profit analysis with less focus on the assumptions of CVP analysis. This is in line with the increased focus on the managerial aspects of the text. This chapter presents the cost-volume-profit (CVP) analysis model and illustrates how managers use that model to help answer important “what-if” business questions. CVP analysis also helps management accountants alert managers to the risks and rewards of decisions they are considering by illustrating how the “bottom-line” is affected by changes in activity levels or key pricing or cost components. CVP analysis is based on several assumptions, one of which is that fixed costs can be distinguished from variable costs. However, whether a cost is variable or fixed depends on the time period for the decision and also the range of activity (relevant range) being considered. Various applications of CVP analysis are explained, including how to compute the number of units to sell (or dollars of sales needed) to earn a target operating income and what operating income to expect at various sales levels. The breakeven point is defined, and breakeven analysis is recognized as a special case of target profit analysis. A CVP graph illustrates operating income and loss at various sales levels. The chapter looks at sensitivity analysis of CVP relationships when changing selling price, unit variable costs, and total fixed costs. Total variable costs change in direct proportion to changes in volume, but the variable cost per unit remains unchanged. Total fixed costs remain unchanged with changes in volume, but the fixed cost per unit changes inversely. Mixed costs have variable and fixed components. Contribution margin is the difference between total revenues and total variable costs. This is an indication of why operating income changes as the number of units sold changes. Contribution margin is calculated as net sales revenue minus variable costs. Contribution margin ratio is calculated as contribution margin divided by net sales revenue. The traditional income statement separates costs by function: product costs and period costs. The contribution margin income statement separates costs by behavior—fixed and variable—and highlights contribution margin.
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