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Unformatted text preview: The Navigator Scan Study Objectives Read Preview Read Chapter Review Work Demonstration Problem Answer True-False Statements Answer Multiple-Choice Questions Match Terms and Definitions Solve Exercises Chapter 18 C OST-VOLUME-PROFIT CHAPTER STUDY OBJECTIVES After studying this chapter, you should be able to: 1. Distinguish between variable and fixed costs. 2. Explain the significance of the relevant range. 3. Explain the concept of mixed costs. 4. List the five components of cost-volume-profit analysis. 5. Indicate what contribution margin is and how it can be expressed. 6. Identify the three ways to determine the break-even point. 7. Give the formulas for determining sales required to earn target net income. 8. Define margin of safety, and give the formulas for computing it. The Navigator PREVIEW OF CHAPTER 18 Management must understand how costs respond to changes in sales volume and the effect of the interaction of costs and revenues on profits. A prerequisite to understanding cost-volume-profit (CVP) relationships is knowledge of how costs behave. In this chapter, we first explain the considerations involved in cost behavior analysis. The content and organization of the chapter are as follows: Cost Behavior Variable Costs Fixed Costs Relevant Range Basic Components CVP Income Statement RELATIONSHIPS COST-VOLUME-PROFIT Cost-Volume- Profit Analysis Analysis Mixed Costs IdentifyingVariable and Fixed Costs Break-even Analysis Margin of Safety Target Net Income Changes in Business Environment The Navigator 18-2 Kimmel Accounting: Tools for Business Decision Making _____________________________________________________________________________ CHAPTER REVIEW Cost Behavior Analysis 1. Cost behavior analysis is the study of how specific costs respond to changes in the level of business activity. A knowledge of cost behavior helps management plan operations and decide between alternative courses of action. 2. The activity index identifies the activity that causes changes in the behavior of costs; examples include direct labor hours, sales dollars, and units of output. Once an appropriate activity index is chosen, costs can be classified as variable, fixed or mixed. Variable and Fixed Costs 3. (S.O. 1) Variable costs are costs that vary in total directly and proportionately with changes in the activity level. Examples of variable costs include direct materials and direct labor, cost of goods sold, sales commissions, and freight out. A variable cost may also be defined as a cost that remains the same per unit at every level of activity. 4. Fixed costs are costs that remain the same in total regardless of changes in the activity level. Examples include property taxes, insurance, rent, supervisory salaries, and depreciation....
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- Fall '07