Review Notes Ch 18

Review Notes Ch 18 - CHAPTER 18 Cost-Volume-Profit STUDY...

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CHAPTER 18 Cost-Volume-Profit STUDY OBJECTIVES 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 FOR- MULAS FOR COMPUTING IT.
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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. Fixed costs per unit vary inversely with activity; as volume increases, unit cost declines and vice versa. Relevant Range 5. (S.O. 2) The range over which a company expects to operate during the year is called the relevant range. Within the relevant range a straight-line relationship exists for both variable and fixed costs. Mixed Costs 6. (S.O. 3) Mixed costs are costs that contain both a variable element and a fixed element; they increase in total as the activity level increases, but not proportionately. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements. 7. The high-low method uses the total costs incurred at the high and low levels of activity. The difference in costs represents variable costs, since only the variable cost element can change as activity levels change. 8. The steps in computing fixed and variable costs under the high-low method are: a. Determine variable cost per unit from the following formula: Change in ÷ High minus Low = Variable Cost Total Costs Activity Level per Unit b. Determine the fixed cost by subtracting the total variable cost at either the high or the low activity level from the total cost at that activity level. Cost-Volume-Profit Analysis
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This note was uploaded on 08/18/2010 for the course ACCOUNTING 6020 taught by Professor Seki during the Spring '10 term at FAU.

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Review Notes Ch 18 - CHAPTER 18 Cost-Volume-Profit STUDY...

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