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Chapter_18 - CHAPTER 18 COST VOLUME PROFIT Accounting...

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Chapter 18-1 CHAPTER 18 COST - VOLUME - PROFIT Accounting, Fourth Edition
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Chapter 18-2 Study Objectives 1. Distinguish between variable and  fixed costs. 2. Explain the concept of mixed costs. 3. List the five components of cost- volume-profit analysis. 4. Indicate what contribution margin  is and how it can be expressed. 5. Identify the three ways to determine  the break-even point.
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Chapter 18-3 Preview of Chapter To manage any business, you must understand: How costs respond to changes in sales volume, and The effect of costs and revenues on profit. To understand cost-volume-profit (CVP), you must know how costs  behave.
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Chapter 18-4 Cost-Volume-Profit Cost Behavior Analysis Cost-Volume- Profit Analysis Variable costs Fixed costs Mixed costs Identifying variable and fixed costs Basic components CVP income statement Break-even analysis Target net income
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Chapter 18-5 Cost Behavior Analysis Cost Behavior Analysis is: the study of how specific costs respond to changes in the level of business activity. Some costs change; others remain the same. A knowledge of cost behavior helps management plan operations and  decide between alternative courses of action. Cost behavior analysis applies to all types of entities.
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Chapter 18-6 Cost Behavior Analysis - Continued Starting point in cost behavior analysis is                   measuring key  business activities. Activity levels may be expressed in terms of: Sales dollars  (in a retail company). Miles driven  (in a trucking company). Room occupancy  (in a hotel). Dance classes taught  (by a dance studio). Many companies use more than one       measurement base.
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Chapter 18-7 Cost Behavior Analysis - Continued For an activity level to be useful:  Changes in the level or volume of activity should be correlated with changes in costs. The activity level selected is called the activity or volume index. The activity index: Identifies the activity that causes changes in  the behavior  of costs. Allows costs to be classified according to their  response to  changes in activity as either: Variable Costs Fixed Costs Mixed Costs
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Chapter 18-8 Variable Costs Variable costs are costs that  vary  in total directly and  proportionately with changes in the activity level. Example:  If the activity level  increases  10 percent, total variable costs  will increase  10 percent . Example: If the activity level  decreases  by 25 percent, total variable costs  will decrease  by 25 percent. Variable costs  remain the same per unit at every level of activity.
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