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Acct 307 Exam 2 Review

Acct 307 Exam 2 Review - Acct 307 Exam#2 Review Chapter 6...

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Acct 307 Exam #2 Review Chapter 6: Cost-volume-profit (CVP) analysis – a tool that focuses on the relationship between a company’s profits and 1) the prices of products or services, 2) the volume of products or services, 3) the per unit variable costs, 4) the total fixed costs, and 5) the mix of products or services produced The payment of income taxes is an important variable in target profit and other CVP decisions Gross profit – the difference between sales and costs of goods sold Contribution margin per unit – the sales price per unit of product less all variable costs per unit; it is used to calculate the change in contribution margin resulting from a change in unit sales Contribution margin ratio – the contribution margin divided by sales revenues; used to calculate the change in contribution margin resulting from a dollar change in sales The contribution margin income statement is structured to emphasize cost behavior as opposed to cost function For every unit change in sales, contribution margin will increase or decrease by the contribution margin per unit multiplied by the increase or decrease in sales volume The contribution margin per unit and the contribution margin ratio will remain constant as long as sales vary in direct proportion to volume For every dollar change in sales, contribution margin will increase or decrease by the contribution margin ratio multiplied by the increase or decrease in sales dollars Break-even point – the level of sales at which contribution margin just covers fixed costs and net income is equal to zero Operating leverage – the contribution margin divided by net income; used as an indicator of how sensitive net income is to the change in sales A company operating near break-even point will have a high level of operating leverage, and income will be very sensitive to changes in sales volume Absorption (full) costing – a method of costing in which product costs include direct material, direct labor, and fixed and variable overhead; required for external financial statements and for income tax reporting
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Variable (direct) costing – a method of costing in which product costs include direct material, direct labor, and variable overhead; fixed overhead is treated as a period cost; consistent with CVP’s focus on cost behavior Variable costing is consistent with CVP’s focus on differentiating fixed from variable costs and provides useful decision-making information that is often not apparent when using absorption costing Chapter 7: Special order decisions –
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