C213 Study Guide - Solution.docx

# 31 compute product costs under a traditional volume

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Compute product costs under a traditional volume-based costing system. The text really doesn’t cover this. Justify a decision about a selling price based on traditional volume-based costing or activity-based costing systems. The following problem from the cohorts illustrates this process. However, it also contains an illustration of how you need to read questions carefully. 32
Chapter 11: Cost-Volume-Profit Analysis (C-V-P) Describe cost-volume-profit analysis. Cost-volume-profit analysis is a technique for determining how changes in revenues, costs, and level of activity affect the profitability of an organization. Describe how basic cost behavior patterns change as sales volumes change. Variable costs - Variable costs, by definition, vary in total proportionately to the number of units sold. However, the variable cost per unit sold is fixed within a relevant range. Fixed costs - Fixed costs, by definition, stay the same in total as units sold changes. However, because the total fixed costs stay the same, the per-unit fixed costs must vary inversely with units sold. That is, if you sell one more unit and the total fixed costs stay the same, the per-unit fixed costs must fall because you are spreading the same fixed costs over more units. The reverse is true if you sell on less unit. Apply cost-volume-profit analysis to demonstrate the effect of changes in variable costs, fixed costs, sales price, and sales volume on profit. The following cohort problem illustrates the process of calculating breakeven as well as calculating the number of units you need to sell to cover a target profit. You can use the full formula, which captures the full logic of the calculation. Alternatively, you can recognize that the full formula boils down to the contribution margin approach, which is much simpler to calculate. However, the full formula is on the PA and OA formula list while the contribution margin approach is not and so you will need to memorize it if you want to use it. The basic information you need to calculate a breakeven point is the selling price, per unit variable cost, fixed cost, and target profit, if any. These are the values you need to plug into either the full formula or the contribution margin approach. 33

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Analyze a cost-volume-profit graph to determine the level of variable costs, fixed costs, break-even point, and profit. The PA and OA can test your knowledge of graphs in two basic ways: by asking about points and lines or by asking about regions. You can determine what a region means by determining what the lines that bound the region are. Here is a cohort problem that illustrates the process: 35
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• Spring '16
• Kenneth Cassell
• Balance Sheet, Generally Accepted Accounting Principles

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