Cost Accounting: Chapter 3 - CVP Analysis Flashcards

Terms Definitions
Contribution Margin
Excess of Revenue minus Variable Costs (or Gross Margin: SP-VCU)
Contribution Margin per Unit
Selling Price per unit less Variable Costs per Unit (SP - VCU or TCM/Total Units)
Contribution Margin Percentage
Contribution Margin per Unit / Selling Price (CMU/SP)
Income Statement grouping costs into their variable and fixed components
Contribution Income Statement
3 methods of CVP analysis
Equation, Contribution Margin, and Graph Methods
Method of CVP involving tests using the basic [Operating Income = (SP*Q) - (VCU*Q) - FC] formula
Equation Method
How is the Contribution Margin method different from the Equation Method?
Instead of (Revenue - VC) as a separate part of the equation, Total C. Margin is used in its place
2 lines used in the graph method of CVP?
Total Revenue Line (Int = 0, Slope = SP); Total Cost Line (Int = FC, Slope = VCU)
How do the revenue and cost lines behave in the Graph Method of CVP?
Linearly (assumed for the purpose of the analysis)
How are profit and loss determined in the Graph Method of CVP?
Vertical distance between Revenue and Cost Lines
What is a critical concern when trying to maintain accuracy when using CVP analysis for estimation?
Staying within relevant range of data
Fixed Costs / Contribution Margin per Unit = ?
Breakeven point in terms of units
Fixed Costs / Contribution Margin Percentage (CMU/SP) = ?
Breakeven Point in Revenues
The objective of Breakeven Analysis is to _____ ?
Find the minimum production level at which Fixed Costs are fully covered (Operating Income = 0)
When trying to find the production level for a target operating income, you ____
Add the Target OI to Fixed Costs and divide by C. Margin per Unit ((FC + TOI) / CMU)
A ____ shows how change in quantity of units sold affects operating income
Profit-Volume (PV) Graph
The line in a PV Graph is drawn using _____
The operating loss at 0 units sold, and the breakeven point
In a PV Graph, the area above the X-Axis is called the _____ and corresponds to ____
Operating Income Area (OI > 0)
The equation for the Operating Income needed to earn a target Net Income is ___?
Target OI = Target NI / (1 - Tax Rate)
The point when the PV line crosses the X-Axis corresponds to ____ ?
The Breakeven Point in units
(SP - VCU) * Q = 960 / 1 - 0.4; solving for Q will give you what?
Quantity needed to be sold in order to earn a target Net Income of $960, assuming a 40% tax rate
True or False: Changing the focus from target Operating Income to target Net Income will change the Breakeven Point
False: Since TOI at the Breakeven should be $0, no income taxes are paid, therefore it won't affect the analysis
"What-If?" analysis used to determine change in operating income given different possible scenarios
Sensitivity Analysis
Amount by which budgeted revenues exceed breakeven revenues (amount sales can drop before BEP is reached)
"Margin of Safety": Calculated as (Budgeted Rev or Units - Breakeven Rev or Units)
Margin of Safety Percentage
Margin of Safety in Rev / Budgeted Revenues [(Rev-BE)/Rev]
A ____ Margin of Safety means that the risk of suffering an operating loss is low
Higher fixed costs result in a higher risk of _____
Operating Loss (Remember term "Operating Leverage")
True or False: CVP Analysis can help managers choose between alternative cost structures
Operating Leverage
The effects of fixed costs on changes in operating income as units sold changes
Degree of Operating Leverage
Contribution Margin / Operating Income
In periods of weak sales, a company with a high ____ is more prone to losses and possible bankruptcy
Degree of operating leverage
True/False: When working with a static sales mix, it is best to treat the combination of units as a "bundle"
When dealing with CVP Analysis in a situation with multiple cost drivers, you must ____
Add the new variable cost (rate * driver) to the old VCs, and proceed a normal with the formula
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