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ACCT 410x – Chapter 19 Cost Volume Profit Analysis: Additional Issues

CVP Income Statement
classifies costs as variable or fixed and computes a contribution margin
Contribution Margin
amount of revenue remaining after deducting variable costs
Contribution Margin Ratio
contribution margin divided by sales
Break-Even Point
fixed cost / contribution margin per unit = breakeven point in units
fixed cost / contribution margin ratio = breakeven point in dollars
Required Sales to Achieve Target Net Income
(fixed cost + target net income) / contribution margin per unit = required sales in units
(fixed cost + target net income) / contribution margin ration = required sales in dollars
Margin of Safety
actual (expected) sales – breakeven sales = margin of safety in dollars
margin of safety in dollars / actual (expected) sales = margin of safety ratio
Sales Mix
relative percentage in which a company sells its multiple products (EX: 80% shoes, 20% jeans)
Weighted-Average Unit Contribution Margin
(unit contribution margin x sales mix percentage) + (unit contribution margin x sales mix percentage) = weighted average unit contribution margin
Break-Even Sales for Mix of Two or More Products
fixed costs / weighted average unit contribution margin = break even point in units
When is it more useful to compute the break-even point in terms of sales dollars?
when a company has a large number of products
Weighted Average Contribution Margin Ratio
multiply each division’s contribution margin ratio by its percentage of total sales and then sum amounts
Break-Even Point in dollars
fixed costs / weighted average contribution margin ratio = break even point in dollars
Cost Structure
relative proportion of fixed versus variable costs that company incurs; increase reliance on fixed costs increases company’s risk
Operating Leverage
extent to which a company’s net income reacts to a given change in sales
Degree of Operating Leverage
measure of a company’s earnings volatility and can be used to compare companies; contribution margin / net income = degree of operating leverage
What are the two approaches to Product Costing?
full/absorption costing and variable costing
Full/Absorption Costing
all manufacturing costs are charged to product
Variable Costing
only direct materials, direct labor, and variable manufacturing overhead costs are treated as product costs; fixed manufacturing overhead costs are recognized as period costs when incurred
What is the difference between variable and absorption costing?
under variable costing the fixed manufacturing overhead is charged as an expense in current period; absorption costing will show a higher net income number than variable costing whenever units produced exceed units sold because the cost of the ending inventory is higher under absorption costing than variable
Units produced exceed units sold – what are the effects on income from operations?
income under absorption costing is higher than under variable costing
Units produced are less than units sold – what are the effects on income from operations?
income under absorption costing is lower than under variable costing
Units produced are equal units sold – what are the effects on income from operations?
income will be equal under both approaches
Problems with absorption costing?
management may be tempted to overproduce to increase net income; variable costing is often used internally to evaluate management decision making to avoid overproduction
Advantages of variable costing?
net income is unaffected by changes in production levels; consistent with CVP analysis; net income closely tied to changes in sales levels giving a more realistic assessment of a company’s success or failure; presentation of fixed and variable cost components on variable costing income statement make it easier to identify costs and understand effect on business

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