study of how specific costs respond
to changes in the level of business
activity.
Cost
Behavior
Analysis
iden-tifies the activity that causes
changes in the behavior of costs
ACTIVITY
INDEX
costs that vary in total directly and
proportionately with changes in the
activity level.
Variable
costs
remains the same per unit at every
level of activity.
variable
lost
costs that remain the same in total
regardless of changes in the activity
level.
Fixed
costs
costs per unit vary inversely with
activity: As volume increases, unit
cost declines, and vice versa.
Fixed
costs
the relationship between the behavior
of a variable cost and changes in the
activity level
curvilinear
The range over which a company
expects to operate during a year is
called the ______ of the activity
index
Relevant
Range
Nonlinear
Fixed
lost
costs that contain both a variableand a fixed-cost element
mixed
cost
also called the normal or practical
range.
Relevant
Range
uses the total costs incurred at the high
and low levels of activity to classify mixed
costs into fixed and variable components
high
-
low
method
A better approach, which uses
information from all the data points to
estimate fixed and variable costs, is
called
Regression
Analysis
study of the effects of changes in costs
and volume on a company’s profits
cost
volume
( WP )
profit Analysis
important in profit planning
cost
volume
profit
Analysis
It also is a critical factor in such
management decisions as setting selling
prices, determining product mix, and
maximizing use of production facilities.
cost
volume
( WP )
profit Analysis
classifies costs as variable or fixed and
computes a contribution margin
Cup
Income
statement
is the amount of revenue remaining
after deducting variable costs. It is
often stated both as a total amount
and on a per unit basis.
contribution
margin
_______are costs that contain both a
variable- and a fixed-cost
element._____, therefore, change in
total but not proportionately with
changes in the activity level.
mixed
costs
Cvp
income
statement formula
sales
"÷:i::r.in
net
income
contribution margin
unit
formula
unit
Less
selling price
:
unit
variable
cost
unitwnmbnmagin
contribution margin expressed as a
percentage of sales
contribution
margin patio
CVP analysis considers the
interrelationships among the components
Volume
1.
or
2.
unit
}
Variable
.
a.
total
5.
sales
of activity
level
selling prices
fixed
mix
costs
costs
per
unit
difference between actual or expected
sales and sales at the break-even
point
Margin
of
safety
level of activity at which total
revenue equals total costs.
BREAKEVEN
POINT
percentage of each dol- lar of sales
that is available to apply to fixed costs
and contribute to net income;
calculated as unit contribu- tion
margin divided by unit selling price.
WNTRLBUTION
RATIO
MARGIN
contribution
unit
margin
contribution
unit
selling
ratio
margin
price
formula
÷
A key relationship in CVP analysis is
the level of activity at which total
revenues equal total costs (both fixed
and variable)
BREAK
-
EVEN
POINT
The process of finding the break-even
point is called
BREAK
EVEN
Analysis
difference between actual or expected
sales and sales at the break-even point
Margin
of
safety
measures the “cushion” that a particular
level of sales provides.
Margin
of
safety
margin of safety in dollars divided by
actual (or expected) sales.
margin
of
safe
in
ratio
tells us how far sales can drop before
the company will be oper- ating at a
loss.
Margin
of
safety
margin
be
of
safety
expressed
Dollars
and
can
through
Ratio
relative percentage in which a company
sells its multiple products.
sales
mix
is important to managers because
different products often have
substantially different contribution
margins
Sales
mix