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33 Cards in this Set
- Front
- Back
Break-Even point in units
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fixed / cmu (contribution margin[sales-variable expenses]/units)
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Contributions Margin Units
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Sales-Variable Expenses/units
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Contribution Margin
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Sales-Variable Expenses
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Variable Expenses (Contribution Format)
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Direct Labor + Direct Material + Variable Manufacturing Overhead + Variable Selling Expenses
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Fixed Expenses (Contribution Format)
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Fixed Manufacturing Overhead + Fixed Selling and Admin Expenses
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Net Income (Contribution Format)
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Sales (units x price) + Variable Expenses = Contribution Margin - Fixed Expenses = Net Income
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Operating Leverage Ratio
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Total Contribution Margin/Net Income
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Margin of Safety in dollars:
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Total Sales – Break-Even Sales
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Margin of Safety as a percentage:
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Margin of Safety in dollars/Total Sales
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Variable OH rate per unit:
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Variable OH/units
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Variable SG&A per unit:
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Variable Selling expenses/units
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Variable Per Unit
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(Sales x Variable Expenses Ratio)/units
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Net Profit after Increased Sales
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(increased amount) x CM ratio
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Target Unit (Contribution Margin Method)
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(Fixed expenses + Target net profit)/Unit contribution margin
or target net sales/price of units |
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Target Sales (Contribution Margin Method)
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(Fixed expenses + Target net profit)/ Contribution Ratio%
or target net units x price of units |
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High-Low Method - Variable rate
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High minus Low fort Units and for Cost. Divide change in cost by change in units to get variable rate.
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High-Low Method - Fixed cost element
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High cost minus (high units x variable rate)
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High-Low Method : Cost formula y=a + bx
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y = fixed + variable(x)
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contribution margin vs gross margin
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Gross Margin is the Gross Profit as a percentage of Net Sales. The calculation of the Gross Profit is: Sales minus Cost of Goods Sold. The Cost of Goods Sold consists of the fixed and variable product costs, but it excludes all of the selling and administrative expenses.
Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales. |
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Contribution Margin
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Sales - Variable Costs
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Gross Margin
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Sales - Variable and Fixed (cost of goods sold) - excluding SG&A
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Margin of Safety in Dollars
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Total sales - Break-even sales
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Margin of Safety in Percentage
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margin of safety in dollars/total sales
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Degree of Operation Leverage
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Contribution Margin/Net Income
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Multi Product Overall CM ratio
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Total contribution margin/total sales dollars
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Multi Product Break Even Sales
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Fixed Expenses/Overall CM ratio
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Multi Product - Sales to attain Target Net Profit
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(Fixed Expenses + Target Net Profit)/Overall Contribution Margin Ratio
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Assumptions in CVP Analysis
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A. Selling price is constant. , B. Costs are linear and can be accurately divided into variable and fixed elements. ,
C. In multi-product companies the sales mix is constant. , D. In manufacturing companies, inventories do not change. |
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Variable vs absorption costing
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A. Variable Costing
Variable costing treats only those costs that vary with output as product costs. Ordinarily, direct materials, direct labor and variable manufacturing overhead costs would be included in product costs under variable costing. Fixed manufacturing overhead is not treated as a product cost under this method. Rather, fixed manufacturing overhead is treated as a period cost and is charged off against revenue each period. B. Absorption Costing Absorption costing treats all costs of production as products costs, regardless of whether they are variable or fixed in nature. Under the absorption costing method, a portion of fixed manufacturing overhead is allocated to each unit of product. The difference between the absorption and variable costing methods centers on the treatment of fixed manufacturing overhead costs. Absorption costing includes fixed manufacturing overhead in product costs, whereas variable costing does not. |
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Costing methods and SG&A
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Selling and administrative expenses are not treated as product costs under either costing method. Selling and administrative expenses are always treated as period costs and deducted from revenues as incurred.
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Production Equals Sales (No Change in Inventories)
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When production equals sales, there is no change in inventories. If there is no change in inventories, then there is no change in the fixed manufacturing overhead costs in inventories under absorption costing. Therefore, under both costing methods all of the current fixed manufacturing overhead will flow through to the income statement and be charged against income
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B. Production Exceeds Sales (Inventories Increase)
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When production exceeds sales, inventories grow. If inventories grow, then some of the current fixed manufacturing overhead costs will be deferred in inventories under absorption costing. Since all of the current fixed manufacturing overhead costs are expensed under variable costing, the net income reported under the absorption costing will be greater than the net income reported under variable costing.
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C. Sales Exceed Production (Inventories Decrease)
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When sales exceed production, inventories shrink. If inventories decrease, then some of the fixed manufacturing overhead costs that had been deferred in inventories in previous periods will be released to the income statement as a charge against income as well as all of the current fixed manufacturing overhead costs. Since only the current fixed manufacturing overhead costs are expensed under variable costing, the net income reported under absorption costing will be less than the net income reported under variable costing.
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