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Barkman TCU

absorption costing

the costing method where products absorb both fixed and variable manufacturing costs

accounting analysis

a method for determining cost behavior that is based on a manager's judgment in classifying each general ledger account as a variable, fixed, or mixed cost

committed fixed costs

fixed costs that are locked because of previous management decisions; management has little or no control over these costs in the short run

contribution margin

sales revenue minus variable expenses

contribution margin income statement

income statement that organizes costs by behavior (variable costs or fixed costs rather than by function

cost behavior

describes how costs change as volume changes

cost equation

a mathematical equation for a straight line that expresses how a cost behaves

curvilinear costs

a cost behavior that is not linear

discretionary fixed costs

fixed costs that are in result of annual management decisions; fixed costs that are controllable in the short run

fixed costs

costs that do not change in total despite wide changes in volume

high low method

a method for determining cost behavior that is based on two historical data points: the highest and lowest volume of activity

mixed cost

costs that change, but not in direct proportion to changes in volume. mixed costs have both variable cost and fixed cost components

regression analysis

a statistical procedure for determining the line that best fits the data by using all of the historical data points, not just high and low data points

relevant range

the band of volume where total fixed costs remain constant at a certain level and where the variable cost per unit remains constant at a certain level

scatter plot

a graph that plots historical cost and volume data

step costs

a cost behavior that is fixed over a small range of activity and then jumps to a different fixed level with moderate changes in volume

outliers

abnormal data points; data points that do not fall in the same general patter as the other data points

variable costs

costs incurred for every unit of activity. as a result, total variable costs change in direct proportion to changes in volume

variable costing

the costing method that assigns only variable manufacturing costs to products. all fixed manufacturing costs (fixed MOH) are expensed as period costs

breakeven point

the sales level at which operating income is zero: total revenues = total expenses

contribution margin

sales revenue minus variable expenses

contribution margin income statement

an income statement that groups costs by behavior rather than function; it can be used only by internal management

contribution margin ratio

ratio of contribution margin to sales revenue

cost volume profit (CVP) analysis

expresses the relationships among costs, volume, and profit or loss

indifference point

the volume of sales at which a company would be indifferent between alternative cost structures because they would result in the same total cost

margin of safety

excess of expected sales over breakeven sales; the drop in sales a company can absorb without incurring an operating loss

operating leverage

the relative amount of fixed and variable costs that make up a firm's total costs

operating leverage factor

at a given level of sales, the contribution margin divided by operating income; the operating leverage factor indicates the percentage change in operating income that will occur from a 1% change in sales volume

sales mix

the combination of products that make up total sales

sensitivity analysis

a what if technique that asks what results will be if actual prices or costs change or if an underlying assumption changes

avoidable fixed costs

fixed costs that can be eliminated as a result taking a particular course of action

constraint

a factor that restricts production or sale of a product

contract manufacturers

manufacturers who make products for other companies, not for themselves

cost plus pricing

an approach to pricing used by price setters; cost plus pricing begins with the product's total costs and adds the company's desired profit to determine a cost plus price

offshoring

having work performed overseas. offshored work can either be performed by the company itself or by outsourcing the work to another company

opportunity cost

the benefit forgone by choosing a particular alternative course of action

outsourcing

a make or buy decision: managers decide whether to buy a product or service or produce it in house

product line income statement

that shows the operating income of each product line, as well as the company as a whole

relevant information

expected future data that differs among alternatives

segment margin

the income resulting from subtracting only the direct fixed costs of a product line from its contribution margin. the segment margin contains no allocation of common fixed costs

segment margin income statement

a product line income statement that contains no allocation of common fixed costs. only direct fixed costs that can be traced to specific product lines are subtracted from the product line's contribution margin. all common fixed costs remain unallocated, and are shown only under the company total

sunk cost

a past cost that cannot be changed regardless of which future action is taken

target costing

an approach to pricing used by price takers; target costing begins with the revenue at market price and subtracts the company's desired profit to arrive at the target total cost

unavoidable fixed costs

fixed costs that will continue to be incurred even if a particular course of action is taken

what is the equation for total variable cost?

y=vx

what is the equation for total fixed cost?

y=f

what is the equation for total mixed cost?

y=vx+f

what is the equation for high low method?

change in cost/change in volume (dependent on the change in volume)

if units produced = units sold...

then inventory levels remain constant, and absorption income = variable costing income

if units produced > units sold...

then inventory levels increase, and absorption income > variable costing income

if units sold > units produced...

inventory levels decrease, and variable costing income > absorption costing income

how do you reconcile the difference in operating income between absorption and variable income statements?

(change in inventory level, in units) x (fixed MOH per unit)

sales price decreases...

unit contribution margin decreases, and the volume needed to break even or achieve target profits decreases

sales price increases...

unit contribution margin increases, and the volume needed to break even or achieve target profits decreases

variable costs increases...

unit contribution margin decreases, then the volume needed to breakeven or achieve target profits increases

variable costs decreases...

unit contribution margin increases, then the volume needed to breakeven or achieve target profits decreases

fixed costs increases...

the volume needed to breakeven or achieve target profits increases

fixed costs decreases...

the volume needed to breakeven or achieve target profits

accept a special order?

if expected increase in revenues exceeds expected increase in variable and fixed costs, accept the order - if expected increase in revenues is less than expected increase in variable and fixed costs, reject the special order

what are the characteristics of price takers?

product lacks uniqueness, heavy competition, pricing approach emphasizes target costing

what are the characteristics of price setters

product is more unique, less competition, pricing approach emphasizes cost plus pricing

how to approach pricing rule?

if the company is a price taker for the product, emphasize a target costing approach - if the company is a price setter for the product, emphasize a cost plus pricing approach

should we discontinue a product, department, or store?

if lost revenues from discontinuing a product, department, or store exceed the cost savings from dropping, do not discontinue - if total cost savings exceed the lost revenues from discontinuing a product, department, or store, discontinue

which product to emphasize?

emphasize the product with the highest contribution margin per unit of the constraint

should we outsource?

if the incremental costs or making exceed the incremental costs of outsourcing, outsource - if the incremental costs of making are less than the incremental costs of outsourcing, do not outsource

sell as is or process further?

if extra revenue from processing further exceeds extra cost of processing further, process further - if extra revenue from processing further is less than extra cost of processing further, do not process further

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