the costing method where products absorb both fixed and variable manufacturing costs
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
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
describes how costs change as volume changes
a mathematical equation for a straight line that expresses how a cost behaves
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
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
costs that change, but not in direct proportion to changes in volume. mixed costs have both variable cost and fixed cost components
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
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
a graph that plots historical cost and volume data
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
abnormal data points; data points that do not fall in the same general patter as the other data points
costs incurred for every unit of activity. as a result, total variable costs change in direct proportion to changes in volume
the costing method that assigns only variable manufacturing costs to products. all fixed manufacturing costs (fixed MOH) are expensed as period costs
the sales level at which operating income is zero: total revenues = total expenses
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
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
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
the combination of products that make up total sales
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
a factor that restricts production or sale of a product
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
having work performed overseas. offshored work can either be performed by the company itself or by outsourcing the work to another company
the benefit forgone by choosing a particular alternative course of action
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
expected future data that differs among alternatives
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
a past cost that cannot be changed regardless of which future action is taken
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?
what is the equation for total fixed cost?
what is the equation for total mixed cost?
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