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Accounting Chpt 3

Terms in this set (30)

Cost-Volume-Profit analysis (CVP)
Examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, the selling price, the variable costs per unit, or the fixed costs of a product.
CM/Sales
Contribution Income Statement
A type of income statement that groups costs into variable costs and fixed costs to highlight contribution margin.
Contribution Margin Ratio
Instead of expressing the contribution margin as a dollar amount per unit, we can express it as a percent.
Total Cost Lines
The sum of fixed cost and variable costs.
Total Revenue Line
An easy place to start is 0 revenue for 0 items sold.
Revenue Driver
A variable, such as volume, that casually effects revenue. Similar to a cost driver.
Breakeven Point
Quantity of output sold at which total revenues equal total costs. The quantity of output sold that results in 0 dollars of operating income. Managers want to avoid operating losses.
PVC graph
Shows how changes in quantity of units sold affect operating income.
Net income
Operating income plus non-operating revenues (ex: interest) minus non-operating costs (ex: interest cost) minus income taxes.
Margin of Safety
Answers the "what if" question:
Target Operating Income
We illustrate this calculation by asking: How many units must the company sell to earn a certain income?
Sensitivity analysis
A "what if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes.
Operating Leverage
Describes the effects that fixed costs have on changes in operating income changes occur in units sold and contribution margin.
Uncertainty
The possibility that an actual amount will deviate from an expected amount.
Sales Mix
The quantities of various products that constitute total unit sales of a company.
Choice Criterion
An objective that can be quantified. It may take many forms. Most often the choice is to maximize income or minimize costs.
Event
A possible relevant occurrence such as the actual number of software packages a company may sell at a convention.
Probability Distribution
Describes the likelihood or chance that, each of the mutually exclusive and collectively exhaustive set of events will occur. In some cases you will get more information and it may be more accurate.
Outcomes
These specify in terms of the choice criterion, the predicted economic results of the various possible combinations of actions and events.
Decision Table
A summary of the alternative actions, events, outcomes, and probabilities of events.
Expected Monetary Value
When outcomes are measure in monetary terms.
Breakeven Formula
Profit ($0) = sales - variable costs - fixed costs
Expected Value
The weighted average of the outcomes, with the probability of each outcome serving as the weight.
Contribution Margin Per Unit
Selling price- variable cost per unit
Contribution margin
Sales - Variable Costs
Gross Margin Percentage
A broad measure of profitability.
Degree of operating leverage
Contribution Margin / Net Operating Income
Target Net Income Formula
sales - variable costs - fixed costs
Gross Margin Percentage Formula
Gross profit divided by net sales revenue.
Gross Margin Formula
Sale price - cost of sales (material and labor)
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