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What is another name for cost-volume-profit (CVP) analysis
Breakeven analysis
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What is the difference between the absorption approach or contribution approach to costing?
- Absorption Approach: GAAP. Does not segregate variable vs fixed costs. Both costs contribute to the COGS amount.
- Contribution Approach: Non-GAAP. Variable costs (including the variable portion of SG&A) are subtracted from revenues to obtain a contribution margin. Fixed costs are then subtracted from that.
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What is the formula for the contribution margin ratio?
Contribution Margin / Sales
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When determining the contribution margin, variable costs are broken into two components. What are they, and what is included in each?
- Product Costs: These include the variable costs of DM, DL, and variable manufacturing overhead.
- Variable SG&A: Just what it says
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How are fixed manufacturing overhead costs treated using the contribution approach vs absorption approach?
- Contribution Approach: period costs
- Absorption Approach: as a product cost and included in either COGS or inventory
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How is SG&A treated differently between the Contribution vs Absorption approaches?
- Contribution Approach: variable SG&A is assigned to determine the contribution margin, but is still counted as a period cost
- Absorption Approach: period cost
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Define the Margin of Safety?
- The excess of sales over breakeven sales.
- Margin of safety (in dollars) = total sales (in dollars) - breakeven sales (in dollars)
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For the following situations, how would Contribution vs Absorption Costing change operating income? (1) production = sales, (2) production > sales, (3) production < sales
- (1) operating income would be the same
- (2) Absorption Costing: COGS would be lower, but some fixed costs would be transferred to ending inventory, thus operating income would higher than Contribution Costing
- (3) Absorption Costing: COGS would be higher because previous fixed costs would be used with the inventory sold; thus, operating income would be lower than Contribution Costing.
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What are the steps to compute the difference between Variable Costing vs Absorption Costing on net income?
- (1) compute the fixed cost per unit
- (2) compute the change in income = change in inventory units x fixed cost per unit
- (3) determine the impact of the change in income
- (3a) if no change in inventory = same net income
- (3b) if inventory increases = absorption has higher net income
- (3c) if inventory decreases = absorption has lower net income
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What is the formula for breakeven (BE) number of units considering (1) no profit, (2) profit
- (1a) no. of BE units = fixed costs / contribution margin per unit
- (1b) dollars = fixed costs / contribution margin ratio OR no. of BE units x sales price per unit OR total sales dollars = fixed costs + total variable costs
- (2a) no. of BE units = (fixed costs + pretax profit) / contribution margin per unit
- (1b) dollars = (fixed costs + pretax profit) / contribution margin ratio OR no. of BE units x sales price per unit OR Total sales dollars = total fixed costs + total variable costs + total pretax profit
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Once breakeven has been achieved, net income will increase by how much?
The contribution margin of each additional unit sold beyond the breakeven amount.
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What is the formula to determine the minimum selling price of a product?
- Selling price = (total fixed costs + total variable costs + pretax profit) / number of units expected to be sold, where
- Total Variable Costs = VCost per unit x number of units expected to be sold
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Define Target Costing. What is the formula?
- The production cost levels that can be allowed given a particular sales price.
- Target cost = market price - required profit
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If desired profit is 15% of sales, what percentage of sales is dedicated to costs?
100% - 15% = 85%
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What is included in full-cost pricing? How is this different from direct-cost pricing? What assumptions are made?
- Full-cost pricing = variable + fixed costs + % markup
- Direct-cost pricing does not include fixed costs.
- Assumptions: prices remain stable, the focus is on fixed cost recovery.
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