What is another name for cost-volume-profit (CVP) analysis
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.
What is the formula for the contribution margin ratio?
Contribution Margin / Sales
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
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
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
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)
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.
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
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
Once breakeven has been achieved, net income will increase by how much?
The contribution margin of each additional unit sold beyond the breakeven amount.
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
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
If desired profit is 15% of sales, what percentage of sales is dedicated to costs?
100% - 15% = 85%
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.