BEC Chapter 2A

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 Author: mmsmiles13728 ID: 254505 Filename: BEC Chapter 2A Updated: 2013-12-29 15:56:41 Tags: Cost Accounting Cards Folders: Description: Flashcards for Cost accounting chapter of BEC Show Answers:

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1. Definition: Breakeven Point
The point at which revenues equal total costs.
2. Formula: Contribution Approach
• Revenues
• Less: Variable Costs
• Equals: Contribution Margin
• Less: Fixed Costs
• Equals: Net Income
3. Formula: Unit Contribution Margin
4. Formula: Contribution Ratio

Represents Contribution Margin as a percentage of Revenue
5. Formula: Absorption Approach Formula
• Revenue
• Less: Product Costs (COGS)
• Equals: Gross Margin
• Less: Period Costs (Operating Expenses)
• Equals: Net Income
6. Treatment of Fixed Factory Overhead

Contribution Approach vs. Absorption Approach
• 1) Contribution Approach = Period Cost
•      (Included in Fixed Costs)

• 2) Absorption Approach = Product Cost
•       (Included in Cost of Goods Sold)
7. Effect on Net Income:
Contribution vs. Absorption Approach

Production Greater than Sales
• Results in Greater Inventory:
• Net income Absorption > Net income Contribution

Reason: Under absorption costing, a portion of Fixed OH is included with each unit in ending inventory, while all FOH is expensed during the period under contribution approach
8. Effect on Net Income:
Contribution vs. Absorption Approach

Sales Greater than Production
Absorption Net Income < Variable Net Income
9. Formula: Breakeven Point in Units
10. Formula: Breakeven Point in Dollars
(Two Formulas)
Formula 1:

Formula 2:
11. Formula:  Required Sales Volume for Target Profit (Sales Dollars)
Sales (\$) = Variable Costs + Fixed Costs+ Net Income Before Taxes
12. Formula: Required Sales Volume for Target Profit (Sales Units)
13. Formula: Margin of Safety (Sales Dollars)
Total Sales (\$) - Breakeven Sales (\$)
14. Formula: Margin of Safety (%)
=
15. Formula: Target Cost
Target Cost = Market Price - Required Profit
16. Definition: Irrelevant Costs
• Costs that do not differ between alternatives
• - Ignored from Marginal Cost analysis
17. Definition:  Incremental Costs
(Aka: Differential Costs and Out-Of-Pocket Costs)
The additional costs incurred to produce an additional amount of the unit over the present output

Relevant Cost
18. Definition: Sunk Costs
Costs that are unavoidable because they were incurred in the past and cannot be changed

Not-Relevant
19. Definition:  Opportunity Costs
The cost of foregoing the next best alternative when making a decision

- Relevant Cost
20. Definition: Controllable Costs
Costs that can be authorized at a specific level of management

- Relevant only if they will change as a result of selecting different alternatives
21. Definition:  Uncontrollable Costs
Costs that are authorized at a different level

- Not relevant because they cannot be changed by the manager making the decision
22. Definition:  Marginal Cost
The costs required for a one-unit increase in activity (includes all variable costs and any avoidable fixed costs associated with a decision)

- Relevant
23. Special Order Decision:

ACCEPT IF:

Effect on Fixed Cost:
• Accept if:  Profitable
•      Revenue > Relevant Costs

• Effect on Fixed Cost:
•     Fixed costs are generally not relevant unless the special order will change total fixed costs
24. Special Order Decisions:
Presumed Excess Capacity
Accept if Selling Price per Unit is greater than Variable Cost per Unit

SP > Relevant Costs (VC)
25. Special Order Decision:
Presumed Full Capacity
Accept if Selling Price per Unit is greater than Variable Cost per Unit and any forgone Opportunity Costs

SP > VC + Opportunity Costs
26. Formula:  Opportunity Cost per Unit
Excess Capacity
Cost of Making product internally is the cost that will be avoided if the product is not made

Cost of making the product internally is the maximum outside purchase price
No Excess Capacity
The cost of making the product internally is the cost that will be avoided (saved) if the product is not made plus the opportunity cost associated with the decision
29. Sell or Process Further Decision
if Incremental revenue > Incremental Cost

= Process Further
30. Keep or Drop Segment
Keep if:

Drop if:
• Keep Segment if: Lost CM > Avoided FC
• Drop Segment if: Lost CM < Avoided FC

The fixed costs associated with the segment must be identified as either avoidable (relevant) or unavoidable even if the segment is discontinued
31. Sensitivity Analysis
Change in Total Costs/Change in Volume = VC per Unit
32. Regression Analysis
y = mx + b

TC = (VC/unit * Volume) + Total FC
33. Coefficient of Correlation (r)
Measures the strength of the linear relationship between the independent variable (x) and dependent variable (y)

Range = -1, 0, 1

• -1 = Perfect Inverse Relationship
• 0 = No relationship
• 1 = Perfect Direct Relationship
34. Coefficient of Determination (R)
R is the proportion of the total variation in the dependent variable (x) explained by the independent variable (y)

Value between 0 and 1

The higher the value, the better the fit on the regression line
35. Formula:  Flexible Budget Formula
Total Cost = Fixed Cost + (Variable cost per unit * # of units)

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