BEC Chapter 2A

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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
    Image Upload
  4. Formula: Contribution Ratio
    Image Upload

    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
    • Fixed Factory Overhead
    • 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
    Image Upload
  10. Formula: Breakeven Point in Dollars
    (Two Formulas)
    Formula 1: Image Upload

    Formula 2: Image Upload
  11. Formula:  Required Sales Volume for Target Profit (Sales Dollars)
    Sales ($) = Variable Costs + Fixed Costs+ Net Income Before Taxes
  12. Formula: Required Sales Volume for Target Profit (Sales Units)
    Image Upload
  13. Formula: Margin of Safety (Sales Dollars)
    Total Sales ($) - Breakeven Sales ($)
  14. Formula: Margin of Safety (%)
    =Image Upload
  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

  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: 


    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
    Image Upload
  27. Make vs. Buy Decision:
    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
  28. Make vs. Buy:
    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 (RImage Upload)
    RImage Upload 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)
Card Set:
BEC Chapter 2A
2013-12-29 20:56:41
Cost Accounting Cards

Flashcards for Cost accounting chapter of BEC
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