Management accounting - Chapter 2

Cost behavior -- how the activities of an organization affect its costs
cost driver -- any output measure that causes costs
variable cost -- a cost that changes in direct proportion to changes in the cost driver level
fixed cost -- a cost that is not immediately affected by changes in the cost driver level
relevant range -- the limit of cost driver activity level within which a specific relationship between costs and the cost driver is valid
cost value profit (CVP) analysis -- the study of the effects of output valume on revenue (sales), expenses (costs), and net income (net profit)
breakeven point -- the level of sales at which revenue equals expenses and net income is zero
unit contribution margin (marginal income) -- the sales price minus the variable cost per unit
contribution margin -- a term used for either unit contribution margin or total contribution margin
variable cost percentage -- total variable costs divided by total sales
contribution margin percentage -- total contribution margin divided by sales or 100% minus the variable cost percentage
variable cost ratio -- variable cost percentage expressed as a ratio
contribution margin ratio -- contribution margin percentage expressed as a ratio
sales mix -- the relative proportions or combinations of quantities of products that constitute total sales
incremental effect -- the change in total results (such as revenue, expenses, or income) under a new condition in comparison with some given or known condition
operating leverage -- a firm's ratio of fixed to variable costs
margin of safety -- the planned unit sales less than break even unit sales; it shows how far sales can fall below the planned level before losses occur
Gross margin (Gross profit) -- the excess of sales over the total cost of goods sold
cost of goods sold -- the cost of the merchandise at a company acquires or produces and then sells

How cost drivers affect cost behavior.
A cost driver is an output measure that causes the use of costly resources. When the level of an activity changes, the level of the cost driver or output measure will also change, causing changes in costs.

Changes and cost driver activity levels affect variable and fixed costs.
Different types of costs behave in different ways. If the cost of the resource used changes in proportion to changes in the cost driver level, the resource is a veritable cost resource. If the cost of the resource used does not change because of cost driver level changes, the resource is a fixed cost resource.

Calculate breakeven sales volume in total dollars and total units.
We can approach CVP analysis (sometimes called break even analysis) graphically or with equations. To calculate the breakeven point in total units, divide the fixed costs by the unit contribution margin. To calculate the break even point in total dollars (sales dollars), divide the fixed costs by the contribution margin ratio.

Cost volume profit graph.
We can create a cost volume profit graph by drawling revenue and total cost lines as functions of the cost driver level. Be sure to recognize the limitations of CVP analysis and that it assumes constant efficiency, sales mix, and inventory levels.

Contribution margin and gross margin.
The contribution margin -- the difference between sales price and variable costs. The gross margin is the difference between the sales price and cost of goods sold.