Describe the assumptions underlying CVP analysis ?
1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units sold.
2. Total costs can be separated into a fixed component that does not vary with the units sold and a variable component that changes with respect to the units sold.
3. When represented graphically, the behaviors of total revenues and total costs are linear (represented as a straight line) in relation to units sold within a relevant range and time period.
4. The selling price, variable cost per unit, and fixed costs are known and constant.
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Cost Accounting
- Describe three reasons for an unfavorable direct manufacturing labor efficiency variance?
- List 4 reasons for using standard costs.
- Describe the steps in developing a flexible budget.
- Why might managers find a flexible budget analysis more informative than a static budget analysis?
- What is the key difference between a static budget and a flexible budget?
- Distinguish between a favorable variance and an unfavorable variance.
- What are the two possible sources of info a company might use to compute the budgeted amount in variance analysis?
- What is the relationship between management by exception and variance analysis?
- In CVP analysis, gross margin is a less-useful concept than contribution margin. Do you agree? Explain briefly.
- How can a company with multiple products compute its breakeven point?
- "There is no such thing as a fixed cost. All costs can be unfixed given sufficient time." Do you agree? What is the implication of your answer for CVP analysis?
- What is operating leverage? How is knowing the degree of operating leverage helpful to managers?
- Give an example of how a manager can increase variable costs while decreasing fixed costs.
- Give an example of how a manager can decrease variable costs while increasing fixed costs.
- Describe sensitivity analysis. How has the advent of the electronic spreadsheet affect the use of sensitivity analysis. How has the advent of the electronic spreadsheet affected the use of sensitivity analysis?
- How does an increase in the income tax rate affect the breakeven point?
- CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP analysis. Do you agree? Explain.
- Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analyses?
- Describe three methods that managers can use to express CVP relationships ?
- Define contribution margin, contribution margin per unit, and contribution margin percentage.
- Distinguish between operating income and net income ?
- Define cost-volume-profit analysis ?