Understanding the relationships in the expanded contribution margin model may be the singlemost important concept developed in managerial accounting. The model presented here provides a structure for explaining, in a consistent manner, the effect on operating income of changesin selling price, variable expenses, fixed expenses, or the volume of activity. As you study theseexamples, you will notice that four relationships are constantly interacting with one another:1. Revenue −Variable expenses 5 Contribution margin.2. Contribution margin / Revenue 5 Contribution margin ratio.3. Total contribution margin depends on the volume of activity.4. Contribution margin must cover fixed expenses before an operating income is earned.Your goals are to identify these relationships in every cost–volume–profit question and appreciatetheir interaction as a way of thinking that becomes second nature for you. Once you can visualize thisinteraction of these relationships, you are well on your way to becoming a successful decision maker
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Understanding the relationships in the expanded contribution margin model may be the single
most important concept developed in
in selling price, variable expenses, fixed expenses, or the volume of activity. As you study these
examples, you will notice that four relationships are constantly interacting with one another:
1. Revenue −Variable expenses 5 Contribution margin.
2. Contribution margin / Revenue 5 Contribution margin ratio.
3. Total contribution margin depends on the volume of activity.
4. Contribution margin must cover fixed expenses before an operating income is earned.
Your goals are to identify these relationships in every cost–volume–profit question and appreciate
their interaction as a way of thinking that becomes second nature for you. Once you can visualize this
interaction of these relationships, you are well on your way to becoming a successful decision maker
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