Contribution margin per unit is the net amount that each additional unit sold contributes towards a company’s fixed costs and profit. It equals the difference between the product’s sales price and variable cost per unit.
Degree of operating leverage (DOL) is defined as percentage change in operating income that occurs in response to a percentage change in sales. In this article we use this definition to derive different formulas for DOL.
EOQ stands for economic order quantity. It is the optimal order size at which total inventory costs are minimized. It is calculated by taking the square root of the ratio of 2 times the product of annual demand and cost per order to the carrying cost per unit per annum.
Manufacturing overheads costs represent all such costs which are incurred in production of goods excluding direct materials and direct labor. Manufacturing overhead costs are further classified into fixed manufacturing overhead costs and variable manufacturing overhead costs.
In management accounting, variable costs are cost items whose total cost varies proportionately with some underlying activity level such as total units, labor hours, machine hours, etc.
Mixed costs (also called semi-variable costs) are costs that have both fixed and variable components. The fixed element doesn’t change with change in activity level at all and the variable component changes proportionately with activity.
Trial balance is a draft report used by accountants that simply lists all the ledger account balances extracted from the accounting system of a business at a given date.
Fixed costs are costs which do not change with change in output as long as the production is within the relevant range. It is the cost which is incurred even when output is zero.
Variable cost ratio is the ratio of variable costs to sales. It equals total variable costs divided by total sales or variable cost per unit divided by price per unit or 1 minus contribution margin ratio.
A break-even chart is a graph which plots total sales and total cost curves of a company and shows that the firm’s break-even point lies where these two curves intersect.