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Topic: How tto Calculate Operation Leverage (

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nicelasvegas2
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Posted: 29 Aug 2009 at 16:18 \| IP Logged

Does anyone know the proper way to calculate operation, financial and combination leverage? Becker review book shows it one way and the AICPA question shows it another way. Also, How does Variable (direct) Costing calculate net income? I know DM, DL, VFOH should be included, should VS&G expense be included?

kj_nyc
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Posted: 29 Aug 2009 at 18:00 \| IP Logged

degree of operating leverage = contribution margin / EBIT

degree of financial leverage = EBIT / (EBIT - interest)

total leverage (I think this is what you mean by combination leverage) = operating leverage * financial leverage = contribution margin / (EBIT - interest)

Variable (direct) costing calculates net income in the same way as absorption, except that all fixed overhead costs are expensed as a period cost. Under absorption costing, fixed overhead costs are capitalzed to inventory and therefore not expensed until the inventory has been sold. Variable SG&A expenses are included as period expenses under both methods.

Jerry
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Posted: 30 Aug 2009 at 14:31 \| IP Logged

DOL = % change in operating income (EBIT OR NOI)/% change in unit volume

DFL = % change in EPS/% change in operating income (EBIT OR NOI)

kj_nyc
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Posted: 30 Aug 2009 at 15:42 \| IP Logged

Jerry, where did you get those formulas from? The ones I posted come from Bisk, which does not have the ones you posted.

Jerry
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Posted: 30 Aug 2009 at 16:08 \| IP Logged

kj_nyc wrote:

Jerry, where did you get those formulas from? The ones I posted come from Bisk, which does not have the ones you posted.

The formulas came from the Yaeger handout, pages 35 & 36. The formulas are also in the Wiley book, page 190. Additionally, Wiley gives an explanation of the formulas and examples. We will have to memorize the formulas and know how to set up the problems.

I love Bob Monette (Bisk) as a teacher. However, he only teaches cost accounting in Bisk's Hot Spots for BEC.

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