10 - Cost Behaviour & Cost Volume Profit

Question 1

Define fixed costs

Answer 1

Those that stay the same when the volume of activity changes.

Question 2

Examples of fixed cost

Answer 2

Depreciation, interest expense, rent, salaries

Question 3

Define variable costs

Answer 3

Those that vary in accordance with the volume of activity.

Question 4

Examples of variable costs

Answer 4

Direct materials, piece rate labour, commissions, credit card fees

Question 5

What is full cost made up off?

Answer 5

Fixed and variable costs together

Question 6

Define semi-fixed (semi-variable) costs

Answer 6

Exhibit aspects of both fixed and variable costs.

Parts of such costs are fixed and will not change with level of activity, while some parts are variable and will vary accordingly with changes in level of activity.

Question 7

Examples of semi-fixed (semi-variable) costs?

Answer 7

Mobile phones costs: some phone plans include fixed monthly charges + various variable costs.

Question 8

What is break-even analysis?

Answer 8

Used to determine when your business will be able to cover all its expenses and begin to make a profit

Question 9

Define break-even point

Answer 9

Break-even point is reached when revenue equals all business costs

Question 10

How to calculate the break-even point?

Answer 10

Fixed costs / (sales revenue per unit - variable cost per unit)

Question 11

Define margin of safety

Answer 11

How much output or sales level can fall before a business reaches its breakeven point

Question 12

How to calculate the margin of safety?

Answer 12

Volume output - breakeven volume

Question 13

Weaknesses of breakeven analysis

Answer 13

Non-linear relationships between sales revenue, variable costs and volume

Stepped fixed costs

Multi-product businesses make breakeven analysis difficult as fixed costs tend to relate to more than one activity, making division of fixed costs across products arbitrary and consequently, the breakeven analysis becomes questionable