Accounting Test 2

Question 1

What are variable costs?

Answer 1

Costs that are incurred for every unit of volum

Question 2

Total variable costs change in direct or indirect proportion

Answer 2

Direct

Question 3

Cost equation

Answer 3

Total variable costs(y)= Variable cost per unit of activity (v) * Volume of activity (x)

Question 4

Fixed costs

Answer 4

Costs that do not change

Question 5

Mixed costs

Answer 5

contain both variable and fixed components

Question 6

Fixed costs are _____ proportional

Answer 6

inversely.

When volume increases then fixed cost per unit decreases

Question 7

Key characteristics of variable costs

Answer 7

1) TOTAL variable costs change in DIRECT PROPORTION to changes in volume
2) The VARIABLE COST PER UNIT OF ACTIVITY(V) remains constant and is the slope of the variable cost line
3) Total variable cost graphs always begin at the origin
4) Total variable costs can be expressed as: y=vx where y=total variable cost, v=variable cost per unit, x=volume of activity

Question 8

Key characteristics of fixed cots

Answer 8

1) TOTAL fixed costs stay CONSTANT over a wide range of volume
2) Fixed costs PER UNIT OF ACTIVITY vary INVERSELY with changes in volume:
- Fixed cost per unit of activity INCREASES when volume DECREASES
- Fixed cost per unit of activity DECREASES when volume INCREASES
3) Total fixed cost graphs are always flat lines with no slope that intersect the y-axis at a level equal to total fixed costs
4) Can be expressed as y=f

Question 9

Total mixed costs increase as volume increases, but

Answer 9

NOT IN DIRECT PROPORTION TO CHANGES IN VOLUME.

Question 10

Mixed costs per unit decrease as volume increases, but

Answer 10

NOT IN DIRECT PROPORTION TO CHANGES IN VOLUME

Question 11

Key characteristics of mixed costs

Answer 11

1) TOTAL mixed costs increase as volume increases because of the variable cost component
2) Mixed costs PER UNIT decrease as volume increases because of the fixed cost component
3) Total mixed cost graphs slope upward but do NOT begin at the origin–they intersect the y-axis at the level of fixed costs
4) Total mixed costs can be expressed as a COMBINATION of the variable and fixed cost equations y=vx+f

Question 12

High-low method

Answer 12

for determining cost behavior that is based on two historical data points; the highest and lowest volume of activity

Question 13

How to find High-low

Answer 13

find highest and lowest VOLUME data points.

Rise over run.

Question 14

Absorption costing

Answer 14

All manufacturing-related costs, whether fixed or variable, are absorbed into the cost of the product

Question 15

Variable costing(contribution margin)

Answer 15

Only variable manufacturing costs are treated as inventoriable product costs

Question 16

Contribution margin formula

Answer 16

Sales revenue-variable expenses=CM - Fixed expenses= Operating income

Question 17

Absorption costing formula

Answer 17

Sales revenue-COGS=Gross profit -Operating expenses=Operating income

Question 18

Contribution margin ratio

Answer 18

Unit contribution margin/sales price per unt

Question 19

Contribution margin per unit

Answer 19

sales price per unit-variable cost per unit

Question 20

Contribution margin ratio

Answer 20

Contribution margin/Sales revenue

Question 21

Operating Income=

Answer 21

Sales revenue- Variable expenses- fixed expenses

Question 22

Break even equation

Answer 22

Units in answer = units in denominator vs. sales in answer = ratio in denominator

Question 23

Break even equation short cut

Answer 23

sales in units= fixed expenses+operating income /contribution margin per unit

sales in dollars= fixed expenses+operating income /contribution margin ratio

Question 24

If the sales price goes down then…(B/E Point)

Answer 24

the unit contribution margin goes down then the volume needed to break even goes up

Question 25

If the sales price goes up then…(B/E Point)

Answer 25

the unit contribution margin goes up and the volume needed to break even goes down

Question 26

If the variable price goes up then…(B/E)

Answer 26

the unit contribution margin goes down then the volume needed to break even goes up

Question 27

If the variable price goes down then…(B/E)

Answer 27

the unit contribution margin goes up and the volume needed to break even goes down

Question 28

Break even is mix of products

Answer 28

(fixed expenses+operating income)/Weighted-average contribution margin per unit

Question 29

Margin of safety in units=

Answer 29

expected sales in units-breakeven sales in units

Question 30

Margin of safety in dollars=

Answer 30

Expected sales in dollars-breakeven sales in dollars

Question 31

Margin of safety as a percentage

Answer 31

(margin of safety in units/dollars) / (expected sales in units/dollars)

Question 32

Characteristics of High operating leverage

Answer 32

1) higer levels fixed costs and lower levels of variable costs
2) higher contribution margin ratios
3) For high operating leverage companies, changes in volume significantly affect operating income, so they face the following: Higher risk and higher potential for reward

Question 33

Operating leverage factor=

Answer 33

contribution margin/operating income

Question 34

Relevant costs

Answer 34

Expected future data, and differs among alternatives

Question 35

Special orders

Answer 35

focus on relevant revenues, costs, and profits

use a contribution margin approach that separates variable costs from fixed costs

Question 36

Price-takers

Answer 36

Product lacks uniqueness, heavy competition, pricing approach emphasizes target costing

Question 37

Price-setters

Answer 37

Product is more unique, less competition, pricing approach emphasizes cost-plus pricing

Question 38

Discontinue decisions

Answer 38

Does the product provide a positive contribution margin? Are there any fixed costs that can be avoided if we discontinue the product? Will discontinuing the product affect sales of the company’s other products? What could we do with the freed capacity?