CHAP 6

Question 1

3 types of costs

Answer 1

fixed

variable

mixed

Question 2

variable

Answer 2

Vary in proportion to changes in activity base

When the base is units produced, direct materials and labor costs are normally classified as variable costs

Question 3

fixed

Answer 3

Remain the same in total dollar amount as the activity base changes

When the activity base is units produced, many FOH costs such as straight-line depreciation are classified as fixed costs

Question 4

mixed

Answer 4

high low method total fixed costs

have characteristics of both a variable and a fixed cost

Using the variable cost per unit and the fixed costs, the total equipment maintenance cost can be computed for various levels of production

Question 5

high low method

Answer 5

Cost estimation methods

Find the highest point in units produced and subtract the lowest amount (units produced and total cost)

Variable cost per unit: difference in total cost/difference in units produced

Question 6

total fixed costs

Answer 6

Subtracting total variables cost from the total costs for units produced

Fixed cost=total costs- (variable cost per unit*units produced)

The fixed cost is the same at the highest and lowest levels of production

Question 7

variable cost behavior

Answer 7

Total amount

-Increases and decreases proportionately w/ activity level

Per unit amount

-Remains the same regardless of activity level

Question 8

fixed cost behavior

Answer 8

Total

-Remains the same regardless of activity level

Per unit amount

-Increases and decreases inversely with activity level

Question 9

cost volume profit relationships

Answer 9

Examination of the relationships among selling prices, sales an production volume, costs, expenses, and profits

useful for managerial decision making

Question 10

contribution margin

Answer 10

The excess of sales over variable costs

Covers fixed costs.

Once the fixed costs are covered, any additional contribution margin increases operating income

Question 11

contribution margin formula

Answer 11

Contribution margin= sales-variable costs

Question 12

contribution margin ratio

Answer 12

• sometimes called the profit-volume ratio,
• indicates the percentage of each sales dollar available to cover fixed costs and to provide operating income
• most useful when the increase or decrease in sales volume is measured in sales dollars. In this case, the change in sales dollars multiplied by the contribution margin ratio equals the change in operating income

Question 13

contribution margin ratio formula

Answer 13

Contribution margin ratio= contribution margin/sales

Question 14

change in operating income

Answer 14

Change in operating income= change in sales dollars*contribution margin ratio

Question 15

unit contribution margin

Answer 15

Useful for analyzing the profit potential of proposed decisions

Most useful when the increase or decrease in sales volume is measured in sales units.

In this case, the change in the sales volume multiplied by the unit contribution margin equals the change in operating income

Question 16

unit contribution margin formula

Answer 16

Unit contribution margin=sales per unit-variable cost per unit

Question 17

break even point

Answer 17

Level of operations at which a company’s revenues and expenses are equal

At break-even, a company reports neither an operating income nor loss

Question 18

break-even point formula

Answer 18

Break-even sales (units)=fixed costs/unit contribution margin

Question 19

break-even in sales dollars

Answer 19

Can also be computed with contribution margin ratio

unit contribution margin/unit selling price

Question 20

break-even in sales dollars formula

Answer 20

Break-even sales (dollars)= fixed costs/contribution margin ratio

Question 21

Changes in fixed costs affect break-even point by

Answer 21

Increases in fixed costs increase break-even point

Decreases in fixed costs decrease break-even point

Question 22

Changes in unit variable costs affect break-even point as

Answer 22

Increases in unit variable costs increase the break-even point Decreases in unit variable costs decrease the break-even point

Question 23

Changes in the unit selling price affect the break-even point as

Answer 23

Increase in the unit selling price decrease break-even point

A decrease in the unit selling price increases the break-even point

Question 24

target profit

Answer 24

Sales required to earn a target or desired amount of profit is determined by modifying the break-even equation

Question 25

target profit formula

Answer 25

Sales (units)= fixed costs+target profit/unit contribution margin

Question 26

margin of safety

Answer 26

Indicates the possible decreases in sales that may occur before an operating loss

If the margin of safety is low, a small decline in sales revenue may result in an operating loss

Question 27

margin of safety formula

Answer 27

The margin of safety= sales-sales at break-even point/sales

Question 28

operating income formula

Answer 28

(sales*contribution margin ratio)-fixed costs

Question 29

Answer 29

Question 30

Answer 30

Question 31

Answer 31

Question 32

Answer 32

Question 33

Answer 33

Question 34

Answer 34

Question 35

how to calculate fixed cost

Answer 35

total costs - (variable cost per unit * units produced)

Question 36

change in operating income formula

Answer 36

change in sales units * unit contribution margin