Chapter 5: Cost Behavior Patterns Flashcards
What are the three cost behavior patterns that help organizations identify which costs will change and which will remain the same with changes in sales volume?
Variable costs
Fixed costs
Mixed costs
*___ costs which change in total with direct proportion to changes in volume and per unit cost remains constant.
Variable
As volume increases, total variable costs increase
Variable costs are affected by ___.
Different activities depending on the organization.
___ costs which stay constant in total over a range of volume levels and per unit cost change I.e., salaried personnel, building rent, insurance, etc. As activity increases, the fixed costs are spread out over more units which results in a lower cost per unit.
Fixed
As volume chances, fixed costs do not
On a graph, what do variable costs look like as units produced increases?
Slope increases
On a graph, what do fixed costs look like as units produced increases?
Flat line
A ___ is a fixed cost that cannot easily be changed in the short run without having a significant impact on the organization I.e., lease, salaried employees, depreciation on buildings, insurance, etc.
Committed fixed cost
A ___ is a fixed cost that can be changed in the short run without having a significant impact on the organization I.e., charitable donations, advertising, R and D, training programs, etc. (however an argument can be made that reducing these could have an impact on the company)
Discretionary fixed cost
In general, managements looks to cut discretionary fixed costs when sales and profits are ___.
Declining
___ describes a cost that has a mix of fixed and variable costs I.e., monthly salary plus commission
Ex. Fixed salary of $10,000 per month plus a variable commission of $7 per unit
Mixed costs
As volume increases, total mixed cost increases
On a graph, what do mixed costs look like as units produced increases?
The slope doesn’t start at $0 because of the fixed costs, but the slope increases
Total Mixed Cost Equation:
Mixed costs = ___ + (___ x ___)
Total fixed costs + (unit variable cost x # units)
Y = f + vX
In the short run, most costs are ___.
In the long run, all costs are ___.
Fixed
Variable and eventually recalculated
___ is the limited range of accuracy of cost behavior patterns.
Relevant range
What are the four common financial approaches used to estimate fixed and variable costs?
⚫️Account analysis
⚫️High-low method
⚫️Scattergraph method
⚫️Regression analysis
How is the variable cost per unit determined?
Variable costs / Measure of activity
F. ___ uses historical data to determine cost behavior.
Scatterplot
Know more details
In a scatterplot, ___ is plotted on the y axis and ___ is plotted on the x axis.
y- cost data
x - volume
___ separates variable costs from total costs to determine fixed costs.
High-low method
How do you calculate fixed costs by the high-low method?
Step 1: Δ cost / Δ volume
Step 2: total at high volume - (high volume x variable cost) = fixed cost
___ is a statistical calculation to find the line which best fits the data (cost equation); uses all data points and most often done in Excel.
Regression analysis
What is R square in a regression analysis?
The statistical measure of how close the data is to the fitted regression line
Which future cost predicting method is most accurate?
Regression analysis
In a regression analysis, which variables are used in Y = f + vx?
f - y intercept coefficient
v - x variable
___ is only appropriate for managerial accounting which reports expenses by behavior (rather than function).
Contribution Margin Income Statement
___ is the incremental profit earned on each unit sold.
Contribution margin
How is contribution margin income statement calculated?
revenues - variable costs = contribution margin - fixed costs = operating income
quiz: T or F? The margin of safety is the difference between fixed costs and variable costs
False
High-low method
*Why use contribution margin income statement over multi-step income statement?
Provides better information for:
- Costs-volume profit analysis
- Short-term business decisions
- Budgetting
quiz: Fixed costs are costs that:
a. remain the same in total regardless of changes in the activity level
b. vary inversely with activity on a per unit basis
c. both (a) and (b)
d. neither (a) nor (b)
c. both (a) and (b)
quiz: In the Gabbana Company, maintenance costs are a mixed cost. At the low level of activity (40 direct labor hours), maintenance costs are $600. At the high level of activity (100 direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost?
a. Variable Cost per Unit = $8.33 and Total Fixed Cost = $500
b. Variable Cost per Unit = $11.00 and Total Fixed Cost = $220
c. Variable Cost per Unit = $15.00 and Total Fixed Cost = $400
d. Variable Cost per Unit = $8.33 and Total Fixed Cost = $267
d. Variable Cost per Unit = $8.33 and Total Fixed Cost = $267
Work: ??
*quiz: The range of activity index over which the company expects to operate during the year is the ___.
Relevant range
quiz: The level of activity at which total revenues equal total costs is the ___.
Break-even point
quiz: The contribution margin per unit decreases when unit selling price remains the same and:
Select one:
a. variable cost per unit decreases
b. fixed costs decrease
c. fixed costs increase
d. variable costs per unit increases
d. variable costs per unit increases
quiz: Costs that remain the same in total regardless of changes in the activity level is ___.
Fixed costs
quiz: T or F? The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars
True
quiz: The study of how specific costs respond to changes in the level of activity is the ___.
Cost behavior analysis
quiz: The amount of revenue remaining after deducting variable costs is ___.
Contribution margin
quiz: T or F? For purposes of CVP (contribution margin) analysis, mixed costs must be classified into their fixed and variable elements.
True
quiz: T or F? The contribution margin per unit is the unit selling price less the fixed costs per unit
False
Selling unit less the variable costs per unit
quiz: T or F? A CVP (contribution margin) income statement classifies expenses by function rather than by cost behavior
False
Behavior rather than by function (multi-step income statement)
quiz: Costs that vary in total directly and proportionately with changes in the activity level is ___.
Variable costs
quiz: T or F? If the contribution margin ratio is 60% and the amount of fixed costs are $400,000, then the sales dollars at the break-even point are $666,667
True
