Chapter 5- Cost- volume- profit

Question 1

cost behavior analysis

Answer 1

is the study of how specific costs respond to changes in the level of business activity

Question 2

Activity index

Answer 2

identifies the activity that causes changes in the behavior of costs
- allows cost to be classified as variable, fixed, or mixed.

Question 3

relevant range

Answer 3

range of activity over which a company expects to operate during a year

Question 4

mixed costs

Answer 4

costs that have both variable and fixed element.

these change in total but not proportionately with changes in the activity level

Question 5

variable costs

Answer 5

costs that vary in total directly and proportionately with changes in the activity level.
Ex. if activ level increases 10% variable increases by 10%

Question 6

Fixed costs

Answer 6

costs that remain the same in total regardless of changes in the activity level

Question 7

high low method

Answer 7

uses the total cost incurred at the high and low levels of activity to classify mixed costs into fixed and variable components

Question 8

Steps in computing fixed and variable costs high low method

Answer 8

1. determine variable cost per unit
   Change (difference) in total costs / high - low activity level = variable cost per unit
2. determine the fixed cost by subtracting the total variable cost at either the high or low activity level from the total cost at that activity level

Question 9

variable cost per unit formula

Answer 9

determine variable cost per unit

Change(difference) in total costs / high - low activity level

Question 10

CVP (cost volume profit) analysis

Answer 10

the study of the effects of changes in costs and volume on a company’s profits

Question 11

CVP income statement

Answer 11

classifies expenses as fixed or variable

Question 12

contribution margin

Answer 12

amount of revenue remaining after deducting variable costs

Question 13

formula for contribution margin per unit

Answer 13

sales price per unit- unit variable costs

Question 14

Break even point

Answer 14

where total sales equal variable costs plus fixed costs ; net income is zero

Question 15

break even point in units

Answer 15

fixed costs / contribution margin per unit

Question 16

break even point in dollars

Answer 16

Fixed costs / contribution margin ratio

Question 17

CVP analysis formula

sales

Answer 17

variable costs+fixed costs + net income

Question 18

steps to do a CVP graph

Answer 18

1. Plot the total sales line starting at the zero activity level.
2. Plot the total fixed cost by a horizontal line.
3. Plot the total cost line. This starts at the fixed cost line at zero activity.
4. Determine the break-even point from the intersection of the total cost line and the total sales line.

Question 19

Mathematical equation for break even point

Answer 19

required sales-variable costs - fixed costs = net income

Question 20

Target net income

Answer 20

level of sales necessary to achieve a specified income

Question 21

mathematical equation for target net income

Answer 21

required sales - variable costs - fixed costs = target net income

Question 22

required sales in units

Answer 22

(fixed costs + target net income) / contribution per unit

Question 23

required sales in dollars

Answer 23

(fixed costs + target net income) / contribution margin ratio

Question 24

margin of safety in dollars

Answer 24

actual expected sales - break even sales

Question 25

margin of safety ratio

Answer 25

margin of safety in dollars / actual expected sales

Question 26

target net income formula

required sales

Answer 26

variable costs + fixed costs + target net income

Question 27

margin of safety in dollars formula

Answer 27

actual expected sales-break even sales

Question 28

net income formula

Answer 28

CM- fixed cost