costs and cost volume analysis

Question 1

cost

Answer 1

sacrifice made in order to obtain a benefit

Question 2

cost objective

Answer 2

any activity for which a separate measurement of costs is desired

Question 3

product costs

Answer 3

manufacturing costs

Question 4

period costs

Answer 4

non manufacturing costs

Question 5

prime costs

Answer 5

direct materials and direct labour

Question 6

conversion costs

Answer 6

direct labor, variable and fixed manufacturing overheads

Question 7

indirect costs

Answer 7

overheads

Question 8

what are overheads

Answer 8

Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service. Thus, overhead costs do not directly lead to the generation of profits - see definition of indirect costs

Question 9

examples of period costs

Answer 9

marketing

admin

Question 10

define manufacturing

Answer 10

transforming an raw material into a form that has greater value to the customer

Question 11

define manufacturing costs

Answer 11

costs of producing the goods that can specifically (directly or indirectly) identified with merchandised purchased or produced for resale - cost of goods sold

Question 12

direct materials

Answer 12

material costs that can be physically identified with a specific product - form large part of the manufacturing cost

Question 13

direct labor

Answer 13

labor costs that can be specifically identified with the product

Question 14

prime costs

Answer 14

sum of direct labor and direct materials

Question 15

indirect materials (variable)

Answer 15

cannot be identified with any one individual product - used for the benefit of all products (cleaning materials, electricty)

Question 16

indirect labor (variable)

Answer 16

indirect manufacturing costs

Question 17

cost driver

Answer 17

factor within the organization that causes a fixed or variable manufacturing overhead to be incurred

Question 18

fixed cost

Answer 18

remain constant over a wide range of activity for a specified time period - total fixed costs are constant for all levels of activity while fixed cost per unit decreases proportionally with the level of activity

Question 19

variable cost

Answer 19

vary in direct proportion to the volume of activity. total var costs are linear as unit variable costs are constant

Question 20

examples of fixed manufacturing overheads

Answer 20

factory rent
manager salary
insurance
annual depreciation

Question 21

examples of variable manufacturing overheads

Answer 21

indirect labout - security, cleaning, repairs
indirect materials
factory telephone
water and telephone

Question 22

non manufacturing costs are sub divided into…

Answer 22

marketing/selling costs

admin costs

Question 23

what is variable costing?

Answer 23

focuses on variable product costs - therefore only variable costs of production are used to calculate the costs of the product produced

Question 24

what is cost volume profit analysis

Answer 24

systematic method of examining the relationship between changes in

• prices of products
• changes per unit in variable costs
• changes in total fixed costs
• volume or level of activity
• mix of products sold - and the resulting effect on the firm’s net profit

Question 25

what are the cost volume profit analysis assumptions

Answer 25

all other variables remain constant a single product or constant sales mix profits are calculated on a variable costing basis total costs and total revenue are linear functions of output the analysis applies to the relevant range only costs can be accurately divided into their fixed and variable elements

Question 26

what is contribution margin

Answer 26

sales - all variable expenses money left over after subtracting all variable costs - the money left over to pay off fixed costs and then for profit

Question 27

what happens if contribution margin isnt sufficient

Answer 27

a loss

Question 28

formula for contribution margin

Answer 28

selling price - variable costs

Question 29

contribution margin ratio

Answer 29

contribution margin per unit*100/selling price per unit

Question 30

what does it mean to break even

Answer 30

profit = 0 income = total costs contribution margin equals fixed expenses

Question 31

calculate break even units

Answer 31

fixed expenses/contribution margin per unit

Question 32

calculate break even value

Answer 32

fixed expenses/contribution margin ratio

Question 33

equation method to calculate break even

Answer 33

salesX = variablecostsX+fixed costs+profit

Question 34

what is the degree of operating leverage

Answer 34

how sensitive the net operating income is to percentage changes in sales volumes is a multiplier

Question 35

what happens if operating leverage is high and what if its low

Answer 35

high = small percentage increase in sales will produce a much higher percentage increase in net operating income

Question 36

a firm with high fixed costs...

Answer 36

will have a higher DOL as variable costs are lower resulting in a higher contribution margin

Question 37

what is the DOL dependent on

Answer 37

cost structures

Question 38

DOL is not constant...

Answer 38

it is at its highest close to the breakeven point and creases as sales and profits increase

Question 39

why does the DOL decrease as sales and profits increase

Answer 39

google it

Question 40

DOL formula

Answer 40

total contribution margin/net profit

Question 41

if sales volumes increase by x%, net income is expected to increase by

Answer 41

DOL*percentage increase

Question 42

if sales volumes decrease by x%, net income is expected to decrease by

Answer 42

DOL*percentage decrease

Question 43

what is the margin of safety

Answer 43

calculates the amount by which sales can drop before the firm makes a loss

Question 44

calculate margin of safety

Answer 44

actual sales - breakeven sales

Question 45

margin of safety percentage

Answer 45

margin of safety*100/actual sales

Question 46

target sales volume

Answer 46

total fixed costs+target profit/CM per unit

Question 47

target sales value

Answer 47

target sales volume*selling price per unit

Question 48

target sales value using CM ratio

Answer 48

total fixed costs+target profit/CM ratio