Exam 2 (Ch. 6-8)

Question 1

Absorption Costing

Answer 1

The costing method where products “absorb” both fixed and variable manufacturing costs.

Question 2

Account Analysis

Answer 2

A method for determining cost behavior that is based on a manager’s judgment in classifying each general ledger account as a variable, fixed, or mixed cost.

Question 3

Committed Fixed Costs

Answer 3

Fixed costs that are locked in because of previous management decisions; management has little or no control over these costs in the short run.

Question 4

Contribution Margin

Answer 4

Sales revenue minus variable expenses.

Question 5

Contribution Margin Income Statement

Answer 5

Income statement that organizes costs by behavior (variable costs or fixed costs) rather than by function.

Question 6

Cost Behavior

Answer 6

A behavior that describes how costs change as volume changes.

Question 7

Cost Equation

Answer 7

A mathematical equation for a straight line that expresses how a cost behaves.

Question 8

Curvilinear Costs

Answer 8

A cost behavior that is not linear (not a straight line).

Question 9

Discretionary Fixed Costs

Answer 9

Fixed costs that are a result of annual management decisions; fixed costs that are controllable in the short run.

Question 10

Fixed Costs

Answer 10

Costs that do not change in total despite wide changes in volume.

Question 11

High-Low Method

Answer 11

A method for determining cost behavior that is based on two historical data points: the highest and lowest volume of activity.

Question 12

Mixed Cost

Answer 12

Costs that change, but not in direct proportion to changes in volume. Mixed costs have both variable cost and fixed cost components.

Question 13

Outliers

Answer 13

Abnormal data points; data points that do not fall in the same general pattern as the other data points.

Question 14

Regression Analysis

Answer 14

A statistical procedure for determining the line that best fits the data by using all of the historical data points, not just the high and low data points.

Question 15

Relevant Range

Answer 15

The band of volume where total fixed costs remain constant at a certain level and where the variable cost per unit remains constant at a certain level.

Question 16

Scatterplot

Answer 16

A graph that plots historical cost and volume data.

Question 17

Step Costs

Answer 17

A cost behavior that is fixed over a small range of activity and then jumps to a different fixed level with moderate changes in volume.

Question 18

Variable Costs

Answer 18

Costs incurred for every unit of activity. As a result, total variable costs change in direct proportion to changes in volume.

Question 19

Variable Costing

Answer 19

The costing method that assigns only variable manufacturing costs to products. All fixed manufacturing costs (fixed MOH) are expensed as period costs. Also known as direct costing. 

Question 20

Breakeven Point

Answer 20

The sales level at which operating income is zero: Total revenues = Total expenses.

Question 21

Contribution Margin

Answer 21

Sales revenue minus variable expenses.

Question 22

Contribution Margin Income Statement

Answer 22

An income statement that groups costs by behavior rather than function; it can be used only by internal management.

Question 23

Contribution Margin Per Unit

Answer 23

The excess of the unit sales price over the variable cost per unit; also called unit contribution margin.

Question 24

Contribution Margin Ratio

Answer 24

Ratio of contribution margin to sales revenue.

Question 25

Cost-Volume-Profit (CVP) Analysis

Answer 25

Expresses the relationships among costs, volume, and profit or loss.

Question 26

Indifference Point

Answer 26

The volume of sales at which a company would be indifferent between alternative cost structures because they would result in the same total cost.

Question 27

Margin of Safety

Answer 27

Excess of expected sales over breakeven sales; the drop in sales a company can absorb without incurring an operating loss.

Question 28

Operating Leverage

Answer 28

The relative amount of fixed and variable costs that make up a firm’s total costs.

Question 29

Operating Leverage Factor

Answer 29

At a given level of sales, the contribution margin divided by operating income; the operating leverage factor indicates the percentage change in operating income that will occur from a 1% change in sales volume.

Question 30

Sales Mix

Answer 30

The combination of products that make up total sales.

Question 31

Sensitivity Analysis

Answer 31

A “what-if” technique that asks what results will be if actual prices or costs change or if an underlying assumption changes.

Question 32

Unit Contribution Margin

Answer 32

The excess of the unit sales price over the variable cost per unit: also called contribution margin per unit.