Financial planning and control - DEFINITIONS section

Question 1

CVP stands for?

Answer 1

cost-volume-profit

Question 2

The ability to analyze the impact of alternative assumptions

Answer 2

sensitivity analysis

Question 3

A cost that dose not change as activity changes

Answer 3

Fixed cost

Question 4

When are costs only fixed?

Answer 4

Short-term only over a range of activity; long term, all costs are variable

Question 5

Are fixed costs fixed when expressed on a per-unit-bases?

Answer 5

NO - fixed costs are fixed IN TOTAL; when expressed on a per-unit basis, the cost per unit varies inversely as the number of units varies

Question 6

How is it best to express fixed costs?

Answer 6

IN TOTAL (rather than on a per-unit basis = avoids the mestake of thinking that fixed costs respond to changes in volume)

Question 7

________ is the range of activity over which a fixed cost remains fixed.

Answer 7

Relevant range

Question 8

Outside of relevant range, a fixed cost will _________

Answer 8

increase OR decrease

Question 9

How does a graph of fixed cost and activity appear?

Answer 9

Set of stair steps - A graph of a fixed cost (total fixed costs on the Y axis and activity on the X axis) that includes several relevant ranges typically resembles a set of stair steps

Question 10

_________ is a cost that varies directly as a function of changes in the level of activity

Answer 10

Variable cost

Question 11

How are variable costs expressed?

Answer 11

fixed amount per unit; total cost will vary directly depending on number of units consumed

Question 12

How can consumption be expressed for variable costs?

Answer 12

Consumption can be expressed in terms of any logical relationship (e.g., number of units, number of procedures, time, and units of material)

Question 13

What is the dependent variable for variable costs?

Answer 13

cost = dependent variable
“cost driver” = independent variable

Question 14

________ is a cost that is a mixture of both fixed and variable elements

Answer 14

Mixed costs

Question 15

_________ is the sum of all variable and fixed elements

Answer 15

Total cost

Question 16

What is the total cost equation, assuming simple linear relationship?

Answer 16

The total cost can be expressed with the equation Y = aX + b, where “a” is interpreted as the variable rate per unit and “b” is interpreted as the total fixed costs

Question 17

What is the total cost equation, assuming simple linear relationship?

Answer 17

The total cost can be expressed with the equation Y = aX + b, where “a” is interpreted as the variable rate per unit and “b” is interpreted as the total fixed costs

Question 18

When the total cost equation is derived from operating data, any extrapolation _________ the relevant range should be __________________.

Answer 18

outside; carefully scrutinized

Question 19

________ is defined as the difference between revenue and variable costs

Answer 19

Contribution margin

Question 20

Contribution margin - The amount that remains after ____________ have been recovered is available to contribute to the _________ and, after the ___________ are recovered, to __________.

Answer 20

variable costs; fixed costs; fixed costs; profit

Question 21

______________ is when the contribution margin is expressed as a percentage of revenue

Answer 21

contribution margin ratio

Question 22

The expression ____________ used in the narrow sense refers only to the relationship between fixed costs and volume

Answer 22

economies of scale (EOS)

Question 23

EOS - The lowest per unit fixed cost within a given relevant range is achieved by __________________________________________________________________________.

Answer 23

attaining the highest volume level that can be attained while staying within the relevant range.
- Capital intensive operations typically require high volumes to justify incurring fixed capital costs

Question 24

If a firm can keep total fixed costs constant while increasing volume, this is sometimes referred to as ____________________

Answer 24

leveraging fixed costs

Question 25

The advantages a firm obtains due to size, such as the ability to influence price and the power to negotiate supply chain contracts advantageously, can be referred to as ___________________ to acknowledge that these advantages are attributable to the scale of operation

Answer 25

scale economies

Question 26

________________ are budgets that can be adjusted to respond to a change in the level of activity (i.e., units of output, number of customers, and number of patients)

Answer 26

Flexible budgets

Question 27

To employ flexible budgets, an organization must be able to __________________________

Answer 27

assign a variable cost to a cost driver
- An organization that cannot specify which costs are variable and which costs are fixed cannot employ flexible budgeting.

Question 28

_____________ make no provision for changes in the volume of activity

Answer 28

Static budgets

Question 29

__________ is a technique where a company compares its performance against the best firms, determines how those firms achieved their superior performance, and uses the knowledge to improve its own performance.

Answer 29

Benchmarking

Question 30

____________ predicts that managers copy the practices of highly successful companies through benchmarking studies.

Answer 30

Economic Darwanism
- The practice of benchmarking dates back to 607, when Japan sent teams to China to learn the best practices in business, government, and education. Today, most large enterprises routinely conduct benchmarking studies to discover the best business practices and then implement them in their firms.

Question 31

_________ means aligning the interests of employees with maximizing the value of the firm.

Answer 31

Control