Using costs for decision making

Question 1

cost behaviours

Answer 1

related to level of activity (on x axis)

Question 2

give some examples of measures of activity

Answer 2

production quantity, number of customers, units of time, service supplied

Question 3

variable costs

Answer 3

vary in direct proportion to activity
eg number of units produced

Question 4

fixed costs

Answer 4

do not change in proportion to activity, they remain constant over a relevant range

Question 5

step-fixed cost

Answer 5

fixed costs which change to reflect stages in activity

Question 6

semi-variable/mixed costs

Answer 6

have a fixed and a variable part

Question 7

what is meant by the relevant range

Answer 7

a level of activity which has a maximum and a minimum amount
analysis should remain within one relevant range
eg one ‘step’ in a graph

Question 8

how do you calculate total cost

Answer 8

fixed costs+variable costs = FC+(VC per unit x output)

Question 9

change in total costs =

Answer 9

change in variable costs

Question 10

variable cost per unit is

Answer 10

constant per unit within the relevant range

Question 11

fixed cost per unit

Answer 11

decreases as the activity increases
same fixed cost spread over increasing units within a relevant range

Question 12

cost-volume-profit (CVP)

Answer 12

the study of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity and mix

Question 13

what is contribution

Answer 13

how much revenue is contributing towards fixed costs

Question 14

what is the formula for contribution

Answer 14

contribution = selling price - variable cost (total or per unit)

Question 15

why are contributions only towards fixed costs

Answer 15

because contribution already accounts for the variable costs which change in direct proportion to activity
the remaining amount is a contribution towards fixed costs which do not change in direct proportion to activity

Question 16

break-even point (in units) =

Answer 16

fixed costs/contribution per unit

Question 17

break-even point (in revenue) =

Answer 17

(fixed costs x selling price)/contribution per unit

Question 18

required sales (in units) =

Answer 18

(fixed costs + profit)/(selling price - variable costs per unit)

Question 19

what is any contribution above the break-even point

Answer 19

profit

Question 20

what is margin of safety

Answer 20

the difference between expected sales and break even based on the estimated customer demand

Question 21

CVP is used for ___ term decision making

Answer 21

short

Question 22

we assume for CVP that all costs and revenues have a ___ relationship with activity level

Answer 22

linear

Question 23

we assume for CVP that ____ is the only factor to influence variable costs, its capacity cannot be increased or decreased

Answer 23

production

Question 24

CVP is useful for

Answer 24

setting short term goals

Question 25

relevant costs

Answer 25

those that change between alternatives, changes are due to a decision being made
the change is an incremental cost

Question 26

are variable costs relevant

Answer 26

yes

Question 27

are fixed costs relevant

Answer 27

no

Question 28

what is a sunk cost

Answer 28

a non relevant cost that has already been paid in the past
historic

Question 29

what is a committed cost

Answer 29

a non relevant cost that has been agreed and must be paid in the future
independent of current decision

Question 30

what is a make or buy decision for a manufacturing business

Answer 30

internal production vs external supplier

Question 31

what is a make or buy decision for a service business

Answer 31

own staff vs out-sourced labour

Question 32

what are the assumption being made with a make or buy decision

Answer 32

fixed costs would continue and there is no scare resource for internal manufacture
only the variable costs would be saved

Question 33

what are opportunity costs

Answer 33

they are represented by the forgone potential benefit from the best rejected course of action