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Ch 21

Cost behavior
the manner in which a cost changes as a related activity changes.
True
Cost behavior is useful to managers because knowing how costs behave allows managers to predict profits as sales and production volume change. T/F
Activity bases
the activities that cause the cost to change
Relevant range
The range of activity over which the changes in the cost are of interest
True
Understanding the behavior of a cost depends on:
1. Activity bases
2. Relevant range
T/F
True
Costs are normally classified as variable costs, fixed costs, or mixed costs T/F
Variable costs
costs that vary in proportion to changes in the activity base.
Fixed costs
costs that remain the same in total dollar amount as the activity base changes.
Mixed costs
costs that have a characteristic of both a variable and a fixed cost. This cost is also sometimes called semivariable or semifixed costs.
High low method
a cost estimation method that uses the highest and lowest activity levels and their related costs to estimate the variable cost per unit and the fixed cost.
Variable cost per unit
Difference in total cost / Difference in units produced
Fixed cost
Total costs – (Variable cost per unit x Units produced)
Variable costing
only the variable manufacturing costs (DM, DL, variable FOH) are included in the product cost.
Cost volume profit analysis
the examination of the relationships among the selling prices, sales and production volume, costs, expenses, and profits
True
Cost volume profit analysis is useful for managerial decision making T/F
Contribution margin
the excess of sales over variable costs

Sales – Variable costs

True
Sales – Variable costs = Contribution margin

Contribution margin – Fixed costs = income from operations
T/F

Contribution margin ratio
(sometimes called profit-volume ratio) indicates the percentage of each sales dollar available to cover fixed costs and to provide income from operations.

Contribution Margin / Sales

Unit contribution margin
Useful for analyzing the profit potential of proposed decisions

Sales prices per unit – Variable cost per unit

Break even point
the level of operations at which a company’s revenues and expenses are equal.
True
At break-even, a company reports neither an income nor a loss from operations T/F
Break even sales in units
Fixed costs / Unit Contribution margin
Break even sales in dollars
Fixed costs / Contribution margin ratio
True
If fixed costs go up, then break even point goes up
If fixed costs go down, then break even point goes down
T/F
True
If unit variable cost goes up, break even point goes up
If unit variable cost goes down, break even point goes down
T/F
True
If unit selling price goes up, break even point goes down
If unit selling price goes down, break even point goes up
T/F
Cost volume profit chart
(sometimes called a break-even chart) graphically shows sales, costs, and the related profit or loss for various levels of units sold
True
Cost volume profit chart assists in understanding the relationship among sales, costs, and operating profit or loss T/F
Profit volume chart
plots only the differences between total sales and total costs (or profits)
True
The profit-volume chart allows managers to determine the operating profit (or loss) for various levels of units sold T/F
Sales mix
the relative distribution of sales among the products sold by a company
Operating leverage
The relationship between a company’s contribution margin and income from operations

Contribution margin / Income from operations

True
The difference between contribution margin and income from operations is fixed costs.
Companies with high fixed costs will also have high operating leverage T/F
Percent change in income from operations
Percent change in sales x Operating leverage
Margin of safety
indicates the possible decrease in sales that may occur before an operating loss results

Sales – Sales at break even point / Sales

True
If the margin of safety is low, even a small decline in sales revenue may result in an operating loss T/F

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