the manner in which a cost changes as a related activity changes.
Cost behavior is useful to managers because knowing how costs behave allows managers to predict profits as sales and production volume change. T/F
the activities that cause the cost to change
The range of activity over which the changes in the cost are of interest
Understanding the behavior of a cost depends on:
1. Activity bases
2. Relevant range
Costs are normally classified as variable costs, fixed costs, or mixed costs T/F
costs that vary in proportion to changes in the activity base.
costs that remain the same in total dollar amount as the activity base changes.
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
Total costs – (Variable cost per unit x Units produced)
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
Cost volume profit analysis is useful for managerial decision making T/F
the excess of sales over variable costs
Sales – Variable costs
Sales – Variable costs = Contribution margin
Contribution margin – Fixed costs = income from operations
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.
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
If fixed costs go up, then break even point goes up
If fixed costs go down, then break even point goes down
If unit variable cost goes up, break even point goes up
If unit variable cost goes down, break even point goes down
If unit selling price goes up, break even point goes down
If unit selling price goes down, break even point goes up
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
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)
The profit-volume chart allows managers to determine the operating profit (or loss) for various levels of units sold T/F
the relative distribution of sales among the products sold by a company
The relationship between a company’s contribution margin and income from operations
Contribution margin / Income from operations
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
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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