Questions and Answers
Which statement describes a fixed cost? (Select all that apply)
Variable costs are costs that:
The range over which a company expects to operate during a year is called the relevant range of the activity index.
True
Why is determination of a relevant range important?
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Which of the following is likely to contain a linear relationship between costs and activities?
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The relevant range is:
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An example of a mixed cost is:
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Which one of the following is not an assumption of cost-volume-profit analysis?
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What is the study of the effects of changes in costs and volume on a company's profits called?
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Which one of the following is not an assumption of CVP analysis?
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Cost-volume-profit analysis assumes that changes in ACTIVITY are the only factors that affect costs.
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Cost-volume-profit analysis assumes the behavior of costs is _______________, not curvilinear, throughout the relevant range.
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Cost-volume-profit analysis includes all of the following assumptions EXCEPT:
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One of the following is not involved in CVP analysis. That factor is:
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What is contribution margin?
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Contribution margin:
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When comparing a traditional income statement to a CVP income statement:
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Breakeven sales in dollars is calculated by dividing _____ _______ by the ___________ ___________ _________.
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Study Notes
Fixed and Variable Costs
- Fixed costs do not change with activity level; their per-unit cost increases as activity declines.
- Variable costs vary in total with changes in activity level, while remaining constant per unit regardless of activity.
- Relevant range refers to the expected operational activity level in a year, during which cost behaviors are predictable.
- Outside the relevant range, costs may behave non-linearly, distorting cost assessments.
Mixed Costs and Cost-Volume-Profit (CVP) Analysis
- Mixed costs, such as utility costs, contain both fixed and variable components.
- CVP analysis explores how changes in costs and activity volume impact profits.
- Assumptions of CVP analysis include costs being either variable or fixed, a constant sales mix, and that all units produced are sold.
- It is not assumed that changes in sales mix are the sole factors affecting costs.
Contribution Margin
- Contribution margin is the amount remaining after variable costs are deducted from revenue, available to cover fixed costs and contribute to profits.
- It can be expressed on a per-unit basis, emphasizing its role in profitability analysis.
- A CVP income statement aligns net income with traditional income statements as they should be identical, though the presentation differs.
Breakeven Analysis
- Breakeven sales in dollars can be calculated by dividing total fixed costs by the contribution margin ratio, determining the sales needed to cover total costs without generating a profit or loss.
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Description
Test your knowledge on fixed and variable costs with this quiz. Each question will challenge your understanding of how costs behave at different activity levels. Perfect for accounting students looking to reinforce their concepts.
