Accounting Test #1 (M.C.)

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Which statement describes a fixed cost? (Select all that apply)

The unit cost varies directly to the activity level.

It varies in total at every level of activity.

When activity declines, its cost per unit increases. (correct)

The unit costs stay the same at every activity level.

Variable costs are costs that:

Vary in total directly and proportionately with changes in the activity level.

Remain the same per unit at every activity level.

Neither of the above.

Both (a) and (b) above. (correct)

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?

Cost behavior outside the relevant range may be distorted. Signup and view all the answers

Which of the following is likely to contain a linear relationship between costs and activities?

Relevant range. Signup and view all the answers

The relevant range is:

The range over which the company expects to operate during a year. Signup and view all the answers

An example of a mixed cost is:

Utility costs. Signup and view all the answers

Which one of the following is not an assumption of cost-volume-profit analysis?

Changes in activity and sales mix are the only factors that affect costs. Signup and view all the answers

What is the study of the effects of changes in costs and volume on a company's profits called?

Cost volume profit analysis Signup and view all the answers

Which one of the following is not an assumption of CVP analysis?

Profit for the period is constant. Signup and view all the answers

Cost-volume-profit analysis assumes that changes in ACTIVITY are the only factors that affect costs.

True Signup and view all the answers

Cost-volume-profit analysis assumes the behavior of costs is _______________, not curvilinear, throughout the relevant range.

linear Signup and view all the answers

Cost-volume-profit analysis includes all of the following assumptions EXCEPT:

The behavior of costs is curvilinear throughout the relevant range. Signup and view all the answers

One of the following is not involved in CVP analysis. That factor is:

Fixed costs per unit. Signup and view all the answers

What is contribution margin?

The amount available to cover fixed and variable costs and contribute to profits. Signup and view all the answers

Contribution margin:

Both (A) and (B) above. Signup and view all the answers

When comparing a traditional income statement to a CVP income statement:

Net income will always be identical on both. Signup and view all the answers

Breakeven sales in dollars is calculated by dividing _ _ by the ___ _ _____.

fixed costs Signup and view all the answers

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.

Accounting Test #1 (M.C.)

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