Podcast
Questions and Answers
Which statement describes a fixed cost? (Select all that apply)
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:
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.
The range over which a company expects to operate during a year is called the relevant range of the activity index.
True (A)
Why is determination of a relevant range important?
Why is determination of a relevant range important?
Which of the following is likely to contain a linear relationship between costs and activities?
Which of the following is likely to contain a linear relationship between costs and activities?
The relevant range is:
The relevant range is:
An example of a mixed cost is:
An example of a mixed cost is:
Which one of the following is not an assumption of cost-volume-profit analysis?
Which one of the following is not an assumption of cost-volume-profit analysis?
What is the study of the effects of changes in costs and volume on a company's profits called?
What is the study of the effects of changes in costs and volume on a company's profits called?
Which one of the following is not an assumption of CVP analysis?
Which one of the following is not an assumption of CVP analysis?
Cost-volume-profit analysis assumes that changes in ACTIVITY are the only factors that affect costs.
Cost-volume-profit analysis assumes that changes in ACTIVITY are the only factors that affect costs.
Cost-volume-profit analysis assumes the behavior of costs is _______________, not curvilinear, throughout the relevant range.
Cost-volume-profit analysis assumes the behavior of costs is _______________, not curvilinear, throughout the relevant range.
Cost-volume-profit analysis includes all of the following assumptions EXCEPT:
Cost-volume-profit analysis includes all of the following assumptions EXCEPT:
One of the following is not involved in CVP analysis. That factor is:
One of the following is not involved in CVP analysis. That factor is:
What is contribution margin?
What is contribution margin?
Contribution margin:
Contribution margin:
When comparing a traditional income statement to a CVP income statement:
When comparing a traditional income statement to a CVP income statement:
Breakeven sales in dollars is calculated by dividing _____ _______ by the ___________ ___________ _________.
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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