ACCT 125 | Cost Accounting Short Answer Quiz

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What are fixed costs?

Costs that remain constant regardless of the change in activity level.

Define variable costs.

Costs that change directly and proportionately with the level of activity.

Explain mixed costs.

Costs that possess both fixed and variable elements, making them difficult to describe by a single behavior pattern.

What are step costs?

Costs that have characteristics of both variable and fixed costs.

What is the Time Assumption in cost behavior patterns?

Cost behavior patterns are valid only over a specific period of time.

Explain the Relevant Range Assumption.

Refers to the band of activity within which the identified cost behavior patterns are valid.

What technique involves selecting the highest and lowest activity levels and their corresponding costs to calculate the variable cost per unit of activity?

High-Low Method

Which statistical technique is used to develop an equation that predicts an unknown value of a dependent variable based on one or more independent variables?

Least Squares Method

What does CVP Analysis systematically examine the relationships among?

Costs, cost drivers, and profit

What does the Contribution Margin Method focus on determining?

Contribution margin

In the Graphical Method, what is represented graphically?

Total costs and total revenues

What does the breakeven point represent?

The volume of activity at which the organization neither makes a profit nor incurs a loss

What important information does the position of the breakeven point provide to management?

The level of sales needed to cover all expenses and the potential impact of changes in sales volume

What is the first assumption in CVP Analysis regarding the behavior of total revenue?

Linear behavior

What is the second assumption in CVP Analysis regarding the behavior of total expenses?

Linear behavior

What equation is followed in the Equation Method of modeling?

Revenues minus variable costs minus fixed costs equals operating income

What is the formula for Contribution Margin?

Sales Revenue - Total Variable

Define Breakeven Point in Units.

(Fixed Costs / Contribution Margin Ratio) / Selling Price

What does Gross Profit equal to zero signify?

It does not mean break even.

What is Profit Targeting in the context of profit planning?

Adding the target profit to fixed costs.

What does a negative Degree of Operating Leverage (DOL) indicate?

Operating loss.

Explain the concept of Sales Mix.

Sales mix is the proportion of products sold and their contribution to total sales.

What is the purpose of determining the breakeven point in cost-volume-profit (CVP) analysis?

To determine the level of sales needed to cover all costs and break even

Explain the concept of Margin of Safety in relation to breakeven analysis.

Margin of Safety is the difference between actual sales revenue and the breakeven sales, indicating how much sales can fall before reaching the breakeven point.

What does Degree of Operating Leverage (DOL) measure and how does it impact an organization?

DOL measures the extent to which an organization uses fixed costs in its cost structure and expresses the percentage impact on net income of a given percentage change in sales revenue.

What are the components of Prime Cost in manufacturing?

Direct costs including direct labor

In managerial accounting, how is Profit calculated?

Contribution Margin - Fixed Costs

What is the importance of known and constant selling price, variable cost per unit, and total fixed costs in cost-volume-profit analysis?

They are crucial assumptions for accurately analyzing the impact of changes in sales volume on an organization's profitability.

How does Profit Targeting differ from calculating the breakeven point?

Profit Targeting involves determining the volume of sales required to earn a specific target profit, while the breakeven point represents the number of units of sales required to earn a target profit of zero.

Explain the concept of Contribution Margin in financial analysis.

Contribution Margin is the difference between sales revenue and variable costs, indicating the amount available to cover fixed costs and contribute to profit.

What is the significance of Consistent Inventory Levels assumption for manufacturing firms?

It indicates that the number of units produced during the period equals the number of units sold.

How does the Constant Sales Mix assumption impact cost-volume-profit analysis in multiproduct organizations?

It is crucial for accurately analyzing the impact of changes in sales volume on an organization's profitability.

Test your knowledge on key assumptions in cost accounting, including fixed and variable expenses, constant sales mix, and consistent inventory levels. These assumptions are vital for analyzing an organization's profitability and performance.

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