ACCT 125 | Cost Concepts, Behavior, and Relationship with Volume and Profit Multiple Choice Quiz

Cost Behavior Patterns

• Fixed costs remain constant regardless of the change in activity level.
• Step costs have a characteristic of remaining constant within a specific range of activity, but change significantly when the range is exceeded.

Cost Classifications

• Mixed costs are difficult to describe by a single cost behavior pattern.
• Variable costs change directly and proportionately with the level of activity.
• Semi-variable costs possess characteristics of both variable and fixed costs.

Cost Formulas

• The formula for VC Ratio is Variable Cost per Unit / Selling Price per Unit.
• In profit planning, the formula to calculate Profit Targeting (PT) in terms of CMU is PT = Fixed Costs / (Selling Price - Variable Cost).

Operating Leverage

• A high Degree of Operating Leverage (DOL) indicates a high proportion of fixed costs in a company's cost structure.
• DOL measures the percentage change in operating income in response to a percentage change in sales.

Cost Structure

• When shifting from outsourcing to insourcing, fixed costs increase, and variable costs decrease.
• A Gross Profit of zero signifies that the breakeven point has been reached.
• Fixed Costs do not change with an increase in activity level.

Profit Analysis

• The purpose of Profit Targeting in cost-volume-profit (CVP) analysis is to determine the required sales revenue to achieve a target profit.
• The main difference between Prime Cost and Conversion Cost is that Prime Cost includes direct material costs, while Conversion Cost includes direct labor and overhead costs.

Margin of Safety

• The margin of safety is used to calculate the excess of actual sales over the breakeven sales.
• It helps answer the question, "How much can sales fall before the breakeven point is reached?"

CVP Analysis Assumptions

• A crucial assumption in CVP analysis is that the selling price per unit remains constant.
• The assumption is made that total revenue changes proportionately with changes in sales volume.

CVP Analysis Methods

• The Contribution Margin Method focuses on the difference between sales revenue and variable costs.
• The Equation Method involves using algebraic equations to determine the breakeven point.
• The High-Low Method involves using the highest and lowest levels of activity to estimate fixed and variable costs.
• The Graphical Method represents the profit relationships in a graphical format.

Cost Segregation

• The Least Squares Method is used to segregate mixed costs into fixed and variable components.

Income Statements

• The distinction between traditional income statements and contribution income statements highlights the fixed and variable cost components.
• Contribution income statements provide a clearer picture of a company's profitability.

Break-Even Point

• The breakeven point marks the level of activity where total revenue equals total fixed and variable costs.
• Within an organization's relevant range of activity, the breakeven point has significant implications for profitability.