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Questions and Answers
Which of the following cost classifications is LEAST relevant when predicting total costs within a wide range of activity?
Which of the following cost classifications is LEAST relevant when predicting total costs within a wide range of activity?
A cost that remains constant on a per-unit basis as production volume changes is classified as a fixed cost.
A cost that remains constant on a per-unit basis as production volume changes is classified as a fixed cost.
False (B)
Provide the term for a cost that contains both a fixed and a variable component. For example, a monthly equipment lease that includes a flat fee plus a price per use.
Provide the term for a cost that contains both a fixed and a variable component. For example, a monthly equipment lease that includes a flat fee plus a price per use.
mixed costs
Costs that are relevant to a particular decision but may not be directly traceable to a product are known as _______ costs.
Costs that are relevant to a particular decision but may not be directly traceable to a product are known as _______ costs.
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Match the cost type with its description:
Match the cost type with its description:
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When using the least squares method to determine cost elements, what does 'n' represent?
When using the least squares method to determine cost elements, what does 'n' represent?
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In cost accounting, fixed costs vary in total with changes in the level of activity.
In cost accounting, fixed costs vary in total with changes in the level of activity.
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In the context of cost analysis, what is the definition of 'variable cost'?
In the context of cost analysis, what is the definition of 'variable cost'?
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Using the least squares method, the __________ cost is the cost that remains constant irrespective of the number of observations.
Using the least squares method, the __________ cost is the cost that remains constant irrespective of the number of observations.
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Match the cost elements with their descriptions:
Match the cost elements with their descriptions:
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Which of the following is the primary focus of cost accounting?
Which of the following is the primary focus of cost accounting?
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A primary objective of cost accounting is to set operational plans only for the short term, as long-term plans fall outside its scope.
A primary objective of cost accounting is to set operational plans only for the short term, as long-term plans fall outside its scope.
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Name three common classifications used in cost accounting.
Name three common classifications used in cost accounting.
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The __________ point is the level of sales at which total revenue equals total costs, resulting in neither profit nor loss.
The __________ point is the level of sales at which total revenue equals total costs, resulting in neither profit nor loss.
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Match each cost accounting objective with its description:
Match each cost accounting objective with its description:
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Using the high-low method, what does the 'high level of activity' refer to when calculating variable cost per unit?
Using the high-low method, what does the 'high level of activity' refer to when calculating variable cost per unit?
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In the high-low method, the variable cost per unit is calculated by dividing the difference in ______ by the difference in activity levels.
In the high-low method, the variable cost per unit is calculated by dividing the difference in ______ by the difference in activity levels.
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What is the variable cost per direct labor hour if the high cost is $241,600 at 70,000 direct labor hours and the low cost is $170,200 at 40,000 direct labor hours?
What is the variable cost per direct labor hour if the high cost is $241,600 at 70,000 direct labor hours and the low cost is $170,200 at 40,000 direct labor hours?
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The high-low method provides a very precise estimation of cost behavior because it considers all available data points.
The high-low method provides a very precise estimation of cost behavior because it considers all available data points.
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Why is it important to identify the 'activity level' when using the high-low method to estimate costs?
Why is it important to identify the 'activity level' when using the high-low method to estimate costs?
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Using the equations provided, what type of analysis can be performed? (Select the best answer)
Using the equations provided, what type of analysis can be performed? (Select the best answer)
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If the selling price per unit increases while fixed costs and variable costs remain constant, the break-even point in units will increase.
If the selling price per unit increases while fixed costs and variable costs remain constant, the break-even point in units will increase.
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In Cost-Volume-Profit (CVP) analysis, what is the significance of the break-even point?
In Cost-Volume-Profit (CVP) analysis, what is the significance of the break-even point?
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The formula for calculating Break-even point (Quantity) is Fixed costs divided by ______.
The formula for calculating Break-even point (Quantity) is Fixed costs divided by ______.
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A company has fixed costs of $500,000, a selling price per unit of $400, and variable costs per unit of $250. What is the break-even point in value?
A company has fixed costs of $500,000, a selling price per unit of $400, and variable costs per unit of $250. What is the break-even point in value?
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What is the formula to calculate the volume of sales required to achieve a target profit?
What is the formula to calculate the volume of sales required to achieve a target profit?
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Define 'contribution margin' and explain its significance in cost-volume-profit analysis.
Define 'contribution margin' and explain its significance in cost-volume-profit analysis.
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In the context of CVP analysis, the break-even point is reached when total revenue equals the sum of total __________ costs and total __________ costs.
In the context of CVP analysis, the break-even point is reached when total revenue equals the sum of total __________ costs and total __________ costs.
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Increasing fixed costs will always decrease the break-even point, assuming all other variables remain constant.
Increasing fixed costs will always decrease the break-even point, assuming all other variables remain constant.
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Using the given data, calculate the volume of sales required to achieve the target profit: Sales price per unit = $100, Variable cost per unit = $60, Fixed costs = $25,000, Target profit = $20,000. Round up to the nearest whole unit.
Using the given data, calculate the volume of sales required to achieve the target profit: Sales price per unit = $100, Variable cost per unit = $60, Fixed costs = $25,000, Target profit = $20,000. Round up to the nearest whole unit.
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Flashcards
Fixed Cost
Fixed Cost
Costs that remain constant regardless of production level.
Variable Cost
Variable Cost
Costs that vary with the level of production or activity.
Least Squares Method
Least Squares Method
A statistical technique to minimize the differences between observed and predicted values.
Observations (n)
Observations (n)
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Cost Elements
Cost Elements
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Cost Classifications for Decision Making
Cost Classifications for Decision Making
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Predicting Cost Behavior
Predicting Cost Behavior
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Variable Cost Per Rate
Variable Cost Per Rate
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High Cost
High Cost
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Low Cost
Low Cost
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Cost Difference Calculation
Cost Difference Calculation
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Direct Labor Hour Rate
Direct Labor Hour Rate
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Cost Accounting
Cost Accounting
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Objectives of Cost Accounting
Objectives of Cost Accounting
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Classification of Costs
Classification of Costs
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Operational Plans
Operational Plans
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Break-Even Point
Break-Even Point
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Contribution Margin
Contribution Margin
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Sales Volume for Target Profit
Sales Volume for Target Profit
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Target Profit
Target Profit
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Selling Price per Unit
Selling Price per Unit
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Break-even point (Quantity)
Break-even point (Quantity)
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Break-even point (Value)
Break-even point (Value)
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Variable Cost per Unit
Variable Cost per Unit
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Total Fixed Cost
Total Fixed Cost
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Study Notes
Cost Accounting - Semester 6
- This course covers cost accounting concepts, cost behavior analysis, cost estimation methods (high-low method, least squares method), break-even analysis, and cost-volume-profit (CVP) analysis.
Cost Behavior Analysis
- Cost behavior is the change in cost or expenses of a business due to a change in the business process.
- Understanding cost behavior is crucial for decision-making, planning, and controlling.
- There are three types of cost behavior patterns:
- Variable costs: Change in direct proportion to the level of activity, fixed per unit.
- Fixed costs: Remain unchanged in total when the level of activity changes, variable per unit.
- Mixed costs: Contain both variable and fixed cost elements.
Cost Analysis Estimation Methods
-
High-low method: Used to estimate the variable and fixed cost elements of a mixed cost.
- Identify the highest and lowest activity levels and their corresponding costs.
- Calculate the variable cost per unit using the formula: (high cost - low cost) / (high activity level - low activity level).
- Calculate the fixed cost using the formula: Y = a + bx (where Y is the total cost, a is the fixed cost, b is the variable cost per unit, and x is the activity level). Use either the high or low activity level to solve for 'a'.
-
Least Squares Method: A more precise method for estimating the variable and fixed cost elements of a mixed cost using linear regression analysis. This method minimizes the sum of squared differences between observed costs and predicted costs based on a linear model.
Break-Even Analysis
- Break-even point is the point at which total revenue equals total costs, resulting in neither profit nor loss.
- Fixed costs are costs that remain constant regardless of the level of output. Variable costs are costs that change in direct proportion to the level of output.
- Contribution margin is the difference between selling price per unit and variable cost per unit and used to determine the break-even point.
Cost-Volume-Profit (CVP) Analysis
- CVP analysis examines the relationship between sales volume, costs, and profit.
- It helps in decision-making regarding pricing, production output, and sales mix.
- Key elements in CVP analysis include: -Selling price per unit -Variable cost per unit -Fixed costs -Target profit -Contribution margin
- Tools for CVP analysis include break-even analysis and calculation of profit at various levels of activity
Manufacturing Costs
- Direct materials: Materials that are easily traceable to a specific product.
- Direct labor: Labor costs directly involved in producing a product.
- Manufacturing overhead: All other manufacturing costs that cannot be directly traced to a specific product.
Cost Accounting Concepts
- Variable cost: Changes in direct proportion to a change in the level of activity; the cost per unit is fixed.
- Fixed cost: Remains unchanged in total when the level of activity changes; the cost per unit is variable.
- Direct cost: Related directly to a cost object, which is any item the manager wants to measure the cost of
- Indirect cost: Not directly related to a cost object.
- Controllable cost: Manager can control or heavily influence the level of cost.
- Uncontrollable cost: Manager cannot control or influence significantly.
- Manufacturing cost: Cost incurred in producing goods or services.
Break-Even Point Calculations
- Break-even point (Quantity) = Fixed Costs / (Selling Price per Unit – Variable Cost per Unit).
- Break-even point (Value) = Break-even point (Quantity) * Selling Price per Unit.
- Contribution Margin: Selling price per unit – variable cost per unit
- Formula for calculating break-even point
Cost Accounting Objectives
- Determine the cost of products or services.
- Determine the selling price.
- Control and reduce costs.
- Find profitability of divisions, activities, and units. -Locate wastages accurately.
- Decision making through accurate data presentations and analysis.
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Description
Test your knowledge of cost classifications, cost behavior, and cost analysis techniques. Key concepts include fixed costs, variable costs, mixed costs, and relevant costs. Also covered are the least squares method and its components in cost accounting.
