Cost Behavior Analysis and Break-even Concepts
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Questions and Answers

What is the High-Low Method?

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels.

What are Curvilinear Costs?

Costs that increase as volume increases, but at a non-constant rate.

Define Step-wise cost.

Cost that remains fixed over limited ranges of volumes but changes by a lump sum when volume changes occur outside these limited ranges.

What is the statistical method for identifying cost behavior called?

<p>Regression / least-square regression.</p> Signup and view all the answers

What is the break-even point?

<p>The point at which the costs of producing a product equal the revenue made from selling the product.</p> Signup and view all the answers

What is Cost-volume-profit (CVP) analysis?

<p>The study of the effects of changes in costs and volume on a company's profits.</p> Signup and view all the answers

What is Margin of Safety?

<p>The difference between actual or expected sales and sales at the break-even point.</p> Signup and view all the answers

How is the contribution margin ratio calculated?

<p>Contribution Margin / Sales.</p> Signup and view all the answers

Define Contribution Margin.

<p>The amount remaining from sales revenues after all variable expenses have been deducted.</p> Signup and view all the answers

The break-even point represents ___ profit.

<p>zero</p> Signup and view all the answers

What is the margin of safety?

<p>Difference between your actual or expected profitability and the break-even point.</p> Signup and view all the answers

A cost volume profit graph represents ___ relationships.

<p>cost-volume-profit</p> Signup and view all the answers

How do you calculate the break-even point?

<p>In units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit - Variable costs per unit).</p> Signup and view all the answers

Define sales mix.

<p>The relative proportions in which a company's products are sold.</p> Signup and view all the answers

What is Degree of Operating Leverage?

<p>Contribution Margin / Net Operating Income.</p> Signup and view all the answers

Define Net Operating Income.

<p>Income before interest and income taxes have been deducted.</p> Signup and view all the answers

What does Cost-Volume-Profit Analysis (CVP) study?

<p>The effects of changes in costs and volume on a company's profits.</p> Signup and view all the answers

How do you calculate Desired Profit (dollar)?

<p>(Fixed Cost / Desired Profit) / Contribution Margin Ratio.</p> Signup and view all the answers

What is Operating leverage?

<p>The relative amount of fixed and variable costs that make up a firm's total costs.</p> Signup and view all the answers

Define Absorption Costing Income Statement.

<p>Sales Revenue - COGS (DM, DL, VOH, FOH) = Gross Profit - Selling and administrative expenses (including variable and fixed selling admin.expenses) = NOI.</p> Signup and view all the answers

What is a Variable Costing Income Statement?

<p>An income statement that reports variable costs and fixed costs separately; also called a contribution margin income statement.</p> Signup and view all the answers

How do you calculate Dollar sales at target income?

<p>(Fixed Costs + Target Income) / Contribution Margin Ratio.</p> Signup and view all the answers

What is the formula for Expected percent change in income?

<p>Degree of Operating Leverage * % change in sales.</p> Signup and view all the answers

Study Notes

Cost Behavior Analysis

  • High-Low Method: A technique to separate mixed costs into fixed and variable components by analyzing the highest and lowest activity levels.
  • Curvilinear Costs: These costs increase with volume but at a non-constant rate.
  • Step-wise Costs: Fixed within certain volume ranges but change in lumps when volume changes occur outside these ranges.

Statistical Methods

  • Regression Analysis: A statistical method used to identify cost behavior, often referred to as least-square regression.

Break-even Concepts

  • Break-even Point: The juncture where production costs equal revenue from sales.
  • Margin of Safety: The difference between actual or expected sales and the break-even sales level, indicating risk buffer.
  • Calculation of Break-even Point: In units, use the formula: Break-even point (units) = Fixed Costs ÷ (Sales price per unit - Variable costs per unit). In sales dollars: Break-even point (sales dollars) = Fixed Costs ÷ Contribution Margin Ratio.

Profit Analysis

  • Cost-Volume-Profit (CVP) Analysis: Analyzes how changes in costs and volume affect a company's profits.
  • Contribution Margin: Represents revenue remaining after deducting variable expenses.
  • Contribution Margin Ratio: Calculated as Contribution Margin divided by Sales.

Income Measures

  • Net Operating Income: Income prior to deducting interest and income taxes.
  • Dollar Sales at Target Income: Calculated using the formula: (Fixed Costs + Target Income) ÷ Contribution Margin Ratio.
  • Desired Profit: Calculated as (Fixed Cost ÷ Desired Profit) ÷ Contribution Margin Ratio.

Operating Leverage

  • Degree of Operating Leverage: A ratio of Contribution Margin to Net Operating Income that measures sensitivity to sales fluctuations.
  • Operating Leverage: Refers to the proportion of fixed and variable costs in a firm's total expenses.

Costing Methods

  • Absorption Costing Income Statement: Takes into account all manufacturing costs (Direct Materials, Direct Labor, Variable and Fixed Overheads) and selling/admin expenses to present gross profit and net operating income.
  • Variable Costing Income Statement: Reports variable and fixed costs separately, emphasizing contribution margin.

Sales Dynamics

  • Sales Mix: Represents the relative proportions of different products sold; calculated by expressing each product's sales as a percentage of total sales.
  • Expected Percent Change in Income: Calculated as Degree of Operating Leverage multiplied by percentage change in sales.

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Description

This quiz covers essential concepts in cost behavior analysis including techniques like the High-Low Method and Curvilinear Costs. It also delves into statistical methods such as Regression Analysis and key break-even concepts like the Margin of Safety. Test your understanding of these fundamental principles in cost accounting.

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