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?
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What is the break-even point?
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What is Cost-volume-profit (CVP) analysis?
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What is Margin of Safety?
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How is the contribution margin ratio calculated?
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Define Contribution Margin.
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The break-even point represents ___ profit.
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What is the margin of safety?
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A cost volume profit graph represents ___ relationships.
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How do you calculate the break-even point?
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Define sales mix.
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What is Degree of Operating Leverage?
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Define Net Operating Income.
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What does Cost-Volume-Profit Analysis (CVP) study?
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How do you calculate Desired Profit (dollar)?
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What is Operating leverage?
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Define Absorption Costing Income Statement.
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What is a Variable Costing Income Statement?
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How do you calculate Dollar sales at target income?
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What is the formula for Expected percent change in income?
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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.
