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ACCT200 Chapter Notes - Chapter 11: Operating Leverage, Fixed Cost, Variable Cost

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taupelion650
19 May 2016
School
University of Delaware
Department
Accounting
Course
ACCT200
Professor
Debessay Araya

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Document Summary

Chapter 11 cost behavior, operating leverage, and profitability analysis. A fixed cost is a cost that in total remains constant as volume of activity changes but on a per unit basis varies inversely with changes in volume of activity. A variable cost is a cost that in to- tal changes directly proportionately with changes in volume of activity but on a per unit basis is constant as volume of activity changes. An example of a fixed cost is a supervisor"s salary in relation to units produced. An example of a variable cost is di- rect materials cost in relation to units produced. Most business decisions are based on cost information. The be- havior of cost in relation to volume affects total costs and cost per unit. For example, knowing that fixed cost stays constant in relation to volume and that variable cost increases proportionate- ly with changes in volume affects a company"s cost structure de- cisions.

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Related Questions

Match each of the following terms to the appropriatedefinition.

A type of cost that has two components; one that does not changein relation to the volume produced and one that does change inrelation to the volume produced.

 Answer 1

A type of cost that does not change in relation to volumeproduced.

 Answer 2

A type of cost that changes in relation to volume produced.

 Answer 3

Describes a company's cost structure and the effect of fixedcosts on operating income as volume changes.

 Answer 4

A fairly accurate calculation to determine the variable andfixed components of a cost.

 Answer 5

The excess of sales over break-even revenue.

 Answer 6

A method of examining different scenarios by only examiningitems that have changed.

 Answer 7

A production level where certain costs remain the same.

 Answer 8

The difference between sales per unit and variable costs perunit.

Answer 9

The answers for each one are one of these, Least squaredregression method, Fixed Costs, Incremental Analysis, RelevantRange, Mixed Costs, Operating Leverage, Margin of Safety, Variablecosts, and Contribution Margin per Unit

________ is the excess of sales over the cost of goods sold.

A) Gross margin

B) Contribution-margin ratio

C) Variable-cost ratio

D) Contribution margin

Answer:

Which statement is FALSE?

A) Each different sales-mix of products has a differentbreak-even point.

B) Changes in the sales-mix of products sold affects a company'snet operating profit.

C) Changes in the sales-mix of products sold affects a company'scontribution margin.

D) If the sales-mix of products sold changes, the break-evenpoint does not change.

Answer:

With mixed costs, the ________ element is unchanged over therelevant range and the ________ element varies proportionately withcost-driver activity.

A) variable cost; fixed cost

B) fixed cost; variable cost

C) fixed cost; step cost

D) step cost; variable cost

Answer:

The sales price is $30 per unit, the contribution margin is $8per unit and total fixed costs are $32,000. What is the break-evenpoint in units?

A) 857

B) 1,200

C) 2,000

D) 4,000

Answer:

If the selling price per unit increases, what is the effect onthe break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

1. Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range?

A. Average cost per unit.

B. Variable cost per unit.

C. Unit fixed cost.

D. Total variable cost.

2. The relevant range refers to the activity levels over which

A. Cost relationships hold constant.

B. Costs fluctuate.

C. Production varies.

D. Relevant costs are incurred.

3. When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?

A. General and administrative costs are assumed to be variable costs.

B. Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.

C. Total costs are assumed to be linear when plotted on a graph.

D. The relevant time period is assumed to be 5 years.

4. A management accountant is about to prepare graphs of total variable cost and per-unit variable cost for use in a short-term planning model. Dollars will be depicted on the vertical axis; activity will be shown on the horizontal axis. How will these graphs appear under completion?

Total Variable Cost; Per-Unit Variable Cost

A. Straight line, sloping upward to the right; Straight line, parallel to the horizontal axis

B. Curvilinear, sloping upward to the right; A line that basically parallels the horizontal axis, first decreasing and then increasing

C. Straight line, sloping upward to the right; Straight line, sloping upward to the right

D. Straight line, parallel to the horizontal axis; Straight line, sloping upward to the right

5. A company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning electricity cost is incorrect?

A. The total electricity cost will increase as production volume increases.

B. The total electricity cost per unit of production will increase as production volume increases.

C. The variable electricity cost per unit of production will remain constant as production volume increases.

D. The fixed electricity cost per unit of production will decline as production volume increases.