ACCT1501 Lecture Notes - Lecture 12: Cost Driver, Variable Cost, Root Mean Square

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18 May 2018

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Accounting & Financial Management 1A

Cost-Volume Profit Analysis

-Cost Behaviour: Deals with how costs change with respect to changes in activity

levels

•Essential for planning, control & decision making

-Cost Driver - factor that causes (drives) activity costs

-Fixed Cost: In total, remains constant within relevant range as level of cost driver

varies (e.g. rent per month, insurance per year)

•Relevant range - range over which assumed ﬁxed cost relationship is valid for

normal operations of an organisation

•Fixed costs per unit vary inversely with activity → unit cost changes as level of cost

driver changes

-Variable Cost: In total, vary proportionally with changes in activity level

•Remain same on per unit basis

•Assumptions:

(i) Cost behaviour is deﬁned with respect to a single, speciﬁc cost object/driver

(ii) Linearity

(iii) Speciﬁed time span (e.g. per month)

(iv) Changes in output volume are moderate (ie capacity)

-Semi-Fixed Cost: Some ﬁxed costs do not ﬁt the ﬁxed cost classiﬁcation completely

•Fixed over moderate range of activity, then rise or fall to new levels beyond that

range

-Semi-Variable Cost: Some variable costs do not ﬁt variable cost classiﬁcation

completely

•Although directly proportional to activity, have a ﬁxed component

-CVP Analysis: Examines effect of changes in costs & volumes on a ﬁrm’s proﬁts

•Factors considered: Volume of activity level, unit selling price, variable cost per unit,

total ﬁxed cost, sales mix

•Assumptions:

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Document Summary

Cost behaviour: deals with how costs change with respect to changes in activity levels: essential for planning, control & decision making. Cost driver - factor that causes (drives) activity costs. Semi-fixed cost: some xed costs do not t the xed cost classi cation completely: fixed over moderate range of activity, then rise or fall to new levels beyond that range. Semi-variable cost: some variable costs do not t variable cost classi cation completely: although directly proportional to activity, have a xed component. Cvp analysis: examines effect of changes in costs & volumes on a rm"s pro ts: factors considered: volume of activity level, unit selling price, variable cost per unit, total xed cost, sales mix, assumptions: Contribution margin: revenue - variable cost: contributes to meeting xed costs, contribution margin per unit = unit selling price - unit variable cost (s-v, contribution margin ratio = cm per unit unit selling price. Where cm ratio = total cm total sales revenue.

Related Questions

1) All of the following are examples of product costs except:

depreciation on the company's administrative offices.

salary of the plant manager.

insurance on the factory equipment.

rental costs of the factory facility.

2) Period costs:

are treated as expenses in the period they are incurred

are directly traceable to products

include direct labor

are also referred to as manufacturing overhead costs

3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:

Direct materials $30

Direct manufacturing labor 5

Variable manufacturing overhead 10

Fixed manufacturing overhead 40

Total manufacturing costs $85

The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?

a. $85,000

b. $170,000

c. $107,500

d. $102,500

4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:

overstate period expenses on the income statement.

overstate the cost of goods sold on the income statement.

understate the cost of goods manufactured.

have no effect on the cost of goods manufactured.

5) In CVP analysis, focusing on target net income rather than operating income:

a. will increase the breakeven point

b. will decrease the breakeven point

c. will not change the breakeven point

d. does not allow calculation of breakeven point

6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.

a. True

b. False

7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.

a. True

b. False

8) Which of the following statements is correct with regard to a CVP graph?

A CVP graph shows the maximum possible profit.

A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.

A CVP graph assumes that total expense varies in direct proportion to unit sales.

A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?

	Cost of purchasing clothing	Sales commissions
a.	Product	Product
b.	Product	Period
c.	Period	Product
d.	Period	Period

10) The principal difference between variable costing and absorption costing centers on:

whether variable manufacturing costs should be included as product costs.

whether fixed manufacturing costs should be included as product costs.

whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.

none of these.

11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?

3,300 hot dogs

3,000 hot dogs

2,727.27 hot dogs

2,728 hot dogs

12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:

	Unit product cost under variable costing..........................	$5.20 per unit
	Fixed manufacturing overhead cost for the year..............	$260,000
	Fixed selling and administrative cost for the year............	$180,000
	Units (calculators) produced and sold..............................	400,000

What is Shun's unit product cost under absorption costing for last year?

$4.10

$4.55

$5.85

$6.30.

Use the following information to answer questions 13 to 15:

Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.

13) Calculate the number of equivalent units for materials.

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

14) Calculate the number of equivalent units for conversion?

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:

	Materials	Conversion
Work in process 5/1.......................	$13,800	$3,740
Costs added during May................	$42,000	$26,260

The total cost per equivalent unit for May was:

$5.02

$5.10

$5.12

$5.25

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ACCT1501 Lecture Notes - Lecture 12: Cost Driver, Variable Cost, Root Mean Square

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