Conceptual Concepts Test 2

When activity levels increases, total variable costs will

increase

When activity levels increase, variable costs per unit

stay the same

When activity levels increase, total fixed costs will

stay the same

When activity level increases, the fixed costs per unit will

decrease

When activity level increases, total costs will

increase

Curvilinear Costs

costs are not linear with acitvity level, curature

Step costs

fixed cost over a certain range, until it jumps

Variable rate

another term for variable cost per unit

What is the benefit of account analysis?

It involves human judgement and familiarity in the industry.

Account Analysis

accountant looks at cost and guesses how it behaves

What is the con of account analysis?

It’s subjective.

Visual Fit analysis

scatterplot; accountant eyeballs where the line goes amoung the dots

What is the benefit of visual fit analysis?

A picture of data points is visible and outliers can be removed if needed.

What is the con of visual fit analysis?

It’s subjective; line varies by placement

High-Low Method

Only uses the points with the lowest and highest activity levels.

What is the benefit of the high-low method of deriving the cost formula?

It is not subjects and is based entirely upon math.

What is the con of the high-low method?

It only uses two points, might not be representative (outliers)

Least Square Regression Analysis

uses statistics to find the line of best fit of all the data

What is the benefit of least squares regression analysis?

It uses all the data and gives R² to tell us how well the data fits.

What is the con of least squares regression analysis?

Outliers can affect statistical outcome.

If only two data points are given, what is true about the results from regression and high-low?

They will be identical.

What is the advantage of including all points when only given two points for regression.

There is no advantage.

What is the interpretation of R²?

About (R² value as %) of the variation in total costs can be explain by activity level.

High R² =

reliable regression analysis

Regression Analysis → Intercept Coefficient value =

Fixed Cost

Regression Analysis → Intercept Coefficients value =

Variable Cost per unit

Revenues are ____ throughout the relevant range.

linear

Throughout the relevant raNge, per unit selling price is

constant.

Costs are _____ throughout the relevant range.

linear

Throughout the relevant range, the per unit variable cost is

constant.

Every cost can be classified as:

fixed or variable

IF we sell multiple items, our product mix

remains constant

Contribution Margin per unit =

Price per unit - Variable Cost per unit

TOtal Contribution Margin =

Sales Revenue - Total Variable Cost

CM Ratio — per unit given =

(CM per unit)/ (Price per unit)

CM Ratio — given totals =

(Total CM)/ (Total Revenue)

Operating Income — given totals =

Sales Revenue - Total Variable Costs - Total Fixed Costs

Operating Income — given per unit =

(Price per unit * #units) - (Variable Cost per unit * #units) - Total Fixed Costs

units needed =

(Fixed Cost + Target Operating Income) / CM per unit

Sales Revenue needed =

(Fixed Costs + Target Operating Income) / CM Ratio

Contribution Margin

Sales Revenue

— Variable Costs

= Contribution Margin

— Fixed Costs

= Operating Income

In a contribution margin income statement, costs are categorized by

behavior

Contribution Margin _____ ____ marginal costs to make or get a product.

removes all

If fixed costs increase, the break-even point

increases

If fixed costs decrease, the break even point

decreases

If variable costs per unit increase, the break-even point

increases

If variable costs per unit decrease, the break-even point

decreases

If the selling price increases, the break-even point

decreases

If the selling price decreases, the break-even point

increases

If the contribution margin per unit increases, the break-even point

decreases

If the contribution margin p;er unit decreases, the break-even point

increases

Break-even point and costs move

the same way

Break-even point and everything (except costs) move

inversly

number of units — product mix =

(Fixed Costs + Target Operating Income) / WACM

WACM

sum of each product’s CM by its % sales mix

Margin of Safety =

Actual (or target) Revenues — break-even point

High operating leverage degree

A company chooses to take on a lot of fixed costs and not too much variable costs.

Low operating leverage degree

A company chooses to take on a lot of variable costs and not too much fixed costs.

Which cost structure is more risky?

High operating leverage degree

Why would a company take on a high operating leverage degree cost struture?

The company sells a lot of units.

Why would a company take on a low operating leverage degree cost structure?

They do not sell many units.

What criteria makes information relevant?

It is a future revenue or cost. It somehow differs from the other alternatives.

Avoidable Costs

Costs that can go away.

Unavoidable Costs

Costs that cannot go away.

Qualitative decisions should _____ be considered.

always

Tracable Costs =

Variable Costs + Tracable Fixed Costs

Another term for avoidable costs

Traceable Fixed Costs

Another term for unavoidable costs

Common Fixed Costs

Sunk Costs

Costs that have occurred in the past, not relevant to decisioln making.

Segment Margin

overall impact of the segment that is separate from any common fixed costs.