CH11- cost behavior and profit analysis

Cost behavior

How a cost reacts to changes in the level of activity

Activity base

The activity that drives a cost (e.g., units sold, patient visits, lawns mowed)

Fixed cost

A cost whose total stays constant as activity changes; cost per unit decreases as activity increases

Variable cost

A cost whose total changes in direct proportion to activity; cost per unit stays constant

Mixed cost

A cost that has both a fixed component and a variable component

Risk

The possibility that sacrifices may exceed benefits

Relevant range

The range of activity over which the definitions of fixed and variable costs are valid

Contribution margin

Sales minus variable costs; the amount available to cover fixed costs and then provide profit

Break-even point

The level of activity where profit (net income) equals zero

Net income (CVP)

Sales − Variable costs − Fixed costs

Unit sales to break even

Fixed costs ÷ Contribution margin per unit

Unit sales for desired profit

(Fixed costs + Desired profit) ÷ Contribution margin per unit

Variable cost structure

A cost setup that shifts costs from fixed to variable to reduce the risk of paying costs when sales are low

Total fixed cost as activity changes

Remains constant

Fixed cost per unit as activity increases

Decreases

Fixed cost per unit as activity decreases

Increases

Total variable cost as activity changes

Changes in direct proportion (increases or decreases with activity)

Variable cost per unit as activity changes

Remains constant

Hourly wages

Variable cost

Annual salary

Fixed cost

Salary plus commission

Mixed cost

Fixed cost examples (merchandiser)

Store manager salary, advertising, insurance, store rent/depreciation

Variable cost examples (merchandiser)

Cost of merchandise, credit card processing fees, shopping bags and packaging

Fixed cost examples (dentist)

Office rent, dentist and employee salaries, insurance, X-ray machine depreciation

Variable cost examples (dentist)

Disposable gloves, bibs, disposable examination supplies

______ refers to how a cost reacts to changes in the level of activity.

Cost behavior

The activity that drives a cost is called the ______.

Activity base

A ______ cost stays constant in total as activity changes.

Fixed

A ______ cost changes in total in direct proportion to activity.

Variable

A ______ cost has both a fixed component and a variable component.

Mixed

______ is the possibility that sacrifices may exceed benefits.

Risk

The ______ is the range of activity over which fixed and variable cost definitions are valid.

Relevant range

Sales minus variable costs equals ______.

Contribution margin

The ______ is the point where net income equals zero.

Break-even point

Unit sales to break even equals fixed costs divided by ______ per unit.

Contribution margin

Unit sales for desired profit equals (fixed costs + desired profit) divided by ______ per unit.

Contribution margin

As activity increases, fixed cost per unit ______.

Decreases

As activity decreases, fixed cost per unit ______.

Increases

Variable cost per unit ______ as activity changes.

Remains constant

Total fixed cost ______ as activity changes.

Remains constant

Wages paid by the hour are a ______ cost.

Variable

An annual salary is a ______ cost.

Fixed

A salary plus commission is a ______ cost.

Mixed

Businesses can reduce fixed cost risk by shifting to a ______ cost structure.

Variable

Managerial income statements classify costs by their ______ patterns.

Behavior

What is the term for how a cost reacts to changes in the level of activity?

Cost behavior

What is the activity that drives a cost called?

Activity base

Which type of cost stays constant in total as activity changes?

Fixed cost

Which type of cost changes in total in direct proportion to activity?

Variable cost

A cost with both a fixed component and a variable component is called a:

Mixed cost

What is the possibility that sacrifices may exceed benefits called?

Risk

What is the range of activity over which the fixed and variable cost definitions are valid?

Relevant range

What is sales minus variable costs called?

Contribution margin

What is the point where profit equals zero called?

Break-even point

What type of cost are hourly wages paid to cashiers?

Variable cost

What type of cost is a salary plus commission?

Mixed cost

What type of cost is a manager's annual salary?

Fixed cost

Managerial accountants often build income statements that classify costs by:

Their behavior patterns

How can a business reduce the risk of fixed costs?

Shift to a variable cost structure

A product sells for $50 per unit and has a variable cost of $32 per unit. What is the contribution margin per unit?

$18

A company sells 2,000 units at $25 each. Variable cost is $15 per unit, and fixed costs are $8,000. What is the total contribution margin?

$20,000

Fixed costs are $24,000. The selling price is $40 per unit and the variable cost is $28 per unit. How many units must be sold to break even?

2,000 units

Fixed costs are $18,000 and the target profit is $9,000. The selling price is $30 per unit and the variable cost is $21 per unit. How many units must be sold?

3,000 units

A truck lease costs $2,000 per month plus $0.50 per mile. The truck is driven 3,000 miles this month. What is the total cost?

$3,500

Monthly rent is $12,000. Production increases from 400 units to 600 units. What is the rent cost per unit at 600 units?

$20

Variable cost is $8 per unit. Activity increases from 1,000 units to 1,500 units. What is the total variable cost at 1,500 units?

$12,000

A company sells 5,000 units at $20 each. Variable cost is $12 per unit and fixed costs are $30,000. What is net income?

$10,000

A product sells for $60. Per-unit costs are $20 of direct materials, $10 of direct labor, and $6 of variable overhead. Monthly fixed costs are $4,000 of rent and $800 of advertising. How many units must be sold for a $7,200 profit?

500 units

Which formula calculates unit sales to break even?

Fixed costs ÷ Contribution margin per unit

Which formula calculates unit sales for a desired profit?

(Fixed costs + Desired profit) ÷ Contribution margin per unit

Which formula calculates net income?

Sales − Variable costs − Fixed costs

Fixed costs increase, but price and variable cost per unit stay the same. What happens to the break-even point?

It increases

Variable cost per unit increases, but price stays the same. What happens to contribution margin per unit and to the break-even point?

Contribution margin decreases, and break-even increases

Contribution margin

Sales − Variable costs

Net income

Sales − Variable costs − Fixed costs

Break-even units

Fixed costs ÷ Unit contribution margin

Units for desired profit

(Fixed costs + Desired profit) ÷ Unit contribution margin

Fixed/Total cost:

Remains constant

Fixed/Cost Per Unit:

Decreases as activity increases, increases as activity decreases

Variable/Total cost:

Changes in direct proportion to activity

Variable/Cost per unit

Remains constant