Accounting Chapter 6,7

False

Fixed cost never change (True or False)

True

Fixed cost never change within the relevant range (True or False)

True

In Fixed costs, total costs are constant (True or False)

True or False

In variable costs, total costs are not constant (True or False)

True

Mixed costs are when costs aren't constant (True or False)

True

Variable cost per activity stays constant Total fixed costs stay constant

True

When volume increases, the fixed cost per unit decreases When volume decreases, the fixed cost per unit increases

Regression

a statistical procedure for determining the line, and associated cost equation, that best fits all of the data points in the data set, not just the high volume and low volume data points. "line of best fit"

Absorption costing

all manufacturing related costs, whether fixed or variable, "absorbed" into to the cost of the product. - all DM, DL, MOH costs are treated as inventoriable product costs

High Low Method

an easy way to estimate the variable and fixed cost components of a mixed cost - uses the highest and lowest points of a data set

Mixed Costs

contain both variable and fixed components - line does not begin at the origin - y=vx+f - Total _____ _____ increases as volume increases but not in direct proportion to changes in volume b/c of the variable cost component - ____ _____ per unit decreases as volume increases b/c of the fixed cost component

Variable Costs

costs that are incurred for every unit of volume. -change in direct proportion to changes in volume. - graphs always begin at the origin (zero volume and zero costs - y=vx

Fixed costs

costs that do not change in total despite wide changes in volume (Property taxes, straight-line depreciation, salaries of hotel department managers, cable tv, etc) - inversely proportional to the number of units - y=f

Cost-Volume Profit Analysis

expresses the relationships among costs, volume, and the company's profits

Step Costs

fixed over a small range of activity, and then jump to a new fixed level with moderately small changes in volume

Cost Behavior

how costs change as volume changes

Breakeven Point

intersects sales revenue and total expense line = Fixed exp/ Contributon margin per unit - Decrease in fixed cost will decrese break even point

Contribution Margin

is equal to sales revenue minus variable expenses. Shows managers how much profit has been made on sales before considering fixed costs

account analysis

managers use their judgment to classify each general ledger account as a variable, fixed, or mixed cost

Variable costing (direct costing)

only variable manufacturing costs are treated as inventoriable product costs

Operating Leverage Factor

tells us how responsive a company's operating income is to changes in volume = contribution margin/ operating income

R-square

tells us how well the line fits that data points - the higher the, the stronger the relationship between cost and volume "goodness of fit"

Relevant Range

the band of volume where total fixed costs and variable cost per unit remains constant

Average cost per unit

the cost to produce a single unit of production as calculated by dividing the total cost by the total number of units produced

Margin of safety

the excess or expected sales over breakeven sales "cushions" or "Drop in sales"

Operating Leverage

the relative amount of fixed and variable costs that make up its total costs

Chapter 7

Chapter 7