Financial and Managerial Accounting Ch 18. (part 1)

Managers use variations of CVP analysis to answer other questions like: 1. 2. 3. 4.

1. What sales volume is needed to earn a target income? 2. What is the change in income if selling prices decline and sales volume increases? 3. How much does income increase if we install a new machine to reduce labor costs? 4. How will income change if we change the sales mix of our products or services?

These methods are commonly used to analyze past costs: 1. 2. 3.

1. scatter diagrams 2. the high-low method 3. least squares regression

Describe the behavior of a fixed cost

A fixed cost remains unchanged in total amount regardless of output levels. However, fixed cost per unit declines with increased output.

One example of step-wise cost:

Salaries of production supervisors behave in this manner because their salaries are fixed within a relevant range of the current production volume. If production volume increases enough to warrant additional supervisors being hired, total cost for supervisor salaries goes up by a lump sum amount.

If cost per unit of activity remains constant (fixed), why is it called a variable cost?

Such a cost is considered variable because the total changes in proportion to the volume changes

One example of a variable cost is:

The direct materials cost of a product

When variable costs are plotted on a graph of cost and volume, they appear as _____________ starting at the zero cost level. This line is ________; it rises as ________ of activity increases.

a straight line upward (positive) volume

Which of the following statements is typically true? a. variable cost per unit increases as volume increases b. fixed cost per unit decreases as volume increases c. a curvilinear cost includes both fixed and variable elements

b.

One example of a mixed cost is:

compensation for sales representatives that includes a fixed monthly salary and a variable commission based on sales.

In its basic form, CVP analysis involves ________________ at which a company neither earns an income nor incurs a loss, this point is called the _______________. This basic form of CVP analysis is often called ______________.

computing the sales level break-even point break-even analysis

Variable cost is _________ as production levels change.

constant

A ___________ cost, aka a nonlinear cost, increases at a non-constant rate as volume increase.

curvilinear

_____________ are plotted on the vertical axis

dollars of cost

The drop in costs per unit as production levels increase is known as ___________.

economies of scale

Conventional cost-volume-profit (CVP) analysis requires management to classify all costs as either _________ or ___________ with respect to production or sales volume.

fixed variable

If the relevant range changes, (production capacity extends beyond the range), then the amount of __________ will likely change.

fixed costs

These costs remain unchanged in amount when the volume of activity varies from period to period within a relevant range.

fixed costs

A mixed cost is __________ when volume is zero, then a mixed cost also _________ in proportion to increases in volume.

greater than zero increases steadily

cost-volume-profit (CVP) analysis:

helps managers predict how changes in costs and sales levels affect income.

When production volume and costs are graphed , units of product (volume) is usually plotted on the ___________ because it __________ at all levels of production.

horizontal line remains constant

A variable cost is a __________ cost. This means it increases at a ________ rate as volume of activity increases.

linear constant

A _____________ includes both fixed and variable cost components.

mixed cost

step-wise cost

reflects a step pattern in costs

_______________ display past cost and unit data in graphical form.

scatter diagrams

step-wise cost is also known as ____________.

stair-step cost

Each individual point on a scatter diagram reflects:

the cost and number of units for a prior period.

One of the first steps in managerial planning requires you to predict the ________, the ___________, ______________, and ___________.

the volume of activity the costs to be incurred sales to be made profit to be received

__________ fixed cost does not change as the level of production changes, but the fixed cost per unit of output __________ as volume increases.

total decreases

One example of curvilinear cost:

total direct labor cost when workers are paid by the hour

With scatter diagrams, _______ are plotted on the horizontal axis and ________ is plotted on the vertical axis.

units cost

A ______________ changes in proportion to changes in volume of activity.

variable cost

In a conventional CVP analysis, a step-wise cost can be treated as either a fixed cost or variable cost. This treatment involves manager judgement and depends on the ___________ and the ____________. Narrower ranges are more likely to be treated as _________.

width of the range expected volume variable costs