Chapter 6 Study guide
Describe the behavior of a variable cost per unit
It remains constant with changes in the activity level
Understanding how costs behave is useful to management for
- analyzing the effects of changes made to the cost structure - estimating costs - predicting profits as sales and production volumes change
This is an example of a cost that varies in total as the number of units produced changes
- Direct materials cost - It is a variable cost
These are examples of costs that stays the same in total as the number of units produced changes
- Straight-line depreciation on factory equipment - Insurance premiums on factory building - Salary of a factory supervisor - They are fixed costs
Variable costs are constant
per unit
Contribution margin is
the excess of sales revenue over variable cost
This would be classified as a mixed cost for a T-shirt manufacturer
warehouse rent of $8,000 per month plus $0.50 per square foot of storage used
The following would be classified as fixed costs for a T-shirt manufacturer
• straight-line depreciation on sewing machines • salary of the production supervisor • advertising costs of $12,000 per month
The systematic examination of the relationships among selling prices, volume of sales and production, costs, and profits is termed
cost-volume-profit analysis
The difference between the current sales revenue and the sales at the break-even point is called the
margin of safety
Most operating decisions of management focus on a narrow range of activity called the
relevant range of production
The following is an example of a mixed cost
rental costs of $10,000 per month plus $0.30 per machine hour of use
The relative distribution of sales among the various products sold by a business is the
sales mix
For purposes of analysis, mixed costs are
separated into their variable and fixed cost components
Costs that remain constant in total dollar amount as the level of activity changes are called
fixed costs
This would be classified as a variable cost for a T-shirt manufacturer
ink used for screen printing
Fixed costs are constant in
total
Costs that vary in total in direct proportion to changes in an activity level are called
variable costs