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