ACCG101 Lecture Notes - Lecture 10: Fixed Cost, Variable Cost

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limehound700

30 May 2018

School

Macquarie University

Department

Accounting and Corporate Governance

Course

ACCG101

Professor

All

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Week 10 Cost Volume Profit Analysis

Variable Costs

- Costs that vary in total directly and proportionately with changes in the activity

level

- Includes direct materials, direct labour, cost of sales, commission and fuel

- E.g. materials used to produce goods

- Cost per unit is constant; total cost increases with volume increase

Fixed Costs

- Costs which remain relatively constant regardless of the activity level

- Includes rates of taxes, insurance, salaries, depreciation

- E.g. rent and insurance paid

- Fixed cost per unit = total cost divided by units of activity level

- Total cost is constant’ cost per unit decreases with volume increase

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Document Summary

Costs that vary in total directly and proportionately with changes in the activity level. Includes direct materials, direct labour, cost of sales, commission and fuel. Cost per unit is constant; total cost increases with volume increase. Costs which remain relatively constant regardless of the activity level. Fixed cost per unit = total cost divided by units of activity level. Total cost is constant" cost per unit decreases with volume increase. Cost volume profit can answer: the entity"s breakeven point, impact on sales volume and profit of increased costs, sales level needed to make a profit, impact of changes in selling price. Basic assumptions: costs and revenue are linear within the relevant range, all costs are identifiable as variable or fixed, costs are affected only be changes in activity level, all units produced are sold. Cm = the amount of revenue remaining after deducting variable costs. Can be expressed as a total amount or an a per-unit basis.

Related Questions

Which one of the following statements is not true?

a. Total fixed costs remain the same regardless of volume.

b. Total variable costs change with volume.

c. Total variable costs decrease as the volume increases.

d. Fixed cost per unit increase as the volume decreases.

e. Variable costs per unit remain the same regardless of volume.

viridianjackal166

If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would:

a. increase.

b. remain the same.

c. decrease.

d. increase or decrease, depending upon the percentage increase in wage rates.

Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio and the unit contribution margin are:

a. 53% and $7 per unit.

b. 47% and $11 per unit.

c. 52% and $11 per unit.

d. 47% and $8 per unit.

If sales are $500,000, variable costs are 75% of sales, and operating income is $40,000, what is the operating leverage?

a. 0

b. 1.3

c. 3.1

d. 1.25

Which of the following describes the behavior of the fixed cost per unit?

a. Increases with increasing production

b. Remains constant with changes in production

c. Decreases with increasing production

d. Decreases with decreasing production

If variable costs per unit decreased because of a decrease in utility rates, the break-even point would:

a. increase.

b. increase or decrease, depending upon the percentage increase in utility rates.

c. decrease.

d. remain the same.

Costs that vary in total in direct proportion to changes in an activity level are called:

a. differential costs.

b. fixed costs.

c. variable costs.

d. sunk costs

Which of the following conditions would cause the break-even point to increase?

a. Total fixed costs decrease

b. Unit variable cost decreases

c. Unit variable cost increases

d. Unit selling price increases

In cost-volume-profit analysis, all costs are classified into the following two categories:

a. discretionary costs and sunk costs

b. variable costs and fixed costs

c. mixed costs and variable costs

d. sunk costs and fixed costs

ochrespider8

1. Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range?

A. Average cost per unit.

B. Variable cost per unit.

C. Unit fixed cost.

D. Total variable cost.

2. The relevant range refers to the activity levels over which

A. Cost relationships hold constant.

B. Costs fluctuate.

C. Production varies.

D. Relevant costs are incurred.

3. When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?

A. General and administrative costs are assumed to be variable costs.

B. Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.

C. Total costs are assumed to be linear when plotted on a graph.

D. The relevant time period is assumed to be 5 years.

4. A management accountant is about to prepare graphs of total variable cost and per-unit variable cost for use in a short-term planning model. Dollars will be depicted on the vertical axis; activity will be shown on the horizontal axis. How will these graphs appear under completion?

Total Variable Cost; Per-Unit Variable Cost

A. Straight line, sloping upward to the right; Straight line, parallel to the horizontal axis

B. Curvilinear, sloping upward to the right; A line that basically parallels the horizontal axis, first decreasing and then increasing

C. Straight line, sloping upward to the right; Straight line, sloping upward to the right

D. Straight line, parallel to the horizontal axis; Straight line, sloping upward to the right

5. A company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning electricity cost is incorrect?

A. The total electricity cost will increase as production volume increases.

B. The total electricity cost per unit of production will increase as production volume increases.

C. The variable electricity cost per unit of production will remain constant as production volume increases.

D. The fixed electricity cost per unit of production will decline as production volume increases.

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ACCG101 Lecture Notes - Lecture 10: Fixed Cost, Variable Cost

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