AFM102 Lecture Notes - Lecture 3: Fixed Cost, Variable Cost, Unit

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azureturtle555

7 Apr 2017

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM102

Professor

Catherine Wong

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Document Summary

Chapter 3 cost behaviour: analysis and use. Cost behavior refers to how a cost will react or change as changes take place in the level of business activity. Cost structure relative proportion of fixed, variable and mixed costs in an organization. Variable cost is one whose total dollar amount varies in direct proportion to changes in the activity level. If the activity level doubles, the total dollar amount of the variable costs also doubles. Variable cost remains constant if expressed on a per unit basis. Activity base measure of whatever causes a variable cost to be incurred. Direct labour hours, machine hours, units produced, units sold, number of km driven by salespeople etc. Costs are caused by many different activities within an organization. Whether a cost is considered to be variable depends on whether it is caused by the activity under consideration.

Related Questions

Which of the following statements describes variable costs?

Costs that vary on a per unit basis as the level of activitychanges

Costs that vary in total in direct proportion to changes in thelevel of activity

Costs that remain the same in total dollar amount as the levelof activity changes

Costs that vary on a per unit basis but remain the same in totalas the level of activity changes

A variant of fiscal-year budgeting whereby a twelve-monthprojection into the future is maintained at all times iscalled:

A. Flexible budgeting

B. Continuous budgeting

C. Zero-based budgeting

D. Master budgeting

erinelk174

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.

silversnake284

Name the definitions given below:

______________	1.	Technique that examines changes inprofits in response to changes in sales volumes, costs, andprices.
______________	2.	Percent by which the selling price (orrevenue) per unit exceeds the variable cost per unit, orcontribution margin as a percent of revenue.
______________	3.	Diagram of the relationship betweentotal revenues and total costs; illustrates how an organizationâsprofits are expected to change under different volumes ofactivity.
______________	4.	Index of the extent to which the costfunction is made up of fixed costs.
______________	5.	Total revenue minus total variable costs.
______________	6.	Proportion of different products or services that anorganization sells.
______________	7.	Excess of an organizationâs expectedfuture sales (in either revenue or units) above the breakevenpoint.
______________	8.	The level of activity where equal costor profit occurs across multiple alternatives.
______________	9.	Selling price per unit minus variablecost per unit.
______________ 10.		Level of operating activity at whichrevenues cover all fixed and variable costs and there is noprofit.
______________ 11.		Margin of safety as a percentage ofactual or estimated sales (units or revenues).
______________ 12.		A systematic tendency for people to beoverly optimistic about the outcomes of their plans andprojects.

AFM102 Lecture Notes - Lecture 3: Fixed Cost, Variable Cost, Unit

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