Deck 2: Introduction to Cost Behavior and Cost-Volume Relationships

Question 1

Gross profit margin is the sales price minus the variable cost per unit.

Answer 1

False

Question 2

Only one cost driver may affect a cost at any given time.

Answer 2

False

Question 3

A fixed cost changes in direct proportion to changes in a cost driver.

Answer 3

False

Question 4

The break-even point is the level of sales at which revenue equals fixed costs.

Question 5

Costs may behave in a linear and nonlinear way.

Question 6

With very short time spans, costs become more fixed and less variable.

Question 7

The margin of safety is the difference between planned unit sales and break-even sales.

Question 8

After a certain point, a unit sold does not generate marginal income.

Question 9

Total contribution margin / total sales = 100% - variable cost percentage.

Question 10

Cost behavior pertains to how costs affect the activities of an organization.

Question 11

The relevant range is the limit of cost-driver activity within which a specific relationship between costs and the cost driver is valid.

Question 12

When analyzing costs, two rules of thumb are useful: 1) think of fixed costs on a per-unit basis; and 2) think of variable costs as a total.

Question 13

A good example of a cost driver for production labor wages is the number of machine hours.

Question 14

A major simplifying assumption of cost-volume-profit analysis is that costs can be classified as either variable or fixed with respect to a single measure of the volume of output activity.

Question 15

At the break-even point, net income may be positive.

Question 16

The income statement can be expressed as:
Sales - Variable Expenses - Fixed Expenses = Net Income

Question 17

The break-even point is when enough units are sold that total contribution margin equals total variable costs.

Question 18

Only managers of profit-seeking organizations find that the cost-volume-profit analysis is useful.

Question 19

A good example of a cost driver for production supervisor salaries is the number of people supervised.

Question 20

A key factor in controlling costs is associating costs with activities.

Question 21

The break-even point is located at the intersection of the total revenue line and the total expenses line on a cost-volume?profit graph.

Question 22

The break-even point may be reduced by increasing the per unit variable cost.

Question 23

Break-even volume in units = fixed costs / unit contribution margin.

Question 24

Break-even volume in dollars = variable costs / contribution-margin ratio.

Question 25

The CVP graph uses the assumption that costs are linear over the relevant range.

Question 26

The reliability of computer models used in CVP analysis depends on the accuracy of their underlying assumptions about how revenues and costs may actually be affected.

Question 27

On the CVP graph, the horizontal difference between the sales line and the total expenses line measures the net income or net loss.

Question 28

An assumption of the CVP analysis is that the difference in inventory level at the beginning and at the end of a period is insignificant.

Question 29

The benefits of increased accuracy of using a computer model in CVP analysis always exceed the costs.

Question 30

The CVP graph shows how costs behave over multiple relevant ranges.

Question 31

The incremental approach means that a manager focuses on the effects of changes from the current condition.

Question 32

The horizontal axis on the CVP graph is the dollars of cost and revenue.

Question 33

An increase in sales price would cause a decrease in the break?even point.

Question 34

The CVP graph shows profit and loss at any rate of activity.

Question 35

Target sales volume in units = variable expenses + target net income) / unit contribution margin.

Question 36

The break-even point may be reduced by reducing total fixed costs and holding everything else constant.

Question 37

The sales mix is the relative proportions or combinations of quantities of products that constitute total sales.

Question 38

An assumption of the CVP analysis is that the sales mix can fluctuate.

Question 39

An assumption of the CVP analysis is that changes in efficiency or productivity are expected.

Question 40

Target sales - variable expenses - fixed expenses = target net income.

Question 41

Highly leveraged companies have low fixed costs and high variable costs.

Question 42

An industry that has a high contribution-margin percentage is the airlines.

Question 43

The margin of safety shows how far sales can fall below the planned level of sales before losses occur.

Question 44

Due to limited resources, sales of every type of product cannot be maximized.

Question 45

A small margin of safety may indicate a risky situation.

Question 46

Operating leverage is the ratio of fixed costs to variable costs.

Question 47

Gross margin is the same as contribution margin.

Question 48

Contribution margin = sales price - all variable expenses.

Question 49

In highly leveraged companies, small changes in sales volume result in large changes in net income.

Question 50

Sales volume of a given product helps guide executives who must decide to emphasize or deemphasize particular products.

Question 51

Cost of goods sold is the cost of the merchandise that a company acquires or produces and then sells.

Question 52

Small increases in profits occur for high contribution-margin ratio companies when sales grow.

Question 53

Selling expenses are found in the cost of goods sold.

Question 54

Gross margin = sales price - cost of goods sold.

Question 55

Manufacturers of industrial equipment have high contribution-margin percentages.

Question 56

Margin of safety = actual unit sales - planned unit sales.

Question 57

Highly leveraged companies are less risky than companies with low leverage.

Question 58

Generally, companies that spend heavily for advertising are willing to do so because they have low contribution-margin percentages.

Question 59

When changes occur in the sales mix, there is no effect on the cost?volume-profit relationships.

Question 60

Gross margin focuses on sales in relation to variable cost.

Question 61

Which value chain function would include depreciation on transportation cost?

A)The distribution function would include depreciation on transportation cost.
B)The customer service function would include depreciation on transportation cost.
C)The production function would include depreciation on transportation cost.
D)The marketing function would include depreciation on transportation cost.

Question 62

As the level of activity decreases within the relevant range _____.

A)total fixed costs increase
B)fixed costs per unit decrease
C)total variable costs increase
D)variable costs per unit remain unchanged

Question 63

As the cost driver activity level decreases within the relevant range _____.

A)total fixed costs increase
B)fixed costs per unit decrease
C)total variable costs decrease
D)variable costs per unit decrease

Question 64

Fixed costs _____.

A)are fixed on a per-unit basis, but vary in total
B)vary on a per-unit basis, but are fixed in total
C)are fixed on a per-unit basis, and fixed in total
D)vary on a per-unit basis, and vary in total

Question 65

Which value chain function would include depreciation of plant and machinery?

A)The distribution function would include depreciation of plant and machinery.
B)The customer service function would include depreciation of plant and machinery.
C)The production function would include depreciation of plant and machinery.
D)The marketing function would include depreciation of plant and machinery.

Question 66

When analyzing cost, think of _____.

A)variable costs as a total
B)variable costs on a per-unit basis
C)fixed costs on a per-unit basis
D)variable costs as a total and fixed costs on a per-unit basis

Question 67

Income before income taxes = net income / marginal tax rate.

Question 68

Number of engineering hours is a likely cost driver for which value chain function?

A)The research and development function has number of engineering hours as a likely cost driver.
B)The design function has number of engineering hours as a likely cost driver.
C)The marketing function has number of engineering hours as a likely cost driver.
D)The production function has number of engineering hours as a likely cost driver.

Question 69

Which value chain function would include advertising costs?

A)The distribution function would include advertising costs.
B)The customer service function would include advertising costs.
C)The production function would include advertising costs.
D)The marketing function would include advertising costs.

Question 70

As the cost-driver activity level increases within the relevant range _____.

A)total fixed costs remain unchanged
B)fixed costs per unit increases
C)total variable costs decrease
D)variable costs per unit increases

Question 71

An increase in total variable cost usually indicates _____.

A)the cost-driver activity level is decreasing
B)the cost-driver activity level is increasing
C)variable costs per unit is decreasing
D)variable costs per unit is increasing

Question 72

Which value chain function would include the cost of computer-aided design equipment and cost to develop the prototype of a product?

A)The distribution function would include these costs.
B)The design of product, services, and processes function would include these costs.
C)The production function would include these costs.
D)The marketing function would include these costs.

Question 73

Which of the following is not a cost driver of customer services costs?

A)Hours spent servicing products are not a cost driver of customer services costs.
B)Travel costs are not a cost driver of customer services costs.
C)Number of service calls is not a cost driver of customer services costs.
D)All of these answers are correct.

Question 74

An increase in fixed costs usually indicates _____.

A)cost driver activity is decreasing
B)cost driver activity is increasing
C)relevant range is increasing
D)relevant range is decreasing

Question 75

An accountant may have difficulty classifying costs as fixed or variable because _____.

A)costs may behave in a nonlinear way
B)costs may be affected by more than one cost driver
C)the decision situation may cause the costs to be fixed in the short term
D)all of these answers are correct

Question 76

As the cost-driver activity level increases within the relevant range _____.

A)total fixed costs increase
B)fixed costs per unit decrease
C)total variable costs decrease
D)variable costs per unit decrease

Question 77

A change in the tax rate will not affect the break?even point.

Question 78

Which of the following would be a good cost driver for salaries of product and supervisory salaries?

A)Number of hours worked is a good cost driver for salaries of product and supervisory salaries.
B)Number of people supervised is a good cost driver for salaries of product and supervisory salaries.
C)Number of department transactions is a good cost driver for salaries of product and supervisory salaries.
D)Number of customers served is a good cost driver for salaries of product and supervisory salaries.

Question 79

_____ is how the activities of an organization affect its costs.

A)Cost behavior
B)Cost driver
C)Volume-related cost drivers
D)None of these answers is correct

Question 80

Output measures of both resources and activities are _____.

A)cost drivers
B)stages of production
C)fixed activities
D)variable activities