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18 Cards in this Set

  • Front
  • Back
Cost behavior
refers to the manner in which a cost changes as a related activity changes
Activity bases (or activity driver)
activities that are thought to relate to the cost incurred
Relevant range
the range of activity over which the changes in the cost are of interest
What are three of the most common classifications of cost behavior?
Variable costs, fixed costs, and mixed costs
Variable costs
costs that vary in proportion to changes in the level of activity

when the level of activity is measured in units produced, direct materials and direct labor costs are generally classified as variable costs
Fixed costs
costs that remain the same in total dollar amount as the level of activity changes
Mixed cost
has characteristics of both a variable and a fixed costs.
For example, over one range of activity, the total mixed cost may remain the same. It thus behaves as a fixed cost.
Over another range of activity, the mixed cost may change in proportion to changes in the level of activity. It thus behaves as a variable cost. Mixed costs are sometimes called semivariable or semifixed costs
Variable cost per unit
Difference in total cost/ Difference in production
Total cost
(Variable cost per unit x Units of production) + Fixed cost
Cost-Volume-profit analysis
the systematic examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits.
Contribution margin
the excess of sales revenue over variable costs
Contribution Margin ratio
sometimes called the profit-volume ratio.
It indicates the percentage of each sales dollar available to to cover the fixed costs and to provide income from operations
Its most useful when increase or decrease in sales volume is measure in sale dollars.

Contribution margin ratio = (Sales - Variable Costs)/ Sales
Unit contribution margin
the sales price less the variable cost per unit.
Most useful when the increase or decrease in sales volume in measured in sald units (quantities)
Break-even point
the level of operations at which a business's revenues and expired costs are exactly equal

Break-even sales (units) = Fixed costs/Unit contribution margin

Increases in fixed costs will raise the break-even point. Likewise, decreases in fixed costs will lower the break-even point

Increase in unit variable costs will raise the break-even point. Likewise, decrease in unit variable costs will lower the even point.
Increase in the unit selling price will lower the break-even point, while decreases in the unit selling price will raise the break-even point.
Target Profit
by modifying the break-even equation, the sales volume required to earn a target or desired amount of profit may be estimated

Sales (units) = (Fixed costs + Target profit)/(Unit contribution margin)
Sales mix
the relative distribution of sales among various products sold by a business
Operating leverage
measures the relative mix of a business's variable costs and fixed costs

Operating leverage = Contribution margin/Income from operations
Margin of safety
the difference between the current sales revenue and the sales at break-even point

Margin of Safety = (Sales - Sales as break-even point)/ Sales