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29 Cards in this Set

  • Front
  • Back

cost behavior

-the manner in which a cost changes as a related activity changes.

Why does cost behavior useful for managers?

1.) Knowing how costs behave allows managers to predict profits as sales and production volumes change.

2.) It's useful for estimating costs which affects the variety of decisions such as whether to replace a machine.

Activity bases

Identifying the activities that cause the cost to change.

Relevant change

Specifying the range of activity over which the changes in the cost are of interest.

Cost are classified as

Fixed Cost, variable cost, and mixed cost.

Variable Costs

costs that vary in proportion to changes in the activity base.

In a variable costs, when activity base is units produced...

direct materials and direct labor are normally variable costs.

Cost per unit in variable costs

remains the same regardless of changes in the activity base

Total costs in variable costs

Changes in proportion to changes in the activity base.

Fixed cost

Cost that remains the same in total dollar amount as the activity base changes

In fixed costs, when the activity base is units produced....

many factory overhead costs such as straight line depreciation are classified as fixed costs

fixed costs decreases

as units produced increase.

Fixed costs increases

as units produced decreases

In fixed cost, the total cost remains..

the same regardless of changes in the activity base.

Mixed Costs

- Costs that have characteristics of both a variable and a fixed costs.

- Sometimes cost semivariable or semifixed cost

In mixed costs, the high-low method

- is a cost estimation method that may be used for this purpose.

- the high and low method uses the highest and lowest activity levels and their related cost

to estimate the variable cost per unit and the fixed cost

The HIGH-LOW method

Units Produced Total Cost

Highest level 2,100 $61, 500

Lowest level 750 $41,250

________________ ______________

Difference 1,350 units $20,250

Variable Cost per Unit = Difference in Total cost $20,250

______________________________ = _________ = $15

Difference of units produced 1,350

Fixed Cost = Total Costs - (Variable Cost per unit * Units produced)

*find the highest level and lowest level fixed cost

Total Cost= (variable Cost * Units produced) + Fixed cost

Variable Costs are

Direct materials

Direct Labor

Electricity Expense


Fixed Costs

Straight line depreciation

Property taxes

Production supervisor salaries

Insurance expense

mixed costs

Quality control department salaries

Purchasing department salaries

maintenance expenses

Warehouses expenses

Cost Volume Profit Analysis

is the examination of the relationships among selling prices, sales and production volume, costs,

Contribution Margin

is the excess of sales over variable costs

Contribution margin= Sales - Variable Costs

Contribution margin income statement

Sales - Variable Costs = Contribution Margin

Contribution Margin - Fixed Costs = Income from operations

Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin



Change in income from operations

Change in income from operations = Change in sales dollars * Contribution Margin ratio

Breakeven point

is the level of operations at which a company's revenues and expenses are equal

Break-even sales (units) = Fixed costs


Unit Contribution Margin


target profit

fixed cost + target profit

Sales (units) = __________________________

Unit Contribution Margin