Principles of Accounting: Chapter Eighteen

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Chapter 18 introduces concepts relating to cost-volume-profit analysis. CVP helps one assess business profitability and growth. It requires an awareness of cost behavior. Broadly defined, costs may be variable or fixed. Variable costs increase in a linear fashion as production rises, while fixed costs are unaffected. These observations only hold over a relevant range of activity. The high-low method or regression analysis may be required to evaluate cost behavior.

Once cost behavior has been correctly described, a company can evaluate the break-even point. The procedure can be modified to calculate alternative measures, such as sales necessary to achieve a target income level. Extensions of CVP allow sensitivity analysis for changes in fixed costs, variable costs, and per unit selling price. CVP is only slightly more complex for multiple product firms, and this technique is also illustrated.

Be aware that CVP is a model that depends upon certain critical assumptions. Foremost among the assumptions is that costs behave as predicted. Further, one must anticipate that actual performance and product mix will remain within the relevant range and at the anticipated blend.

Exercises

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Problems
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Multiple Choice
Objectives
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Fill in the Blanks: Chapter Eighteen

1. The study of interrelationships among cost and volume is termed ____________ cost-volume-profit analysis.Correct

2. ____________Variable costvaries in direct proportion to a change in activity base.

3. The area of activity where a specified cost relationships is expected to hold true is known as the ____________relevant range.

4. Cost functions which change only when a sizable change in volume is experienced are called ____________step costs.

5. ____________Committed fixed costs arise from an organization's commitment to engage in operations, whereas ____________discretionaryfixed costs are those that originate from top management's yearly spending decisions.

6. Another name for mixed costs is ____________semivariable costs.

7. A graphical representation of observed relationships between costs and activity levels is termed a ____________scattergraph.

8. The ____________ high-low method focuses on only two data points when analyzing costs.

9. Selling price minus variable costs is termed the ____________contribution margin.

10. On a break-even chart the amount by which the total revenue line is above the total cost line is the amount of ____________operating income .

11. The amount of sales necessary to produce a particular level of income, often called the ____________target income, can be determined by using cost-volume-profit analysis.

12. Fixed costs divided by unit contribution margin equals break-even sales in ____________units.