Acct 102 Chap 2

Acct 102 Chap 2 - if they have both fixed and variable...

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Acct 102 – Chap 2 The factor that causes changes in total variable cost is called the Activity Base . It is usually some measure of volume when used to explain cost behavior. Contribution margin is the excess of a product’s selling price over its variable costs. It is the amount available to cover fixed costs and profit. Cost averaging is measuring the cost per unit of a product or service by dividing the total production cost by the total activity base to which the cost pertains; average cost is often more relevant to pricing, performance evaluation, and control than actual cost. Cost Behavior is the way a cost reacts relative to changes in some measure of activity. A company’s cost structure is its mix of fixed and variable costs. A Fixed Cost is a cost that in total remains constant when the volume of activity changes. Fixed costs per unit decrease as production increases. Costs are Mixed Costs
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Unformatted text preview: if they have both fixed and variable components. Operating leverage is a produced when a small percentage change in revenue produces a proportionately larger percentage change in net income. The higher the proportion of fixed costs to total cost, the greater the operating leverage. To calculate a company’s operating leverage divide contribution margin by net income. The scope of activity over which the definitions of fixed and variable costs apply is called the Relevant Range . A Variable Cost is a cost that in total changes in direct proportion to changes in volume of activity. The concept known as economies of scale says that cost of production can be reduced by taking advantage of opportunities that become available when an operation’s size is increased. Formulas to Review Contribution Margin = Revenue – Variable Costs Operating Leverage = Contribution Margin/Net Income...
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