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When the activity level increases within the relevant range What should happen with respect to the following?

Terms in this set (55) If the level of activity increases within the relevant range then the fixed cost per unit will decrease. If the level of activity increases within the relevant range then the total cost per unit will increase.

When the activity level is expected to decline within the relevant range?

11 Cards in this Set

A variable cost is a cost that remains constant in total throught wide ranges of activity. ToF False
When the activity level in expected to decline within the relevant range, what effects would be anticipated with respect to each of the following Fixed incrase; variable not change

Which costs will change with a decrease in activity within the relevant range?

Which costs will change with a decrease in activity within the relevant range? Unit fixed costs and total variable cost. You just studied 53 terms!

Which of the following is an example of a cost that is variable with respect to the number of units produced?

An example of cost that is variable with respect to the number of units produced and sold: Power to run production equipment.

What will happen if the activity level increases?

What happens when activity level increases? total variable cost increases AND variable cost per unit remains constant. total fixed cost remains constant AND fixed cost per unit increases.

How does the variable cost per unit change as the level of activity increases?

The total variable cost increases and decreases based on the activity level, but the variable cost per unit remains constant with respect to the activity level.

Which of these costs will increase or decrease with increase in production?

Variable cost increases continuously with the increase in production.

Why is that fixed cost per unit decreases as the activity level increases?

Fixed costs do not vary with the production level. Total fixed costs remain the same, within the relevant range. However, the fixed cost per unit decreases as production increases, because the same fixed costs are spread over more units.

What is the relevant range?

The relevant range is the range of activity where the assumption that cost behavior is a straight line (linear) is reasonably valid. Managerial accountants like to assume that the relationship between a cost and an activity run in a straight line.

What is the High Low method?

In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.

Why relevant range is important in defining variable cost and fixed costs?

The term relevant range is included in the definition of fixed costs, because if a company’s volume were to decline to an extremely low level, the company would take action to decrease its total amount of fixed costs.

How do you find the relevant range of activity?

The relevant range refers to a specific activity level that is bounded by a minimum and maximum amount. Within the designated boundaries, certain revenue or expense levels can be expected to occur. Outside of that relevant range, revenues and expenses will likely differ from the expected amount.

What is the relevant range quizlet?

Relevant Range (aka: normal/practical) The range of activity index over which the company expects to operate during the year. Target Net Income. The income objective set by management. Variable Costs.

What is relevant costing with examples?

Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. As an example, relevant cost is used to determine whether to sell or keep a business unit.

What exactly is a cost driver?

A cost driver is the direct cause of a cost. Fixed costs remain unchanged and its effect is on the total cost incurred. For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity.

What is the meaning of contribution margin?

“Contribution margin shows you the aggregate amount of revenue available after variable costs to cover fixed expenses and provide profit to the company,” Knight says. You might think of this as the portion of sales that helps to offset fixed costs.

Is contribution margin the same as gross profit?

Contribution Margin: An Overview. Gross profit margin measures the amount of revenue that remains after subtracting costs directly associated with production. Contribution margin is a measure of the profitability of various individual products.

How do you interpret contribution margin?

The contribution margin (CM) ratio is equal to total sales revenue minus variable costs to the business, divided by total sales revenue. Expressed as a percent, it is the portion of total sales revenue that became profit after deducting the cost to develop each individual product sold.

How do I calculate a 40% margin?

How to calculate profit margin

  1. Find out your COGS (cost of goods sold).
  2. Find out your revenue (how much you sell these goods for, for example $50 ).
  3. Calculate the gross profit by subtracting the cost from the revenue.
  4. Divide gross profit by revenue: $20 / $50 = 0.4 .
  5. Express it as percentages: 0.4 * 100 = 40% .

What is the difference between contribution margin and profit margin?

While gross profit margin establishes the overall profitability of a company, the contribution margin shows the gross profit contribution of a given product or group of products offered by the company.

What is a healthy contribution margin?

What is a Good Contribution Margin? The closer a contribution margin percent, or ratio, is to 100%, the better. The higher the ratio, the more money is available to cover the business’s overhead expenses, or fixed costs.

What is contribution to profit?

Contribution is the amount of earnings remaining after all direct costs have been subtracted from revenue. This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs equals the profit earned.

How do you reduce contribution margin?

Companies can improve contribution margins by increasing operational efficiencies ways. You might buy more efficient equipment that produces the same amount of widgets in less time, thus lowering variable product costs. The company may also implement lean manufacturing or more efficient operational processes.