Question 1

A cost that increases or decreases only in response to more than a unit change in the activity level is known as a step-variable cost.

Accepted Answer

A step-variable cost is a cost that remains constant within certain activity levels, but increases or decreases in response to a step-change or a significant increase or decrease in activity level.

Question 2

The contribution margin approach to the income statement classifies costs by behaviour rather than by function.

Accepted Answer

The contribution margin approach categorizes costs as either variable or fixed and separates them from revenues to arrive at the contribution margin, which is then used to determine the company's profit or loss. This method concentrates on cost behaviour rather than cost function.

Question 3

If the contribution margin is $70,000 and the total of variable expenses is $50,000, then total sales is $120,000.

Accepted Answer

Contribution Margin = Total Sales - Total Variable Expenses
$70,000 = Total Sales - $50,000
$70,000 + $50,000 = Total Sales
$120,000 = Total Sales

Question 4

A mixed cost contains both variable and fixed cost elements.

Accepted Answer

A mixed cost is a cost that contains both fixed and variable components. The fixed component remains constant regardless of the level of activity, while the variable component changes in proportion to changes in the level of activity.

Question 5

If the contribution margin is $50,000 and the total of fixed expenses is $40,000, then net
income is $10,000.

Accepted Answer

Net income is calculated by subtracting total fixed expenses from the contribution margin. Therefore, $50,000 - $40,000 = $10,000 net income.

Question 6

Discretionary fixed costs usually arise from annual decisions by management to spend in certain fixed cost areas.

Accepted Answer

Discretionary fixed costs are expenses that management can control by making decisions to spend or not spend in certain areas. They are typically annual in nature and can vary from year to year based on company priorities and budget constraints. Examples include advertising, research and development, and employee training programs.

Question 7

Advantages of the high-low method are that it is easy to understand and apply.

Accepted Answer

The high-low method is a simple and straightforward method that involves using the highest and lowest activity levels to estimate fixed and variable costs. It is easy to understand and apply, making it a popular technique for many businesses.

Quiz 6: Cost Behaviour: Analysis and Use