Accounting Test 3

Variable Cost

Varies in total, in direct proportion to changes in the level of activity. The total cost increases/decreases as units made increases/decreases.
Variable cost is constant if expressed on a per unit basis.

Fixed Cost

Total cost does not change with changes in the volume of activity (within a relevant range)
The cost per unit will change as the number of units change

Mixed Costs (sometimes called semi-variable)

One that contains both variable and fixed costs elements:
Fixed - minimum cost of having a service ready and available for use
Variable - cost incurred for actual consumption of the service
Total Mixed Costs = Total Fixed Cost $ + (Variable Cost $ per act

Relevant Range

The range of activity where the assumption about cost behavior is valid.

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another alternative. Opportunity costs are not recorded/reported because they do not occur. The cost is the benefit that you gave up.

Sunk Cost

Cost that is already paid for and can not be changed by a decision made now or in the future.


Investment in facilities, equipment, and the basic operations of the company
1) long term in nature
2) can't be significantly reduced, even over short periods of time without changing the long term goals of the company
Difficult to change the cost once th


Annual decisions made by management to spend in certain areas for certain things.
Can be cut for short periods of time with minimal damage to long term goals.

Flexible budget

Used to estimate totals sales, costs, and profit at various sales levels. Per unit sales price and variable costs do not change as volume changes. Contribution margin per unit does not change as volume changes. Total fixed costs do not change as volume ch

Contribution Margin

The difference between total sales and total variable costs. It is the amount available to "contribute" towards covering fixed costs. Profitability is achieved when contribution margin is greater than fixed costs.

Contribution Margin Per Unit

Difference between the sales price per unit and all variable costs per unit. The amount operating income increases when one more unit is sold and decreases when one less unit is sold. A company that is unprofitable adds to profits by decreasing the loss.

Contribution Margin Ration (Percentage)

Gives the amount as a percent of every sales dollar that is added to operating income when sales dollars increase


Occurs when operating profit equals $0. An operating profit of $0 occurs when total contribution margins is equal to total fixed costs.
Break-even quantity in units=total fixed costs/contribution margin per unit
Break-even in sales dollars= total fixed co

Margin of Safety

Estimates the amount sales can decrease for a profitable company before the company is no longer profitable. The margin of safety also estimates how much sales must increase before an unprofitable company becomes profitable.
Current sales
-computed break-

Product Costs

The cost of making goods provided to customers. Includes in inventory until provided to the customer. Summarized on the "cost sheet" for each product or service.

Period Costs

Costs to support general corporate, selling, administrative, and warehouse functions of the business. Expensed in the period incurred.

Manufacturing Overhead (MOH)

Consists primarily of manufacturing facility costs and management salaries related to operating the facility. It is impossible to determine how much overhead cost is incurred to make on product.