A favorable cost variance occurs when a. actual costs are the same as standard costs b. actual costs are more than standard costs c. standard costs are less than actual costs d. standard costs are more than actual costs  Contribution margin is a. another term for volume in the “cost-volume-profit” analysis b. the same as sales revenue c. the excess of sales revenue over variable cost d. profit  Which of the graphs in Figure 5-1 illustrates the nature of a mixed cost? a.
The correct answer and explanation is:
Question 1: Favorable Cost Variance
The correct answer is d. standard costs are more than actual costs.
Explanation:
A favorable cost variance occurs when the actual costs incurred by a business are less than the standard or budgeted costs. This means that the company spent less than expected to produce goods or deliver services, which is a positive outcome for cost control and profitability. Favorable variances can result from factors such as lower material costs, improved operational efficiencies, reduced labor expenses, or better negotiation of supplier contracts.
For example, if the standard cost for producing a product is $100 per unit and the actual cost comes out to $90 per unit, the cost variance is favorable by $10. While favorable cost variances indicate efficiency, it’s essential to evaluate their cause to ensure quality standards are not compromised, as overly aggressive cost-cutting measures may affect product or service quality.
Question 2: Contribution Margin
The correct answer is c. the excess of sales revenue over variable cost.
Explanation:
The contribution margin is a key concept in cost-volume-profit (CVP) analysis, representing the portion of sales revenue that exceeds variable costs and contributes to covering fixed costs and generating profit. It is calculated as: Contribution Margin=Sales Revenue−Variable Costs\text{Contribution Margin} = \text{Sales Revenue} – \text{Variable Costs}
The contribution margin helps businesses understand how sales affect profitability. A high contribution margin indicates that a larger portion of sales revenue is available to cover fixed costs and profit, whereas a low contribution margin suggests that variable costs consume a significant share of revenue. This metric is essential for decision-making, such as setting prices, analyzing product profitability, and evaluating the impact of changes in sales volume.
For example, if a product sells for $50 and the variable costs are $30, the contribution margin is $20 per unit. If the fixed costs for the business are $10,000, the company needs to sell at least 500 units to break even (10,000/20=50010,000 / 20 = 500).
Question 3: Nature of Mixed Costs (Figure 5-1)
Without access to Figure 5-1, the answer typically depends on identifying a graph showing mixed cost behavior. Mixed costs include both fixed and variable components and exhibit a linear increase in cost as activity level rises, starting from a baseline fixed cost.
Explanation:
Mixed costs combine a fixed base cost (incurred regardless of activity level) with a variable component that changes proportionally with activity. For example, a utility bill might include a fixed monthly charge plus a variable rate based on usage. Mixed costs are often represented by a graph with a y-intercept (fixed cost) and a positive slope (variable cost per unit of activity). Understanding mixed costs is crucial for accurate budgeting and cost analysis.