Suppose a Firm Uses a High Degree of Operating Leverage

question 88

True/False

Suppose a firm uses a high degree of operating leverage and operates in an industry whose sales are greatly affected by changes in the overall level of economic activity.The riskiness of that firm's earnings stream will likely be greater than the earnings of a firm in the same industry which has a lower degree of operating leverage.

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Definitions:

Direct Labor Rate Variance

The difference between the actual cost of direct labor and the expected (or standard) cost, calculated for a specific period.

Total Cost Variance

This refers to the difference between the budgeted or standard cost of production and the actual cost incurred.

Factory Overhead Cost

All indirect costs associated with manufacturing, excluding direct materials and direct labor. These can include utilities, maintenance, and salaries of non-direct labor employees.

Variance Report

A document that compares actual financial performance to planned or budgeted performance, highlighting variances between these figures.