The Use of Actual Cost Rates for Allocating Variable Costs

question 48

True/False

The use of actual cost rates for allocating variable costs of service departments protects the user departments from intervening price fluctuations.

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Definitions:

Fixed Expenses

Fixed expenses are costs that do not fluctuate with changes in production level or sales volume, including lease payments and insurance.

Volume

The number of units of a product or service sold or produced.

CM Ratio

The CM Ratio, or Contribution Margin Ratio, is a financial metric that shows the proportion of sales revenue that exceeds variable costs, indicating the amount available to cover fixed costs and generate profit.

Fixed Expenses

Costs that remain constant for a set period and do not vary with changes in activity level, production volume, or sales, such as lease payments and utility bills. This is a rephrased definition of Fixed Costs.