Critical Thinking Questions and Exercises

1. Identify the major differences between financial accounting and managerial accounting.

2. Describe the difference between variable and fixed cost behavior patterns.

3. Explain why expressing fixed costs on a per unit of activity basis is misleading and may result in faulty decisions.

4. What does it mean to say that determination of a cost behavior pattern involves some implicit assumptions?

5. What does it mean to develop a cost formula?

6. Explain the difference between the traditional income statement format and the contribution margin income statement format?

7. Calculate the contribution margin ratio and explain how it can be used in CVP analysis.

8. What does it mean to expand the contribution model?

9. What does it mean that fixed expenses should not be unitized because they do not behave that way?

10. What does it mean to state that contribution margin ratio is frequently a more useful measurement than contribution margin per unit?