Question

1- Activity-Based Costing:

Explain three (3) reasons in details, why all manufacturing companies don’t use an activity-based costing system.

2- Cost Behaviors:

Explain in details, what operating leverage means and how a business would apply operating leverage to be successful and more profitable.

Answer 1

2- Cost Behaviors:

Operating Leverage meaning:-

Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.

The higher the degree of operating leverage, the greater the potential danger from forecasting risk, where a relatively small error in forecasting sales can be magnified into large errors in cash flow projections.

how a business would apply operating leverage to be successful and more profitable:-

Measuring Operating Leverage. Operating leverage occurs when a company has fixed costs that must be met regardless of sales volume. When the firm has fixed costs, the percentage change in profits due to changes in sales volume is greater than the percentage change in sales. ... Each copy costs the company$5 to sell.