Problems
1.
Marx Inc. supplied the following data:
Month
Miles
Total Cost
January
60,000
$95,000
February
70,000
103,000
March
50,000
83,000
April
80,000
101,000
Use the high-low method, to calculate variable cost per unit, total fixed costs, and the
cost equation (in good form).
Choose March and April....lowest activity levels.
VC per unit = [$101,000 ─ $83,000] / [80,000 ─ 50,000] = $0.60 per mile
TC = VCx + FC
$101,000 = $0.60*80,000 + FC
FC = $53,000
TC = 0.60X + 53,000
2. Accustaff Company's high and low level of activity was 8,000 units during March
and 3,000 units produced in August. Machine maintenance costs were $29,000 in
March and $12,000 in August. Using the high-low method, how much will total
maintenance cost be in January of the following year if production is expected to be
7,000 units?
VC per unit = [$29,000 ─ $12,000] / [8,000 ─ 3,000] = $3.40 per unit
TC = VCx + FC
$29,000
FC = $1,800
=
[8,000*$3.40]
+
FC
TC at 7,000 units:
TC = 7,000*$3.40 + $1,800
TC = $25,600
3. The following totals are available from accounting records of Steering Company in
May when it sold 1,000 widgets with sales totaling $35,000:
Fixed product costs
$8,000
Variable operating
costs
$6,000
Variable product costs
12,000
Fixed operating
costs
10,000
How much is contribution margin per unit? What information does this amount
provide?
[$35,000 ─ $12,000 ─ $6,000] / 1,000 = $17 per unit
Steering Company has $17,000 available to cover fixed costs and to
contribute to profit.
How much is the gross profit ratio? What information does this amount provide?
[$35,000 ─ $12,000 ─ $8,000] / $35,000 = 42.86%
Steering Company has about 43 cents out of every sales dollar available to
cover operating costs and to contribute to profit.
4. Clark Company produces flash drives for computers, which it sells for $20 each.
Each flash drive costs $6 of variable costs to make. During April, 1,000 drives were
sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month.
How much is the contribution margin ratio for April?
CMR for April: [$20 - $6] / $20 = 70%
Operating income?
Operating income: [$20 - $6]*1,000 ─ $1,000 = $13,000
5.
Two costs at Watson, Inc. appear below for specific months of operations.
Delivery costs
Utilities
Month
January
February
March
January
February
March
Which type of costs are these? Justify.
Amount
$42,000
42,000
42,000
Units Produced
40,000
60,000
54,000
$ 84,000
126,000
113,400
40,000
60,000
54,000
Delivery: Fixed cost since total cost at all 3 activity levels is the same total.
Utilities: FC ruled out since total cost at both activity levels is different.
VC per unit is $84,000/40,000 = $$2.10; and $126,000/60,000 =
$2.10; and $113.400/54,000 = $2.10; Since VC per unit is the same for all
activity levels, the cost is variable.
6. Regression output appears below. How much is the total expected cost is 3,100
units are produced and sold?
Regression Statistics
Multiple R
0.9565485
R Square
0.914985
Adjusted R
Square
0.9064835
Standard
Error
Observations
ANOVA
67.799432
12
df
Regression
Residual
Total
Intercept
X Variable 1
SS
MS
F
1 49432.37
494732
107.6
10 45967.62 4596.7629
11 540700
Coefficients
847.98299
1.3150781
Standard
Error
407
0.127
Pt Stat
value
2.084 0.064
10.37 0.006
Significance
F
1E-06
Lower 95%
-58.8
1.033
Upper
95%
1755
1.598
y = 1.3150781*3,100 + 847.98299 = $4,925
7. Butts, Inc. collected the following production data for the past
month:
Units
Produced
1,600
1,300
1,500
1,000
Total Cost
$44,000
38,000
45,000
33,000
If the high-low method is used, what is the monthly total cost equation?
[$44,000 - $33,000] / [1,600 - 1,000] = $18.33 per unit
$44,000 = $18.33333*1,600 + FC
FC = $14,667
TC = $18.33x + $14,667
8. Golden Company produced 1,000 items and had the following costs-Depreciation, $10,000; Materials, $8,000; Rent, $5,000, and Labor,
$15,000. How much is variable cost per unit?
[$8,000 + 15,000] / 1,000 = $23 per unit
9. Information concerning amounts for Bridges, Inc. appears below:
January
February
Cost
$100,000
120,000
Units
1,200
1,600
Lower
95.0%
-58.8
1.033
U
95
1
1
March
90,000
1,100
April
85,000
1,250
May
110,000
1,300
Using the high-low method, what is the fixed portion of costs?
[$120,000 - $90,000] / [1,600 - 1,100] = $60 per unit
$120,000 = $60*1,600 + FC
FC = $24,000
10. The following costs were incurred related to providing 80,000 car
washes:
Car wash labor
$240,000 Electric power to move conveyor belt
Soap, cloth, and
32,000 Depreciation
supplies
Water
28,000 Supervisory salaries
$72,000
64,000
46,000
How much is the variable cost per car to the nearest whole cent?
Car wash labor
$ 240,000
Soap, cloth, and
32,000
supplies
Water
28,000
Electric power to move conveyor belt
72,000
Total variable cost
$372,000
Variable cost per unit = $372,000/80,000 =
$ 4.65
11. Total costs amount to $6,000 when labor hours total 400, and $5,000 when
labor hours total is 300. Using the high-low method, what would be the total cost
when labor hours amount to 450 hours?
[$6,000 - $5,000] / [400 - 300] = $10 per hour = variable cost
Total cost = Variable cost + Fixed cost
$6,000 = $10 (400) + FC; so FC = $2,000;
$10(450) + $2,000 = $6,500
12. Page Company’s accountants provided the following information for its sales and
production of one product:
June
50,000
July
60,000
August
70,000
September
80,000
Volume direct labor-hours per
month
Total cost per month
$15,000 $14,900 $18,000
$23,000
When using the high-low method, which month’s data will be used to estimate
costs?
October
90,000
$22,800
Choose June and October from the Units column.
[$22,800 - $15,000] / [90,000 - 50,000] = $0.195 per unit
TC = VC x + FC
$15,000 = 0.195 (50,000) + FC, so FC = $5,250
How do the results using regression differ from those using the high-low method
conceptually and why do they differ? Which is better?
Regression uses all the data points (all 5 months) while high-low uses only the
highest and lowest activity points. The high-low points can be outliers (extremes) that
are not representative of the linear function, so the regression is more accurate as it
reflects all activity.
Draw a large scale scattergraph (the larger the scale, the more accurate). Write the
cost equation based on your graph.
Extending the trendline to the y-axis shows that the line crosses at about $3,300
(fixed costs). The variable cost is rise over run, in this case,
approximately: $10,000/2,500 units = $4 per unit
TC = 4.00x + 3,300
13. RMA Company’s accountants provided the following information:
June
July
August
September
October
Miles per month
13,000
9,000
9,500
11,500
14,000
Total cost per month $210,000 $164,000 $160,000
$180,000 $208,000
Use the high-low method for parts A, B, and C.
A. Calculate the unit variable cost.
($208,000 - $164,000) / (14,000 - 9,000) = $8.80 per unit
B. Calculate total fixed cost.
TC = VC x + FC
$164,000 = $8.80(9,000) + FC
so FC = $84,800
C. Write the total cost equation:
y = 8.80X + 84,800
14. Sale Company produced and sold 5,000 tuples. At this level of production, each
unit has a selling price of $22, a variable cost of $10, and a fixed cost of $5. How
much is the total cost if Sale produces and sells 4,000 tuples?
Total fixed cost at 5,000 units = 5,000 x $5 = $25,000
Fixed cost is the same in total regardless of the number of units, so at 4,000 units,
FC = $25,000.
Total cost at 4,000 units:
Variable cost = 4,000 x $10 = $40,000
Fixed cost = $25,000
Total cost = $65,000
15. Which of the following costs are variable?
Cost
8,000 Units
10,000 Units
1
$100,000
$125,000
2
40,000
50,000
3
80,000
110,000
Costs 1 and 2 are variable since the cost per unit is the same at both levels.
. Variable costs per unit are the same at any level of activity. Costs per unit are:
Cost 1: $100,000/8,000 = $12.50 and $125,000/10,000 = $12.50
Cost 2: $40,000/8,000 = $5.00 and $50,000/10,000 = $5.00
Cost 3 is a mixed cost since the total cost is different, however, since the cost per
unit is not the same at both levels, this is a mixed cost.
Cost 3: $80,000/8,000 = $10.00 and $110,000/10,000 = $11.00
16. Acustaff Company's high and low level of activity was 10,000 units during March
and 6,000 units produced in August. Machine maintenance costs were $24,000 in
March and $19,000 in August. Using the high-low method, how much will total
maintenance cost be in January of the following year if production is expected to be
8,250 units?
Cost per unit using high-low method: [$24,000 - $19,000]/[10,000 - 6,000] = $1.25
per unit
Total costs = VC + FC: $24,000 = (10,000*$1.25) + FC; so FC = $11,500
Total costs at 8,250 units = (8,250*$1.25) + $11,500 = $21,813
How does the concept of relevant range apply to this problem?
The cost function is assumed to be linear in a company's relevant range...its normal
level of operating activity. In this case, it appears that operating anywhere between
6,000 and 10,000 units. When operating outside this range, the company cannot
expect the fixed and variable costs to behave the same as within the relevant range.
17. Foress Company reported the following date for four months of 2004:
Month
Miles Total
Cost
January
60,000 $95,000
February
70,000 103,000
March
50,000
88,000
April
80,000 118,000
In applying the high-low method, how much is the variable cost per unit?
First the high and low activity levels are chosen---50,000 and 80,000. The costs
correlating to these levels are then chosen: [$118,000 - $88,000]/[80,000 - 50,000] =
$1.00 per mile
How much is the y-intercept value?
y-intercept = fixed costs:
$118,000 = $1*80,000 + FC;; FC = $38,000
Write the total cost equation in good form.
TC = 1.00x + 38,000
18. The following costs were incurred related to providing 20,000 oil
changes:
Oil change labor
$24,000 Electric power to pump oil
Oil and filters
3,000 Depreciation
Supplies
2,000 Supervisory salaries
How much is the variable cost per oil change to the nearest whole cent?
Identify the variable costs: $24,000 + $3,000 + $2,000 + $7,000 = $36,000 (all these
costs increase when the number of oil changes increase.)
VC per unit = $36,000/20,000 = $1.80 per oil change
19. Clinton Cookies bakes chocolate chip cookies and ships them to fast food
restaurants for sale to customers. Clinton charges the restaurants $1.25 per cookie.
The company has projected the following costs for sales of 3,000 and 4,000 cookies
for the next month’s operation:
Cost Items
3,000 cookies
4,000 cookies
Cookie batter
$ 600
$ 800
Baking
1,150
1,300
employees
Packaging
450
600
Facilities
300
300
$7,000
2,000
6,000
Shipping charges
160
200
Marketing
420
420
Total costs
$3,080
$3,620
Calculate the variable cost of each cookie and total fixed cost.
Cookie batter
Baking employees
Packaging
Facilities
Shipping charges
Marketing
Total costs
variable cost/unit
0.20
0.15
0.15
0.04
$
0.54
$
fixed cost
700
300
40
420
1,460
$
$
Calculations of mixed costs:
Baking:
$1,300 - $1,150
4,000 - 3,000
=
$0.15
per unit
$1,300 = 0.154,000 + FC
FC = $700
Shipping:
$200 - $160
4,000 - 3,000
=
$0.04
per unit
$200 = .04*4,000 +FC
FC = $40
20. Handley Company's activity for the first four months of 2004 is as follows:
Machine Hours Electrical
Cost
January
4,000
$2,800
February
4,800
$3,500
March
4,600
$3,600
April
3,800
$3,000
May
4,400
$3,100
Using the high-low method, how much is the cost per machine hour?
[$3,500 - $3,000]/[4,800 - 3,800] = $0.50; Note that the high and low amounts are
chosen from the activity column (machines hours), then the corresponding costs are
used.
21. Hank’s Toys used high-low data from March and May to determine its unit
variable cost of $0.50.
Month
Units produced
Total costs
March
14,000
$25,600
May
18,000
27,600
If Hank produces 15,000 units in September, how much is its total cost
expected to be?
Variable rate = [$27,600 - $25,600]/[18,000 - 14,000] = $0.50 per unit
$25,600 = $0.50(14,000) + FC; so FC = $18,600
TC = $18,600 + $0.50(15,000) = $26,100
22. Johnson Manufacturing paid $5,000 for materials, $4,000 for production labor,
$3,500 depreciation of manufacturing equipment, $2,500 depreciation of office
furniture, and $5,000 for sales salaries. What is the average cost per unit to produce
50 units?
($4,000 + $5,000 + $3,500)/50 units = $250 each
23. At Fruit Company, the total cost to produce 50,000 units is $750,000. Total fixed
costs are $250,000. What is the expected cost to produce 48,000 units?
VC = ($750,000 - $250,000) = $500,000
VC per unit = $500,000/50,000 = $10
Cost at 48,000 units = $10(48,000) + $250,000 = $730,000
24. At Richetti Company, the total variable cost to produce 15,000 units is $45,000.
Total fixed costs are $21,000. What is the expected cost to produce 13,000 units?
VC per unit = $45,000/15,000 = $3 per unit
Total cost = variable cost + fixed costs = [$3*13,000] + $21,000 = $60,000
Note that product costs include both fixed and variable amounts. If the question
asked for the incremental cost, then $39,000, the variable cost would be the answer,
only if the difference in units was 13,000.
25. Duffy Company produced and sold 10,000 nits. At this level of production, the
selling price per unit is $10, the variable cost per unit is $4, and the fixed cost per
unit is $2. How much is the total cost per unit if management produces and sells
12,500 units?
Fixed costs cost $2 per unit when the company produces and sells 10,000
units....giving a total fixed cost of $20,000. No matter how many units are produced
and sold, fixed costs don't change...they remain at $20,000.
Variable costs: $4 x 12,500 =
$50,000
Fixed costs
20,000
Total costs at 12,500 units
$70,000
Cost per unit: $70,000/12,500 =
$5.60
26. At Adeniran Company, the material and labor cost to produce 800 units is
$5,000. Total fixed costs are $6,000. What is the expected cost to produce 900
units?
VC per unit = $5,000/800 = $6.25;
At 900 units: [$6.25 x 900] + $6,000 = $11,625
27. PoolCo provided the following information for its pool cleaning business for
selected months:
Pools cleaned
Total cost
January
21,000
$194,000
February
25,000
$ 210,000
March
18,000
$164,500
April
18,600
$160,000
May
23,200
$180,000
June
24,600
$208,000
Management has also provided the following output from Excel. Answer the
questions that follow.
SUMMARY OUTPUT
Statistics
Multiple R
0.8390729
R Squre
0.7907020
Adjusted R
074883756
StandardErr
1074.5169
Observation
6
ANVA
Regression
Residual
Total
df
SS
18342980
4177859.4
2298208333
MS
13642904
115444632.4
F
15.9745075
Sgnifiance
0.016286429
Std Error
t Stat
P-value
Lowe 95%
Uper 95
Lwer
95%
4757.0882
3495830797
1.366114712
0.243667124
49302.76423
144816.8819
49302.7
6.364705882
1.595798475
3.988414566
0.016286429
1.934059018
10.79535275
1.93405
1
4
5
Coefficints
Intrcept
X Variable
1
A. Based on the regression:
1. How much is the variable cost per unit? $6.36
. If 22,000 pools were cleaned during July, what would be the total cost?
Y = 6.36X + 47,757
= ($6.364705882*22,000) + 4,757.0882 = $144,781
B. Use the high-low method to:
1. Calculate the variable cost per unit.
High and low points highlighted (select high and low activity levels, then
corresponding amounts)
[$210,000 - $164,500] / [25,000 - 18,000] = $6.50 per unit
2. Determine total fixed costs if 21,500 pools are cleaned during a month.
TC = VC x + FC
210,000 = 6.50 (25,000) + FC, so FC = $47,500
Note that FC are the same at every activity level
3. Write the cost equation in proper form.
y = 6.50X + 47,500
28. The following regression output was generated by Casio Enterprises based on
deliveries made and the related costs incurred for each.
SUMMARY OUTPUT
Regression Statistics
0.8253
Multiple R 58
0.6812
R Square 16
Adj
0.6566
RSquare
95
Standard
39.3589
Error
22
Observati
1
ons
5
ANOVA
df
Regressi
on
1
Residual
13
Total
14
SS
43,034.
71
20,138.
62
63,173.
33
Coefficie
nts
262.2198
72
Std Error
101.80
7352
t Stat
2.6267
25
Pvalue
0.020
917
Lower
95%
47.4784
60
Upper
95%
487.361
284
Lower
95%
47.478
460
Upper
95%
487.361
284
35.58346
15
6.10
2342
5.270
675
0.000
151
18.9801
54
45.346
770
18.980
154
45.346
770
Intercept
X
Variable
1
MS
43,034
.71
1,549.
12
F
27.780
017
Sig F
0.0001
51
Answer the questions that follow Do not round in the interim. Use proper decimal
notation.
1. Based on the regression, write the cost equation in good form:
TC = 35.69X + 262
2. If Casio makes 19 deliveries, how much is the expected
cost?
TC = $35.5834615*19 + $262.219872 = $938
Multiple Choice
1. What type of information does the high-low method usually produce?
a. A reasonable estimate of variable and fixed costs
b. A very precise estimate of the behavior of the costs
c. A very conservative estimate of costs for analysis purposes
d. A exact calculation of variable and fixed costs to be incurred
None of the methods product an exact cost calculation.
2. Which one of the following is a relatively accurate method of analyzing cost
behavior that relies on an analysis of all cost levels?
A. Regression analysis
B. Relevant range approach
C. Scatter diagram approach
D. High-low analysis
3. Information concerning amounts for Bridges, Inc. appears below:
Costs
Units
January
$100,000
1,200
February
120,000
1,600
March
90,000
1,100
April
85,000
1,250
May
110,000
1,300
Using the high-low method, what periods would be used?
A. February and April
B. March and February
C. March and April
D. Either February and March or February and April
Select the months with the highest and lowest activity levels.
4. The cost estimation method that uses all relevant data points is
A. regression analysis
B. scatter graphs
C. high-low method
D. A, B, and C
E. Both A and C
Scatter-graphs involve graphing data points and eye-balling a line through points,
however, the line doesn't go through all the points. Account analysis involves using
judgment about which costs are variable and which are fixed and adding them
together for one period. The high low method uses on the largest and the smallest
activity level.
5. Which of the following best describes the relationship between total fixed costs
and total variable costs, as total volume decreases?
A. Total fixed costs stays the same and total variable costs stays the same.
B. Total fixed costs decreases and total variable costs stays the same.
C. Total fixed costs stays the same and total variable costs decrease.
D. Total fixed costs decrease and total variable costs decrease.
Note that total fixed costs stays the same no matter what happens to activity.
6. Saylor, Inc. provided the following results:
2003
2002
Units
2,600
3,000
Total
$17,550
$20,250
Cost
What form of cost behavior is represented by the above results?
A. Fixed Cost
B. Opportunity Cost
C. Mixed Cost
D. Variable Cost
$17,500/2,600 = $6.75 per unit; $20,250/3,000 = $6.75 per unit. Since unit cost is
the same, this is a variable cost.
7. What is the best explanation for the use of regression analysis by accountants?
A. Regression analysis provides the exact measure of variable costs.
B. Regression analysis is more difficult to use than the high-low method.
C. Regression analysis provides an estimate based upon statistical measures.
D. Regression analysis produces a graph that is just as accurate as a manually
prepared graph.
Regression analysis is an estimation of costs, not an exact measure, though it it
much more accurate than a manual graph or the high-low method.
8. A significant weakness of the high-low method is that
A. a significant amount of management expertise is necessary to break out the
variable and fixed costs.
B. the two data points that are used may not be representative of the general
relation between cost and activity.
C. the calculations are so complex that a computer is usually necessary in order
to get accurate results.
D. monthly data must be collected for at least three years before the method can
be used.
Answer A applies to the account analysis method. Answer C likely applies to
regression analysis.
9.When units produced and total production costs are graphed, the result is called
A. incremental analysis.
B. a profit graph.
C. a scatter graph
D. a CVP analysis graph
A CVP graph is more than only production costs. It represents the components of the
income statement.
10. What is cost behavior?
a. The way management chooses to estimate its costs
b. The method used to allocate costs to products
c. How a cost is used in setting selling prices
d. The manner in which a cost changes as the related activity changes
11. Costs that remain constant in total dollar amount as the level of activity changes
and cost that remains constant per unit in dollar amount as the level of activity
changes are called (respectively)
a. fixed costs and variable costs
b. mixed costs and fixed costs
c. mixed costs and variable costs
d. variable costs and fixed costs
Mixed costs are those that contain both fixed and variable components.
12. Which of the following describes the behavior of the fixed cost per unit?
a. Decreases with decreasing production
b. Decreases with increasing production
c. Remains constant with changes in production
d. Increases with increasing production
Note that it is asking about 'per unit'. e.g., if rent is $800 per month, the cost for one
person is $800 per person, the cost for two people is $400 per person, and so
on....on a decreasing basis.
13. A mixed cost
A. fluctuates between fixed to variable from period to period.
B. changes in proportion to changes in volume both in unit and in total.
C. includes both a variable cost component and a fixed cost.
D. is omitted from CVP analysis since it does not fit either fixed or variable
categories.
To include in a CVP analysis, we must break out the fixed and variable portions.
14. Why do management accountants use regression analysis and the high-low
method?
A. To verify actual costs incurred during the period.
B. To determine the profitability of a company or division
C. To calculate break even amounts
D. To estimate the relation between cost and activity
While a company may ultimately want to determine profitability or calculate break
even points, these methods help estimate the fixed and variable costs.
15. Why is identification of a relevant range important?
A. It is required under GAAP.
B. Cost behavior outside of the relevant range is not linear, which distorts
CVP analysis.
C. It directly impacts the number of units of a product a customer buys.
D. It is a cost that is incurred by a company that must be accounted for.
Since CVP is for management purposes and not required under GAAP, relevant
range has no role in external GAAP reporting.
16. For what purpose is the high low method primarily used?
A. To analyze the behavior of fixed costs
B. To separate mixed costs into the fixed and variable portions
C. To analyze the behavior of variable costs
D. To determine how much to price products
Answer: B is the best answer since that is what regression and the high-low method
do. Before these methods can be performed, answer A must occur.
17. What is a relevant range of activity?
A. The geographical locations in which the company operates
B. The activity level at which profits are maximized
C. The levels of activity over which the company expects to operate
D. The level of activity in which all costs are constant
This is the range we expect variable costs per unit and fixed costs in total to stay the
same.
18. In cost analysis, what does the term "cost" mean?
A. It includes all fixed and variable costs of products, but excludes period
costs.
B. It includes all costs which are part of cost of goods sold, plus variable
operating expenses.
C. It includes all manufacturing costs and operating expenses.
D. It includes only manufacturing costs.
Manufacturing costs are product costs which include both fixed and variable.
Operating expenses are period costs which include both fixed and variable. Cost
includes both of these.
19. If a company identifies it has a mixed cost, which one of the following is a
reasonable option?
a. It should break it into a variable cost element and a fixed cost element.
b. It should consider it to be a fixed cost.
c. It should consider it to be a variable cost.
d. It should omit the cost from the analysis.
20. Which of the following is most likely a mixed cost?
a. Car rental fee
b. Storage unit rent
c. Equipment depreciation
d. Direct labor
Storage unit for one particular unit (i.e., at a relevant range) is fixed. Depreciation is
fixed. Direct labor is variable. Car rental fees such as Enterprise Car Rental can
often charge a flat fee per day, plus a cost per mile.
21. Why is the high-low method frequently not as accurate as regression analysis?
a. It assumes managers have classified costs correctly.
b. It uses analytical techniques which are questionable.
c. It assumes that costs behave linearly.
d. It uses extreme points which may not be representative of the rest of the
data.
All estimation methods assume managers have classified costs correctly into fixed
and variable categories that behave linear.
22. In cost analysis, what does the term "cost" mean?
a. It includes all fixed and variable costs of products.
b. It includes all costs which are part of cost of goods sold.
c. It includes manufacturing costs plus selling and administrative expenses.
d. It includes all manufacturing costs.
Cost means total costs, which include both fixed and variable. Since CVP analysis
has a goal of determining activity levels to reach desired profit levels, a
determination of net income is necessary. Net income calculates profits after ALL
costs....both product and period are subtracted.
23. Hanalia, Inc. provided the following results:
2004
2003
Units
2,400
3,000
Total
$19,200
$24,000
Cost
What form of cost behavior is represented by the above results?
A. Fixed Cost
B. Opportunity Cost
C. Mixed Cost
D. Variable Cost
Cost per unit is the same for both levels of activity:
2004: $19,200/2,400 = $8
2003: $24,000/3,000 = $8
24. Which is true as it relates to fixed costs?
A. Total fixed cost increases as production/sales increase
B. Fixed cost per unit declines as production/sales increases.
C. Fixed cost per unit increases as production/sales increases.
D. Total fixed cost declines as production/sales increase
As fewer units are produced/sold, the cost per unit goes up. Answers A and C are
wrong
because total fixed costs remain the same regardless of the activity level.
25. Why is determination of a relevant range important?
A. Cost behavior outside of the relevant range is generally distorted.
B. It directly impacts the direct cost allocated to a product or service.
C. It is a relevant cost.
D. GAAP requires companies to report this information.
Managerial accounting is not a part of GAAP. Within the relevant range, the behavior
of costs is assumed to be linear.
26. For what purpose is regression analysis used in accounting?
A. To determine the break even point
B. To estimate the behavior of costs
C. To allocate costs to products, services, jobs, or departments.
D. To determine how profitably the companies activities are.
Then the costs can be used to predict future costs.
27.
Which statement describes a fixed cost?
A. It varies in total at every level of activity.
B. The unit cost varies directly to the activity level.
C. Its unit cost varies inversely to the level of activity.
D. It remains the same per unit regardless of activity level.
Answer D is wrong because fixed cost "per unit" declines as activity increases. Only
fixed costs in total remain the same at different levels of activity.
28. Which one of the following would most likely be considered a mixed
cost?
a. Cost of using a copy machine
c. Supervisory salaries
b. Direct labor
d. Direct materials
Answers B and D are variable costs. Answer C is a fixed cost.
29. Why do managers use scattergraphs?
A. To estimate the relation between cost and activity
B. To verify actual costs incurred during the period
C. To determine the profitability of a company or division
D. To calculate break even amounts
The relationship between cost and activity is how we determine which costs are
fixed and variable. Once we determine which costs are fixed and variable, they can
be used for a number of decisions, such as break even analysis, pricing products,
budgets, etc.
30. When 200 gallons of ice cream are produced, the total cost is $200. When 300
gallons of ice cream are produced, the total cost is $250. Which of the following
statements is true?
A. This company has only fixed costs
B. This company has only variable costs
C. This company has both variable and fixed costs
D. It is impossible to determine this company’s cost structure without more
information.
Since total costs are not the same at both 200 and 300 gallons, the costs are not
fixed. The cost per units are $1 and $1.20 respectively, which means they are not
variable in total. That leaves them at mixed costs which means a portion are fixed
and a portion are variable.
31. Variable costs per unit
A. can be estimated by using break even analysis.
B. remain the same on a per unit basis when the level of activity changes.
C. are represented by the slope of the total cost line.
D. Both B and C are correct, but not A.
E. A, B and C are correct.
Break even analysis is used to predict cost behavior, not estimate costs.
32. Why must a company determine what its relevant range is?
A. It directly impacts the indirect cost allocated to a product or service.
B. It is a relevant cost.
C. GAAP requires companies to report this information.
D. Cost behavior outside of the relevant range is generally distorted
33. Which of the following statements is false regarding regression analysis?
A. It is used to predict the fixed and variable components of a mixed cost.
B. It is used to predict whether or not a cost is a product or period cost.
C. It is usually more accurate than the high/low method.
D. It uses statistical methods to fit a cost line through a number of data points.
Since it uses all data points, it is more accurate than the high low method. It does not
attempt to decide the function of a cost, i.e., product or period.