Chapter 5 Cost Behavior: Analysis and Use

Chapter 5 Cost Behavior: Analysis and Use

True/False Questions

1.Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost.

Ans:True

2.The reluctance of managers to lay off employees when activity declines in the short-run leads to an increase in the ratio of variable to fixed costs.

Ans:False

3.A variable cost fluctuates in total as activity changes but remains constant on a per unit basis over the relevant range.

Ans:True

4.A cost that is classified as variable with respect to one measure of activity could be classified as fixed with respect to a different measure of activity.

Ans:True

5.Fixed costs remain constant in total, but vary inversely with changes in activity when expressed on a per unit basis.

Ans:True

6.Committed fixed costs have a short-term planning horizon--usually one year.

Ans:False

7.The following costs are all examples of committed fixed costs: depreciation on buildings, advertising, insurance, and management development and training.

Ans:False

8.The time frame in which discretionary fixed costs are controllable is usually much shorter than the time frame for committed fixed costs.

Ans:True

9.The high-low method is generally more accurate than the least-squares regression method in analyzing cost behavior.

Ans:False LO:3,5

10.A major problem with the high-low method of cost estimation is that some data are omitted from the analysis.

Ans:True

11.The high and low points used in the high-low method tend to be unusual and therefore the cost formula may not accurately represent all of the data.

Ans:True

12.Contribution margin and gross margin mean the same thing.

Ans:False AICPAFN:Reporting,Measurement LO:4

13.Contribution margin equals revenue minus all variable costs.

Ans:True LO:4

14.The traditional income statement organizes costs on the basis of cost behavior.

Ans:False LO:4

15.It is necessary to break mixed costs into their variable and fixed cost components in order to construct an income statement using the contribution approach.

Ans:True LO:4

Multiple Choice Questions

16.A is a fixed cost; B is a variable cost. During the current year the level of activity has decreased but is still within the relevant range. We would expect that:

A)The cost per unit of A has remained unchanged.

B)The cost per unit of B has decreased.

C)The cost per unit of A has decreased.

D)The cost per unit of B has remained unchanged.

Ans:D

17.Which costs will change with an increase in activity within the relevant range?

A)Unit fixed cost and total fixed cost

B)Unit variable cost and total variable cost

C)Unit fixed cost and total variable cost

D)Unit fixed cost and unit variable cost

Ans:C

18.Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts receivable is an example of a:

A)fixed cost

B)step-variable cost

C)mixed cost

D)curvilinear cost

Ans:B

19.Limousine Conversion Company purchases ordinary Cadillacs, cuts them in half, and then adds a middle section to the vehicles to create stretch limousines. With respect to the number of cars converted, the cost of the Cadillacs purchased for conversion by Limousine Conversion Company would best be described as a:

A)fixed cost

B)mixed cost

C)step-variable cost

D)variable cost

Ans:D

20.For an automobile manufacturer, the cost of a driver's side air bag purchased from a supplier and installed in every automobile would best be described as a:

A)fixed cost.

B)mixed cost.

C)step-variable cost.

D)variable cost.

Ans:D

21.With respect to a fixed cost, an increase in the activity level within the relevant range results in:

A)an increase in fixed cost per unit.

B)a proportionate increase in total fixed costs.

C)an unchanged fixed cost per unit.

D)a decrease in fixed cost per unit.

Ans:D

22.In the standard cost formula Y = a + bX, what does the “Y” represent?

A)total cost

B)total fixed cost

C)total variable cost

D)variable cost per unit

Ans:A

23.In the standard cost formula Y = a + bX, what does the “a” represent?

A)total cost

B)total fixed cost

C)total variable cost

D)variable cost per unit

Ans:B

24.In the standard cost formula Y = a + bX, what does the “b” represent?

A)total cost

B)total fixed cost

C)total variable cost

D)variable cost per unit

Ans:D

25.In the standard cost formula Y = a + bX, what does the “X” represent?

A)total cost

B)total fixed cost

C)units of activity

D)variable cost per unit

Ans:C

26.Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling company?

A)the cost of advertising its products

B)the cost of fire insurance on its factory building

C)depreciation on its manufacturing equipment

D)both a and b above

Ans:A

27.Which of the following is a weakness of the quick-and-dirty scattergraph method of analyzing mixed cost?

A)It is impossible to determine variable cost per unit.

B)Only two data points are used and the rest are ignored in drawing the scattergraph.

C)Different people will have different answers even though they are analyzing the same set of data.

D)Both B and C above

Ans:C

28.Which of the following statements is true when referring to the high-low method of cost analysis?

A)The high-low method has no major weaknesses.

B)The high-low method is very hard to apply.

C)In essence, the high-low method draws a straight line through two data points.

D)None of the above is true.

Ans:C

29.Contribution margin is computed as sales revenue minus:

A)fixed expenses

B)variable expenses

C)cost of goods sold

D)cost of goods manufactured

Ans:B AICPAFN:Reporting,Measurement LO:4

30.Which of the following approaches to preparing an income statement calculates gross margin?

Traditional / Contribution
Approach / Approach
A) / Yes / Yes
B) / Yes / No
C) / No / Yes
D) / No / No

Ans:B LO:4

31.The least-squares regression method:

A)fits a regression line by minimizing the sum of the squared errors from the regression line.

B)is generally less accurate than the scattergraph method.

C)can be used only if the fixed cost element is larger than the variable cost element.

D)is the only method acceptable under generally accepted accounting principles.

Ans:A LO:5

32.Multiple regression analysis is used when:

A)more than one cost category must be analyzed.

B)when more than one factor causes variation in a cost.

C)the high-low method cannot be used because there is only one observation.

D)all of the points on a scattergraph fall exactly on a regression line.

Ans:B LO:5

33.Iacono Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $127.20 per unit.

Sales volume (units)...... / 5,000 / 6,000
Cost of sales...... / $419,000 / $502,800
Selling and administrative costs...... / $186,500 / $202,200

The best estimate of the total contribution margin when 5,300 units are sold is:

A)$230,020

B)$51,410

C)$146,810

D)$32,330

Ans:C LO:1,3,4

Solution:

Variable component of cost of goods sold:

Variable cost = Change in costs/Change in units

Variable cost = ($502,800 − $419,000)/(6,000 − 5,000)

Variable cost = $83.80 per unit

Variable component of selling and administrative expenses:

Variable cost = Change in costs/Change in units

Variable cost = ($202,200 − $186,500)/(6,000 − 5,000)

Variable cost = $15.70 per unit

Sales revenue ($127.20 ×5,300)...... / $674,160
Variable expenses:
Variable cost of goods sold ($83.80 × 5,300). / $444,140
Variable selling and administrative expense ($15.70 × 5,300) / 83,210 / 527,350
Contribution margin...... / $146,810

34.Utility costs at Service, Inc. are a mixture of fixed and variable components. Records indicate that utility costs are an average of $0.40 per hour at an activity level of 9,000 machine hours and $0.25 per hour at an activity level of 18,000 machine hours. Assuming that this activity is within the relevant range, what is the expected total utility cost if the company works 13,000 machine hours?

A)$4,225

B)$5,200

C)$4,000

D)$3,250

Ans:C LO:1,3

Solution:

Machine-Hours / Average Cost per Hour / Total Utility Cost (machine-hours × average cost per hour)
High activity level.. / 18,000 / $0.25 / $4,500
Low activity level.. / 9,000 / $0.40 / $3,600

Variable cost = Change in cost ÷ Change in activity

= ($4,500 − $3,600) ÷ (18,000 – 9,000) = $0.10

Fixed cost element = Total cost − Variable cost element

= $4,500 − ($0.10 × 18,000) = $2,700

Therefore, the cost formula for total utility cost is $2,700 per period plus $0.10 per machine-hour, or Y = $2,700 + $0.10X.

At an activity level of 13,000 machine-hours, total cost is estimated to be:

Y = $2,700 + ($0.10 × 13,000) = $4,000

35.Clerical costs in the billing department of Craig Company are a mixture of variable and fixed components. Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500. Assuming that this activity is within the relevant range, at a budgeted level of 25,000 accounts:

A)processing costs are expected to total $8,750.

B)fixed processing costs are expected to be $10,400.

C)the variable processing costs are expected to be $0.35 per account processed.

D)processing costs are expected to total $14,975.

Ans:C LO:1,3

Solution:

Accounts / Average Cost per Account Processed / Total Utility Cost (accounts × average cost per account processed)
High activity level.. / 32,000 / $0.50 / $16,000
Low activity level.. / 22,000 / $12,500*

*Given

Variable cost = Change in cost ÷ Change in activity

= ($16,000 − $12,500) ÷ (32,000 – 22,000) = $0.35

Fixed cost element = Total cost − Variable cost element

= $16,000 − ($0.35 × 32,000) = $4,800

Therefore, the cost formula for total utility cost is $4,800 per period plus $0.35 per account processed, or Y = $4,800 + $0.35X.

At an activity level of 25,000 accounts, total cost is estimated to be:

Y = $4,800 + ($0.35 × 25,000) = $13,550

36.Shipping cost at Junk Food Imports is a mixed cost with variable and fixed components. Past records indicate total shipping cost was $18,000 for 16,000 pounds shipped and $22,500 for 22,000 pounds shipped. Assuming that this activity is within the relevant range, if the company plans to ship 18,000 pounds next month, the expected shipping cost is:

A)$18,500

B)$20,400

C)$19,500

D)$24,000

Ans:C LO:1,3

Solution:

Pounds Shipped / Shipping Cost
High activity level.. / 22,000 / $22,500
Low activity level.. / 16,000 / $18,000

Variable cost = Change in cost ÷ Change in activity

= ($22,500 − $18,000) ÷ (22,000 − 16,000) = $0.75

Fixed cost element = Total cost − Variable cost element

= $22,500 − ($0.75 × 22,000) = $6,000

Therefore, the cost formula for total shipping cost is $6,000 per period plus $0.75 per pound shipped, or Y = $6,000 + $0.75X.

At an activity level of 18,000 pounds shipped, total cost is estimated to be:

Y = $6,000 + ($0.75 × 18,000) = $19,500

37.Larson Brothers, Inc., used the high-low method to derive its cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is $3 per machine-hour. Total electrical power cost at the high level of activity was $7,600 and at the low level of activity was $7,300. If the high level of activity was 1,200 machine hours, then the low level of activity was:

A)800 machine hours

B)900 machine hours

C)1,000 machine hours

D)1,100 machine hours

Ans:D LO:1,3

Solution:

Variable cost = Change in cost ÷ Change in activity

= ($7,600 − $7,300) ÷ (1,200 − X) = $3, where X = low level of activity

=> $300 ÷ (1,200 – X) = $3

=> $300 = $3 × (1,200 – X)

=> $100 = $1,200 – X

=> X = $1,100

38.The following production and average cost data for a month's operations have been supplied by a company that produces a single product.

Production volume...... / 1,000 units / 2,000 units
Direct materials...... / $4.00 per unit / $4.00 per unit
Direct labor...... / $3.50 per unit / $3.50 per unit
Manufacturing overhead...... / $10.00 per unit / $6.20 per unit

The total fixed manufacturing cost and variable manufacturing cost per unit are as follows:

A)$3,600; $7.50

B)$3,600; $9.90

C)$7,600; $7.50

D)$7,600; $9.90

Ans:D LO:1,3

Solution:

First, calculate the variable manufacturing cost per unit:

Production Volume (Units) / Average Cost per Unit / Total Manufacturing Overhead Cost (units × average cost per unit)
High activity level.. / 2,000 / $6.20 / $12,400
Low activity level.. / 1,000 / $10.00 / $10,000

Variable manufacturing overhead cost = Change in cost ÷ Change in activity

= ($12,400 − $10,000) ÷ (2,000 – 1,000) = $2.40

Fixed cost element of manufacturing overhead = Total cost − Variable cost element

= $12,400 − ($2.40 × 2,000) = $7,600

Total variable cost per unit = Direct material + Direct labor + Variable manufacturing overhead = $4.00 + $3.50 + $2.40 = $9.90

There are no fixed direct materials or direct labor, so the total fixed costs would be equal to the fixed cost portion of manufacturing overhead, or $7,600.

39.Anderst Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume...... / 2,000 units / 4,000 units
Direct materials...... / $50.20 per unit / $50.20 per unit
Direct labor...... / $45.10 per unit / $45.10 per unit
Manufacturing overhead...... / $100.90 per unit / $58.30 per unit

The best estimate of the total monthly fixed manufacturing cost is:

A)$201,800

B)$233,200

C)$170,400

D)$392,400

Ans:C LO:1,3

Solution:

First, calculate the variable manufacturing cost per unit:

Production Volume (Units) / Average Cost per Unit / Total Manufacturing Overhead Cost (units × average cost per unit)
High activity level.. / 4,000 / $58.30 / $233,200
Low activity level.. / 2,000 / $100.90 / $201,800

Variable manufacturing overhead cost = Change in cost ÷ Change in activity

= ($233,200 − $201,800) ÷ (4,000 – 2,000) = $15.70

Fixed cost element of manufacturing overhead = Total cost − Variable cost element

= $233,200 − ($15.70 × 4,000) = $170,400

40.Bakeman Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume...... / 2,000 units / 3,000 units
Direct materials...... / $36.10 per unit / $36.10 per unit
Direct labor...... / $48.00 per unit / $48.00 per unit
Manufacturing overhead...... / $51.00 per unit / $40.90 per unit

The best estimate of the total variable manufacturing cost per unit is:

A)$104.80

B)$36.10

C)$20.70

D)$84.10

Ans:A LO:1,3

Solution:

To calculate the variable manufacturing cost per unit:

Production Volume (Units) / Average Cost per Unit / Total Manufacturing Overhead Cost
(units × average cost per unit)
High activity level.. / 3,000 / $40.90 / $122,700
Low activity level.. / 2,000 / $51.00 / $102,000

Variable manufacturing overhead cost = Change in cost ÷ Change in activity

= ($122,700 − $102,000) ÷ (3,000 – 2,000) = $20.70

Total variable manufacturing cost per unit
= Direct materials + Direct labor + Manufacturing overhead

= $36.10 + $48.00 + $20.70 = $104.80

41.Carcia Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume...... / 6,000 units / 7,000 units
Direct materials...... / $89.40 per unit / $89.40 per unit
Direct labor...... / $11.20 per unit / $11.20 per unit
Manufacturing overhead...... / $107.70 per unit / $95.70 per unit

The best estimate of the total cost to manufacture 6,300 units is closest to:

A)$1,274,490

B)$1,287,090

C)$1,312,290

D)$1,236,690

Ans:B LO:1,3

Solution:

To calculate the variable manufacturing cost per unit:

Production Volume (Units) / Average Cost per Unit / Total Manufacturing Overhead Cost (units × average cost per unit)
High activity level.. / 7,000 / $95.70 / $669,900
Low activity level.. / 6,000 / $107.70 / $646,200

Variable manufacturing overhead cost
= Change in cost ÷ Change in activity

= ($669,900 − $646,200) ÷ (7,000 – 6,000) = $23.70

Fixed cost element of manufacturing overhead
= Total cost − Variable cost element

= $669,900 − ($23.70 × 7,000) = $504,000

Per Unit Cost / Number of Units / Total Cost
Direct materials...... / $89.40 / 6,300 / $ 563,220
Direct labor...... / $11.20 / 6,300 / 70,560
Variable manufacturing overhead... / $23.70 / 6,300 / 149,310
Fixed manufacturing overhead..... / 504,000
Total cost to manufacture 6,300 units / $1,287,090

42.Daar Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume...... / 2,000 units / 3,000 units
Direct materials...... / $188,400 / $282,600
Direct labor...... / $91,800 / $137,700
Manufacturing overhead...... / $110,400 / $127,800

The best estimate of the total monthly fixed manufacturing cost is:

A)$75,600

B)$390,600

C)$469,350

D)$548,100

Ans:A LO:1,3

Solution:

To calculate the variable manufacturing cost per unit:

Production Volume (Units) / Total Manufacturing Overhead Cost
High activity level.. / 3,000 / $127,800
Low activity level.. / 2,000 / $110,400

Variable manufacturing overhead cost
= Change in cost ÷ Change in activity

= ($127,800 − $110,400) ÷ (3,000 – 2,000) = $17.40

Fixed cost element of manufacturing overhead
= Total cost − Variable cost element

= $127,800 − ($17.40 × 3,000) = $75,600

43.Edde Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume...... / 4,000 units / 5,000 units
Direct materials...... / $291,200 / $364,000
Direct labor...... / $219,600 / $274,500
Manufacturing overhead...... / $320,400 / $343,000

The best estimate of the total variable manufacturing cost per unit is:

A)$127.70

B)$150.30

C)$22.60

D)$72.80

Ans:B LO:1,3

Solution:

Direct material cost per unit = $291,200 ÷ 4,000 = $72.80

(Alternatively, direct material cost per unit = $364,000 ÷ 5,000 = $72.80)

Direct labor cost per unit = $219,600 ÷ 4,000 = $54.90

(Alternatively, direct labor cost per unit = $274,500 ÷ 5,000 = $54.90)

Variable manufacturing overhead cost = Change in cost ÷ Change in activity

= ($343,000 − $320,400) ÷ (5,000 – 4,000) = $22.60

Total variable manufacturing cost per unit = $72.80 + $54.90 + $22.60 = $150.30

44.Farah Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume...... / 2,000 units / 3,000 units
Direct materials...... / $146,200 / $219,300
Direct labor...... / $37,200 / $55,800
Manufacturing overhead...... / $146,600 / $158,100

The best estimate of the total cost to manufacture 2,300 units is closest to:

A)$332,120

B)$379,500

C)$355,810

D)$360,960

Ans:D LO:1,3

Solution:

To calculate the variable manufacturing cost per unit:

Production Volume (Units) / Total Manufacturing Overhead Cost
High activity level.. / 3,000 / $158,100
Low activity level.. / 2,000 / $146,600

Variable manufacturing overhead cost
= Change in cost ÷ Change in activity

= ($158,100 − $146,600) ÷ (3,000 – 2,000) = $11.50

Fixed cost element of manufacturing overhead
= Total cost − Variable cost element

= $158,100 − ($11.50 × 3,000) = $123,600

Per Unit Cost / Number of Units / Total Cost
Direct materials...... / $73.10* / 2,300 / $168,130
Direct labor...... / $18.60** / 2,300 / 42,780
Variable manufacturing overhead... / $11.50 / 2,300 / 26,450
Fixed manufacturing overhead..... / 123,600
Total cost to manufacture 2,300 units / $360,960

*$219,300 ÷ 3,000 units = $73.10 per unit

**$55,800 ÷ 3,000 units = $18.60 per unit

45.Gamad Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $131.00 per unit.

Sales volume (units)...... / 4,000 / 5,000
Cost of sales...... / $262,800 / $328,500
Selling and administrative costs.... / $230,400 / $244,500

The best estimate of the total monthly fixed cost is:

A)$174,000

B)$533,100

C)$493,200

D)$573,000

Ans:A LO:1,3

Solution:

Variable component of cost of goods sold:

Variable cost = Change in costs/Change in units

Variable cost = ($328,500 − $262,800)/(5,000 − 4,000)

Variable cost = $65.70

Fixed cost:

High volume: $328,500 − $65.70 × 5,000 = $0

Low volume: $262,800 − $65.70 × 4,000 = $0

Variable component of selling and administrative expenses:

Variable cost = Change in costs/Change in units

Variable cost = ($244,500 − $230,400)/(5,000 − 4,000)

Variable cost = $14.10 per unit

Fixed cost:

High volume: $244,500 − $14.10 × 5,000 = $174,000

Low volume: $230,400 − $14.10 × 4,000 = $174,000

Total variable cost per unit:

$65.70 + $14.10 = $79.80

Total fixed cost:

$0 + $174,000 = $174,000

46.Harada Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $88.70 per unit.

Sales volume (units)...... / 4,000 / 5,000
Cost of sales...... / $273,600 / $342,000
Selling and administrative costs.... / $56,800 / $68,000

The best estimate of the total variable cost per unit is: