CAE9 Chap5 Cost behavior PDF

Preview

Summary

Chapter 5 Cost behavior question and answer with solution....

Description

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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 2. The reluctance of managers to lay off employees when activity declines in the shortrun leads to an increase in the ratio of variable to fixed costs. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard 3. A variable cost fluctuates in total as activity changes but remains constant on a per unit basis over the relevant range. Ans: True AACSB: Reflective Thinking AICPA BB: Criti cal Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard 5. Fixed costs remain constant in total, but vary inversely with changes in activity when expressed on a per unit basis. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 6. Committed fixed costs have a short-term planning horizon--usually one year. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 7. The following costs are all examples of committed fixed costs: depreciation on buildings, advertising, insurance, and management development and training. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

5-5

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 9. The high-low method is generally more accurate than the least-squares regression method in analyzing cost behavior. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,5 Level: Easy 10. A major problem with the high-low method of cost estimation is that some data are omitted from the analysis. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 12. Contribution margin and gross margin mean the same thing. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Medium 13. Contribution margin equals revenue minus all variable costs. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy 14. The traditional income statement organizes costs on the basis of cost behavior. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Easy

5-6

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy

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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

5-7

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

5-8

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

5-9

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

5-10

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Medium 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium 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 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

5-11

Chapter 5 Cost Behavior: Analysis and Use 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) .................................. Cost of sales............................................... Selling and administrative costs ................

5,000 6,000 $419,000 $502,800 $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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3,4 Level: Hard 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 83,210 527,350 ($15.70 × 5,300) ........................................... Contribution margin ............................................ $ 146,810

5-12

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Solution: MachineHours High activity level .... 18,000 Low activity level ..... 9,000

Average Cost per Hour $0.25 $0.40

Total Utility Cost (machine-hours × average cost per hour) $4,500 $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

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

5-13

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Solution:

High activity level .... Low activity level ..... *Given

Accounts 32,000 22,000

Average Cost per Account Processed $0.50

Total Utility Cost (accounts × average cost per account processed) $16,000 $12,500*

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

5-14

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium Solution:

High activity level ..... Low activity level ......

Pounds Shipped 22,000 16,000

Shipping Cost $22,500 $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

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

5-15

Chapter 5 Cost Behavior: Analysis and Use 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard 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

5-16

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 5 Cost Behavior: Analysis and Use 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 ........................ Direct materials ............................. Direct labor .................................... Manufacturing overhead................

1,000 units 2,000 units $4.00 per unit $4.00 per unit $3.50 per unit $3.50 per unit $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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Source: CIMA, adapted Solution: First, calculate the variable manufacturing cost per unit: Production Volume (Units) High activity level .... 2,000 Low activity level ..... 1,000

Average Cost per Unit $6.20 $10.00

Total Manufacturing Overhead Cost (units × average cost per unit) $12,400 $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.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

5-17

Chapter 5 Cost Behavior: Analysis and Use 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 ........................ Direct materials ............................. Direct labor .................................... Manufacturing overhead................

2,000 units 4,000 units $50.20 per unit $50.20 per unit $45.10 per unit $45.10 per unit $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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Solution: First, calculate the variable manufacturing cost per unit:

Production Volume (Units) High activity level .... 4,000 Low activity level ..... 2,000

Average Cost per Unit $58.30 $100.90

Total Manufacturing Overhead Cost (units × average cost per unit) $233,200 $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

5-18

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 5 Cost Behavior: Analysis and Use 40. Bakeman Corporation has provided the following production and average cost data for two levels of monthly production volume. The co...