Test Bank Chapter 5 Cost Behavior Analysis PDF

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Chapter 5 Cost Behavior: Analysis and Use 1. T Easy Modern technology is causing shifts away from variable costs toward more fixed costs in many industries. 2. F Medium In order for a cost to be variable it must vary with either units produced or units sold. 3. T Easy A cost that is obtainable in la...

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Chapter 5 Cost Behavior: Analysis and Use

True/False 1. T Easy

Modern technology is causing shifts away from variable costs toward more fixed costs in many industries.

2. F Medium

In order for a cost to be variable it must vary with either units produced or units sold.

3. T Easy

A cost that is obtainable in large chunks and that increases or decreases only in response to fairly wide changes in the activity level is known as a step-variable cost.

4. F Easy

The concept of the relevant range does not apply to fixed costs.

5. F Medium

Indirect costs, such as manufacturing overhead, are always fixed costs.

6. T Easy

A cost formula may not be valid outside the relevant range of activity.

7. T Easy

Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas.

8. F Easy

Significant reductions in committed fixed costs can usually be made on a temporary basis without seriously impairing the long-run goals of a firm.

9. F Easy

The planning horizons for committed fixed costs and discretionary fixed costs are generally the same.

10. T Easy

The high-low method is generally less accurate than the least-squares regression method for analyzing the behavior of mixed costs.

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11. T Easy

In a scattergraph, the line fitted to the plotted points is known as a regression line.

12. F Easy

The adjusted R2 (i.e., R-squared) indicates the proportion of a mixed cost that is variable.

13. F Easy

In least-squares regression, independent variables are not included in the computations of the slope and intercept.

14. T Easy

The contribution approach to the income statement classifies costs by behavior rather than by function.

15. T Easy

A mixed cost is partially variable and partially fixed.

Multiple Choice 16. C Medium

Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that: a. expense A has remained unchanged. b. expense B has decreased. c. expense A has decreased. d. expense B has increased.

17. B Easy

Which costs will change with a decrease in activity within the relevant range? a. Total fixed costs and total variable cost. b. Unit fixed costs and total variable cost. c. Unit variable cost and unit fixed cost. d. Unit fixed cost and total fixed cost.

18. B Medium

Within the relevant range of activity, variable cost per unit will: a. increase in proportion with the level of activity. b. remain constant. c. vary inversely with the level of activity. d. none of these.

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19. D Medium

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.

20. B Easy CPA adapted

The term "relevant range" means the range over which: a. costs may fluctuate. b. a particular cost formula is valid. c. production may vary. d. relevant costs are incurred.

21. A Medium

The linear equation Y = a + bX is often used to express cost formulas. In this equation: a. the b term represents variable cost per unit of activity. b. the a term represents variable cost in total. c. the X term represents total cost. d. the Y term represents total fixed cost.

22. C Easy

An example of a discretionary fixed cost is: a. insurance. b. taxes on real estate. c. management training. d. depreciation of buildings and equipment.

23. C Easy

An example of a committed fixed cost is: a. a training program for salespersons. b. executive travel expenses. c. property taxes on the factory building. d. new product research and development.

24. D Easy

Discretionary fixed costs: a. vary directly and proportionately with the level of activity. b. have a long-term planning horizon, generally encompassing many years. c. are made up of plant, equipment, and basic organizational costs. d. none of the above.

25. B Medium

In describing the cost formula equation Y = a + bX, which of the following statements is correct? a. "X" is the dependent variable. b. "a" is the fixed component. c. In the high-low method, "b" equals change in activity divided by change in costs. d. As "X" increases "Y" decreases.

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26. B Easy

The contribution approach to the income statement: a. organizes costs on a functional basis. b. is useful to managers in planning and decision making. c. shows a contribution margin rather than a net income figure statement. d. can be used only by manufacturing companies.

at the bottom of the

27. D Easy CMA adapted

Contribution margin is the excess of revenues over: a. cost of goods sold. b. manufacturing cost. c. all direct costs. d. all variable costs.

28. B Easy

An example of a cost that is variable with respect to the number of units produced and sold is: a. insurance on the headquarters building. b. power to run production equipment. c. supervisory salaries. d. depreciation of factory facilities.

29. C Medium CMA adapted

A cost driver is: a. the largest single category of cost in a company. b. a fixed cost that cannot be avoided. c. a factor that causes variations in a cost. d. an indirect cost that is essential to the business.

30. C Medium

The following data pertain to activity and costs for two recent months:

Activity level in units

October November 5,000 10,000

Variable costs ............ P10,000 ? Fixed costs ............... 30,000 ? Mixed costs ............... 20,000 ? _ Total costs ............... P60,000 P75,000 Assuming that these activity levels are within the relevant range, the mixed costs for November were: a. P40,000. b. P35,000. c. P25,000. d. P20,000.

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31. C Medium

The following data pertains to activity and costs for two months: June 10,000

July 20,000

Variable costs ................ P20,000 Fixed costs ................... 15,000 Mixed costs ................... 10,000 Total costs ................... P45,000

P ? ? ? _ P70,000

Activity level in units

Assuming that these activity levels are within the relevant range, the mixed costs for July were: a. P10,000. b. P35,000. c. P15,000. d. P40,000. 32. B Easy

At an activity level of 10,000 units, variable costs totaled P35,000 and fixed costs totaled P20,800. If 16,000 units are produced and this activity is within the relevant range, then: a. total cost would equal P89,280. b. total unit cost would equal P4.80. c. fixed cost per unit would equal P5.58. d. total costs would equal P55,800.

33. D Medium

Anaconda Mining Company shipped 9,000 tons of copper concentrate for P450,000 in March and 11,000 tons for P549,000 in April. Shipping costs for 12,000 tons to be shipped in May would be expected to be: a. P548,780. b. P549,020. c. P594,000. d. P598,500.

34. A Medium

An analysis of past maintenance costs indicates that maintenance cost is an average of P0.20 per machine-hour at an activity level of 10,000 machine-hours and P0.25 per machine-hour at an activity level of 8,000 machine-hours. Assuming that this activity is within the relevant range, what is the total expected maintenance cost if the activity level is 8,700 machine-hours? a. P2,000 b. P400 c. P2,250 d. P1,740

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35. D Medium

Shipping expense is P9,000 for 8,000 pounds shipped and P11,250 for 11,000 pounds shipped. Assuming that this activity is within the relevant range, if the company ships 9,000 pounds, its expected shipping expense is closest to: a. P10,125. b. P8,583. c. P9,972. d. P9,750.

36. C Hard

Average maintenance costs are P1.50 per machine-hour at an activity level of 8,000 machine-hours and P1.20 per machine-hour at an activity level of 13,000 machinehours. Assuming that this activity is within the relevant range, total expected maintenance cost for a budgeted activity level of 10,000 machine-hours would be closest to: a. P16,128. b. P15,000. c. P13,440. d. P11,433.

37. D Medium CMA adapted

The controller of JoyCo has requested a quick estimate of the manufacturing supplies needed for the month of July when production is expected to be 470,000 units. Below are actual data from the prior three months of operations. Production in units March 450,000 April 540,000 May 480,000

Manufacturing supplies P723,060 853,560 766,560

Using these data and the high-low method, what is the best estimate of the cost of manufacturing supplies that would be needed for July? (Assume that this activity is within the relevant range.) a. P805,284 b. P1,188,756 c. P755,196 d. P752,060

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38. D Hard

(Appendix) The following activity and cost data were provided by Hammer Corp., which would like help in estimating its future maintenance costs: Units Maintenance Cost 3 P450 7 P530 11 P640 15 P700 Using the least-squares regression method to estimate the cost formula, the expected total cost for an activity level of 10 units would be closest to: a. P612.50. b. P581.82. c. P595.84. d. P601.50.

39. C Easy

Given the cost formula Y = P15,000 + P5X, total cost at an activity level of 8,000 units would be: a. P23,000. b. P15,000. c. P55,000. d. P40,000.

40. B Easy

Given the cost formula Y = P12,000 + P6X, total cost at an activity level of 8,000 units would be: a. P20,000. b. P60,000. c. P12,000. d. P48,000.

41. D Easy

Reddy Company has the following cost formulas for overhead: Cost Indirect materials Maintenance Machine setup Utilities Depreciation

Cost Formula P2,000 plus P0.40 per machine hour P1,500 plus P0.60 per machine hour P0.30 per machine hour P200 plus P0.10 per machine hour P800

Based on these cost formulas, the total overhead cost at 600 machine hours is expected to be: a. P4,500. b. P5,200. c. P5,620. d. P5,340.

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42. C Medium

Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500? a. 10,625 units. b. 4,375 units. c. 6,250 units. d. 5,250 units.

43. D Easy

The following data pertains to activity and utility costs for two recent years: Year 2 Year 1 Activity level in units 12,000 8,000 Utilities cost P15,000 P12,000 Using the high-low method, the cost formula for utilities is: a. P1.50 per unit. b. P8,000 plus P0.50 per unit. c. P1.25 per unit. d. P6,000 plus P0.75 per unit.

44. D Easy

The following data pertains to activity and utility costs for two recent years:

Activity level in units Utilities cost observed

Year 2 Year 1 10,000 6,000 P12,000 P9,000

Using the high-low method, the cost formula for utilities is: a. P1.50 per unit. b. P1.20 per unit. c. P3,000 plus P3.00 per unit. d. P4,500 plus P0.75 per unit. 45. D Easy

At an activity level of 6,000 units the cost for maintenance is P7,200 and at 10,000 units the cost for maintenance is P11,600. Using the high-low method, the cost formula for maintenance is: a. P1.20 per unit. b. P1.16 per unit. c. P1,200 plus P1.10 per unit. d. P600 plus P1.10 per unit.

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46. C Easy

Bell Company has provided the following data for maintenance costs:

Machine hours incurred Maintenance cost incurred

April 12,000 P24,000

May 16,000 P26,000

Using the high-low method, the cost formula for maintenance cost would be: a. P2.00 per machine hour. b. P1.625 per machine hour. c. P18,000 plus P0.50 per machine hour. d. P24,000 plus P0.50 per machine hour. 47. C Medium

Buckeye Company has provided the following data for maintenance cost: Prior Year Machine hours ..... 12,500 Maintenance cost .. P27,000

Current Year 15,000 P31,000

The best estimate of the cost formula for maintenance would be: a. P21,625 per year plus P0.625 per machine hour. b. P7,000 per year plus P0.625 per machine hour. c. P7,000 per year plus P1.60 per machine hour. d. P27,000 per year plus P1.60 per machine hour. 48. A Hard

Selected information about Buehler Corporation's operations at high and at low levels of activity follow: Level of Activity Low High Number of units produced ............ 25,000 30,000 Total manufacturing costs ........... P575,000 P680,000 Direct material cost per unit ....... P5 P5 Direct labor cost per unit .......... P6 P6 Using the high-low method, what is the cost formula for manufacturing overhead? a. P50,000 per period plus P10 per unit b. P50,000 per period plus P21 per unit c. P50,000 per period plus P22 per unit d. P347,000 per period plus P0.10 per unit

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49. D Hard

At a sales level of P300,000, James Company's gross margin is P15,000 less than its contribution margin, its net income is P50,000, and its selling and administrative expenses total P120,000. At this sales level, its contribution margin would be: a. P250,000. b. P155,000. c. P170,000. d. P185,000.

50. B Hard

(Appendix) Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost for four recent periods appear below.

Period 1 Period 2 Period 3 Period 4

Activity 24 25 20 22

Cost P174 179 165 169

Using the least-squares regression method, what is the cost formula for this cost? a. Y = P 0.00 + P7.55X b. Y = P110.44 + P2.70X c. Y = P103.38 + P3.00X d. Y = P113.35 + P0.89X

Reference: 5-1 Rymore Company would like to classify the following costs according to their cost behavior: July Sales in units.. 1,500

August 1,600

Cost A ......... P35,000 Cost B ......... 16,000 Cost C ......... 67,500

P36,000 16,000 72,000

51. A Easy Refer To: 51

Which of the following classifications best describes the behavior of Cost A? a. Mixed. b. Variable. c. Fixed d. none of the above.

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52. C Easy Refer To: 51

Which of the following classifications best describes the behavior of Cost B? a. Mixed. b. Variable. c. Fixed. d. none of the above.

53. B Easy Refer To: 51

Which of the following classifications best describes the behavior of Cost C? a. Mixed. b. Variable. c. Fixed. d. none of the above.

Reference: 5-2 Comparative income statements for Boggs Sports Equipment Company for the last two months are presented below:

Sales in Units ............. Sales Revenue .............. Less Cost of Goods Sold .... Gross Margin ............... Less Operating Expenses: Rent ..................... Sales Commissions ........ Maintenance Expenses ..... Clerical Expense ......... Total Operating Expenses ... Net income .................

July 11,000

August 10,000

P165,000 P150,000 72,600 66,000 92,400 84,000 12,000 12,000 13,200 12,000 13,500 13,000 16,000 15,000 54,700 52,000 P 37,700 P 32,000

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that the relevant range includes all of the activity levels mentioned in this problem. 54. B Easy Refer To: 52

Which of the operating expenses of the company is variable? a. Rent. b. Sales Commissions. c. Maintenance Expense. d. Clerical Expense.

55. C Hard Refer To: 52

The total monthly fixed cost for Boggs Sporting Equipment Company is: a. P12,000. b. P22,500. c. P25,000. d. P40,000.

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56. D Medium Refer To: 52

If sales are projected to be 8,000 units in September, total expected operating expenses would be: a. P49,300. b. P41,600. c. P44,750. d. P46,600.

Reference: 5-3 Gasson Company is a merchandising firm. Next month the company expects to sell 800 units. The following data describe the company's revenue and cost structure: Selling price per unit ....... P40 Sales commission ............. 5% Purchase price (cost) per unit P18 Advertising expense .......... P4,000 per month Administrative expense ....... P4,500 per month plus 15% of sales Assume that all activity mentioned in this problem is within the relevant range. 57. A Medium Refer To: 53

The expected gross margin next month is: a. P17,600. b. P11,200. c. P14,400. d. P16,000.

58. C Easy Refer To: 53

The expected total administrative expense next month is: a. P 4,800. b. P13,300. c. P 9,300. d. P14,900.

59. B Medium Refer To: 53

The expected contribution margin next month is: a. P17,600. b. P11,200. c. P14,400. d. P16,000.

60. C Medium Refer To: 53

The expected net income next month is: a. P 7,500. b. P 5,100. c. P 2,700. d. P11,200.

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Reference: 5-4 In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were P130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range. 61. C Hard Refer To: 54

The variable cost for maintenance per machine hour is: a. P1.30. b. P1.44. c. P0.75. d. P1.35.

62. A Hard Refer To: 54

The total fixed overhead cost for O'Donnell is: a. P115,000. b. P130,000. c. P 60,000. d. P 55,000.

63. B Hard Refer To: 54

If 110,000 machine hours of activity are projected for next period, total expected overhead cost would be: a. P256,000 b. P263,500. c. P306,625. d. P242,500.

Reference: 5-5 Maxwell Company has a total expense per unit of P2.00 per unit at the 16,000 level of activity and total expense per unit of P1.95 at the 21,000 unit level of activity. 64. B Medium Refer To: 55

The best estimate of the variable cost per unit for Maxwell Company is: a. P0.56. b. P1.79. c. P2.00. d. P1.95.

65. C Medium Refer To: 55

The best estimate of the total fixed cost per period for Maxwell Company is: a. P40,950. b. P32,000. c. P3,360. d. P29,190.

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66. C Medium Refer To: 55

The best estimate of the total expected costs at the 19,000 level of activity for Maxwell Company is: a. P37,050. b. P38,000. c. P37,370. d. P39,830.

Reference: 5-6 Johnson Company has provided the following data for the first five months of the year: Machine Hours January .... 120 February ... 160 March ...... 200 April ...... 150 May ........ 170

Lubrication Cost P750 P800 P870 P790 P840
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