X03 Activity Costs WP - Lecture notes sfdg PDF

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Activity Cost and AnalysisMODULE 3 ACTIVITY COST AND COST ANALYSISTHEORIES: Cost behavior analysis is a study of how a firm's costs A. relate to competitors' costs. B. relate to general price level changes. C. respond to changes in activity levels within the company. D. respond to changes in the gro...

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Activity Cost and Analysis

MODULE 3 ACTIVITY COST AND COST ANALYSIS

7. A cost that remains constant on a per unit basis in a given period despite changes in the level of activity should be considered a(an): A. variable cost. C. fixed cost. B. prime cost. D. overhead cost. Bobadilla

THEORIES: 1. Cost behavior analysis is a study of how a firm's costs A. relate to competitors' costs. B. relate to general price level changes. C. respond to changes in activity levels within the company. D. respond to changes in the gross national product.

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2. The term “relevant range” as used in cost accounting means the range over which A. costs may fluctuate C. production may vary B. cost relationships are valid D. relevant costs are incurred

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8. Malayan Company’s average cost per unit is the same at all levels of volume. Which of the following is true? A. MALAYAN must have only variable costs. B. MALAYAN must have only fixed costs. C. MALAYAN must have some fixed costs and some variable costs. D. MALAYAN’s cost structure cannot be determined from this information. Bobadilla 9. Depreciation expense based on the number of units produced is classified as what type of cost? A. Out-of-pocket cost. C. Variable cost. B. Marginal cost. D. Fixed cost. Bobadilla

3. Most operating decisions by management focus on a narrow range of activity which is called the: A. relevant range of production. C. optimal level of production. Bobadilla B. strategic level of production. D. tactical operating level of production.

10. When production increases, variable manufacturing costs react in which of the following ways? Bobadilla A. B. C. D. Unit variable cost decreases remains same remains same increases Total variable cost decreases Increases decreases Increases

4. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a A. mixed cost. C. direct cost. D. cost driver. Bobadilla B. predictor.

11. When the number of units manufactured increases, the most significant change in unit cost will be reflected as a(n) A. increase in the fixed element. C. increase in the mixed element. B. decrease in the variable element. D. decrease in the fixed element. Bobadilla

5. If a predetermined overhead rate is not employed and the volume of production is increased over the level planned, the cost per unit would be expected to A. Decrease for fixed costs and remain unchanged for variable costs. B. Remain unchanged for fixed costs and increase for variable costs. C. Decrease for fixed costs and increase for variable costs. D. Increase for fixed costs and increase for variable costs. Bobadilla

12. As volume increases, A. total fixed costs remain constant and per-unit fixed costs increase. B. total fixed costs remain constant and per-unit fixed costs decrease. C. total fixed costs remain constant and per-unit fixed costs remain constant. D. total fixed costs increase and per-unit fixed costs increase.

6. Which of the following describes the behavior of the variable cost per unit? Variable cost: A. Varies in increasing proportion with changes in the activity level. B. Varies in increasing proportion with changes in the activity level. C. Remains constant with changes in the activity level. D. Varies in direct proportion with the activity level. Bobadilla

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13. Which of the following best describes a fixed cost? A. It may change in total when such change is unrelated to changes in production. B. It may change in total when such change is related to changes in production. C. It is constant per unit of change in production. D. It may change in total when such change depends on production within the relevant range. Bobadilla 51

Activity Cost Analysis

A. Breakeven point must increase. B. Margin of safety must decrease.

14. If activity increases, which of the following statements about cost behavior is true? Bobadilla C. Fixed cost per unit will decrease A. Fixed cost per unit will increase B. Variable cost per unit will increase D. Variable cost per unit will decrease 15. 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.

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16. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n) A. expired cost. C. variable cost. B. fixed cost. D. mixed cost. Bobadilla

C. Operating leverage must increase. D. Profit must increase. Bobadilla

21. The indifference point is the level of volume at which a company A. earns the same profit under different operating scheme. B. earns no profit. C. earns its target profit. D. any of the above.

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22. Operating leverage is the relative mix of A. revenues earned and manufacturing costs B. fixed and variable costs. C. high-volume and low-volume products. D. manufacturing costs and period costs.

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23. The increased use of automation and less use of the work force in companies has caused a trend towards an increase in A. both variable and fixed costs. B. fixed costs and a decrease in variable costs. C. variable costs and a decrease in fixed costs. D. variable costs and no change in fixed costs. Bobadilla

17. Which of the following statements regarding fixed costs is incorrect? A. Expressing fixed costs on a per unit basis usually is the best approach for decisionmaking process. B. Fixed costs expressed on a per unit basis will react inversely with changes in activity. C. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the concept of the relevant range. Bobadilla D. Fixed costs frequently represent long-term investments in property, plant, and equipment.

24. If fixed costs decrease while variable cost per unit remains constant, the contribution margin will be A. Unchanged C. Higher B. Lower D. Indeterminate Bobadilla

18. Lamang Company changed its cost structure by increasing fixed costs and decreasing its perunit variable costs. The change: A. Increases risk and increases potential profit. B. Increases risk and decreases potential profit. C. Decreases risk and decreases potential profit. D. Decreases risk and increases potential profit. Bobadilla

25. Costs that increase as the volume of activity decreases within the relevant range are A. Average cost per unit. C. Total fixed costs. B. Average variable cost per unit. D. Total variable costs. Bobadilla

19. A management’s preference for a very low degree of operating leverage might indicate that: A. an increase in sales volume is expected. B. a decrease in sales volume is expected. C. the firm is very unprofitable. D. the firm has very high fixed costs. Bobadilla

26. Which costs will change with an increase in activity within the relevant range? A. Total fixed costs and total variable cost. B. Per unit fixed costs and total variable cost. C. Per unit variable cost and per unit fixed cost. D. Per unit fixed cost and total fixed cost.

20. Management is considering replacing its existing sales commission compensation plan with a fixed salary plan. If the change is adopted, the company’s

27. Which of the following best describes the relationship between fixed costs per unit and variable costs per unit, as total volume increases? 52

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Activity Cost Analysis

A. B. C. D.

Fixed cost per unit stays the same and variable cost per unit stays the same. Fixed cost per unit stays the same and variable cost per unit increases. Fixed cost per unit increases and variable cost per unit increases. Fixed cost per unit decreases and variable cost per unit stays the same.

28. Within the relevant range, the difference between variable costs and fixed costs is: A. variable costs per unit fluctuate and fixed cost per unit remains constant. B. variable cost per unit is constant and fixed cost per unit fluctuates. C. both total variable cost and total fixed cost are constant. D. both total variable cost and total fixed cost fluctuate. 29. The learning curve in cost estimation is a good example of: A. non-linear cost behavior. C. simple regression. B. machine-intensive production. D. a random variable.

35. The equation(s) required for applying the least squares method in the computation of fixed and variable production costs could be expressed as A. xy = ax + b x2 C.  y = na + b x B. y = a + bx2 D. xy = ax + b x2 xy = na + b x y = na + bx Bobadilla

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36. Weaknesses of the high-low method include all of the following except A. Only two observations are used to develop the cost function. B. The high and low activity levels may not be representative. C. the method does not detect if the cost behavior is nonlinear. D. the mathematical calculations are relatively complex.

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37. Which of the following methods estimates costs by identifying costs as variable or fixed based on qualitative analysis? A. Regression analysis C. Engineering method B. Account analysis D. High-low method Bobadilla

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30. Cost estimation is the process of A. estimating the relationship between costs and the cost drivers that cause those costs. B. documenting costs in terms of direct and indirect costs. C. summarizing past costs into fixed and variable components. D. all of the above. Bobadilla 31. Which of the following methods is used to estimate costs? A. Account analysis C. Engineering method D. All of the above B. High-low method

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32. For analysis purposes, the high-low method usually produces a(n) A. reasonable estimate. C. overstated estimate. B. precise estimate. D. understated estimate.

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38. Account analysis as compared to the engineering method A. relies on past data. B. relies on present and future data. C. measures the work involved in the activities that go into a product. D. a and c.

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39. Which of the following methods may be used to estimate costs by using time-and-motion studies to approximate labor time? A. Regression analysis C. Engineering method B. Account analysis D. High-low method Bobadilla 40. The cost estimation method that gives the most mathematically precise cost prediction equation is A. the high-low method C. the scatter-diagram method B. the contribution margin method D. regression analysis Bobadilla

33. The high-low method is criticized because it A. is not a graphical method. B. is a mathematical method. C. ignores much of the available data by concentrating on only the extreme points. D. does not provide reasonable estimates. Bobadilla

41. Regression analysis is better than the high-low method of cost estimation because regression analysis: A. is more mathematical. C. fits its data into a mathematical equation. B. uses all the data points, not just two. D. takes more time to do. Bobadilla

34. The high-low method may give unsatisfactory results if C. the points are not representative. A. the data points all fall on a line. B. volume of activity is heavy. D. volume of activity is light. Bobadilla

42. In regression analysis, what does the variable "X" stand for in the model Y = a + bX + e? 53

Activity Cost Analysis

49. The engineering method of estimating costs: A. can be used to estimate costs for totally new activities. B. can detail each step required to perform an operation. C. sometimes can be quite expensive to use. D. all of the above are true.

A. The amount of the dependent variable, the cost to be estimated. B. The regression error, which is the distance between the regression line and the data point. C. The value for the independent variable, the cost driver for the cost to be estimated; there may be one or more cost drivers. D. The unit variable cost, also called the coefficient of the independent variable. Bobadilla

50. The correlation coefficient or R-squared (R2) is interpreted as: A. the minimum distance between the regression line and a single data point. B. the measure of the linear relationship between two or more variables. C. a determination of whether the data point is considered to be an "outlier." D. the proportion of the variation in the dependent variable explained by the independent variable. Bobadilla

43. Simple regression is A. a regression equation with more than one independent variable. B. a regression equation with more than one dependent variable. C. a regression equation with more than one independent and dependent variables. D. a regression that considers all unknown factors. Bobadilla 44. Regression shows A. the proportion of the variation of dependent variable explained by dependent variables. B. the proportion of the variation of independent variable explained by the independent variables. C. the proportion of the variation of dependent variable explained by the independent variables. D. none of the above. Bobadilla 45. In the method of least squares, the deviation is the difference between the A. predicted and estimated costs. C. predicted and average costs. B. predicted and actual costs. D. average and actual costs.

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46. A cost-predicting equation determined through regression analysis A. always gives close predictions. B. will not work any better than one obtained using the high-low method. C. can be used only for costs that vary with sales of production. D. could be severely affected by outliers.

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47. In the cost equation TC = F + VX, the X term is: A. total fixed costs. C. unit variable cost. B. total variable costs. D. activity units.

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51. The closeness of the relationship between the cost and the activity is called A. correlation C. spurious B. regression analysis D. manufacturing overhead

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52. R-squared is a measure of A. the spurious relationship between cost and activity B. the fixed cost component C. the variable cost per unit of activity Bobadilla D. how well the regression line accounts for the changes in the dependent variable 53. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the scatter-diagram method A. includes cost outside the relevant range. B. considers more than two points. C. can be used with more types of costs than the high-low method. D. gives a precise mathematical fit of the points to the line. Bobadilla 54. The major objective of preparing a scatter-diagram is to A. develop an equation to predict future costs. B. perform regression analysis on the results. C. determine the relevant range. Bobadilla D. find the high and low points to use for the high-low method of estimating costs.

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48. Which of the following methods would be best for estimating costs for totally new activities? A. Engineering method C. Scattergraph method B. Account analysis method D. High-Low method Bobadilla

55. Advantages of the method of least squares over the high-low method include all of the following except A. a statistical method is used to mathematically derive the cost function 54

Activity Cost Analysis

B. only two points are used to develop the cost function C. the squared differences between actual observations and the line (cost function) are minimized D. all the observations have an effect on the cost function Bobadilla

Direct labor hours 60,000 Variable factory overhead P150,000 Fixed factory overhead P240,000 Assume that Deakin’s normal capacity is 80% of maximum capacity. What would be the total factory overhead rate, based on direct labors, in a flexible budget at normal capacity? A. P6.00 C. P6.50 B. P7.50 D. P8.13 Bobadilla

56. The scatter diagram method of cost estimation A. is influenced by extreme observations B. requires the use of judgment C. uses the least-squares method D. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs Bobadilla

5. Irma Company manufactures office furniture. During the most productive month of the year, 3,500 desks were manufactured at a total cost of P84,400. In its slowest month, the company made 1,100 desks at a cost of P46,000. Using the high-low method of cost estimation, total fixed costs in August are: A. P56,000 C. P17,600 B. P28,400 D. P38,400 Bobadilla

PROBLEMS: 1. Nite Corporation has developed the following flexible budget formula for annual indirect labor costs: Total Cost = P480,000 + P5.00 per machine hour Operating budgets for the current month are based upon 20,000 machine hours of planned machine time. Indirect labor costs included in this planning budget are: A. P 48,333 C. P580,000 D. P140,000 B. P100,000 Bobadilla

6. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the rooms are occupied each day. The company’s operating cost is P21 per occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure contains both variable and fixed cost elements. During October, the occupancy dropped to only 45 percent. A total of P792,000 in operating costs were incurred during the month. What would be the expected operating costs, assuming that the occupancy rate increases to 60 percent during November? A. P1,056,000 C. P 756,000 B. P 846,000 D. P 829,500 Bobadilla

2. Harem Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each unit requires five minutes of direct labor. Harem Company’s budgeted overhead for the month is A. P 12,800 C. P 84,800 B. P 18,800 D. P774,000 Bobadilla

7. The controller of Jema Company has requested a quick estimate of the manufacturing supplies that it needs for the month of July when the expected production are 470,000 units. Below are the actual data from the prior three months of operations. Production in units Manufacturing supplies March 450,000 P723,060 April 540,000 853,560 May 480,000 766,560 Using these data and the high-low method, what is the reasonable estimate of the cost of manufacturing supplies that would be needed for July? (Assume that this activity is within the relevant range.) A. P 805,284 C. P 755,196 D. P 752,060 B. P1,188,756 Bobadilla

3. Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000 and 60,000 units of budgeted output, respectively. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for 50,000 units. How much is Jordan’s budgeted variable cost per unit of output? C. P30.00 A. P 7.50 B. P16.00 D. P62.50 Bobadilla 4. Deakin Company is preparing a flexible budget for the coming year and the following maximum capacity estimates for Department OZ are available: 55

Activity Cost Analysis

8. The following activity and cost data that were provided by Hoist Corporation would 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. C. P595.84. D. P601.50. B. P581.82. Bobadilla

B. P32,677

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12. Clone Machinery had the following experience regarding power costs: Month Machine hours Power cost Jan. 300 P680 Feb. 600 720 Mar. 400 695 Apr. 200 640 Assume that management expects 500 machine hours in May. Using the high-low method,...