Deck 2: Cost Behavior and Cost Estimation

Question 1

Discretionary fixed costs are fixed costs that cannot be changed over the short run.

Answer 1

False
Discretionary fixed costs are fixed costs that can be changed over the short run,

Question 2

A variable cost is one that varies in proportion to a business activity.

Answer 2

True

Question 3

Since a mixed cost has both a fixed and a variable component, both the total cost and the unit cost will vary with changes in the level of activity.

Answer 3

True

Question 4

A scattergraph is simply a graph that shows total costs in relation to volume, or activity level.

Question 5

Regression is a more precise method of estimating the fixed and variable components of a mixed cost than the high-low method or a scattergraph.

Question 6

Like the high-low method of estimating the fixed and variable components of a mixed cost, regression analysis uses a statistical technique that identifies the line of best fit.

Question 7

With a variable cost, as the level of activity decreases, the total cost remains the same.

Question 8

To estimate the unit variable cost using the high-low method, identify the highest and lowest level of activity and compute the slope of the line.

Question 9

The high-low method of estimating the fixed and variable components of a mixed cost is a precise approach that uses a statistical technique.

Question 10

Once you know how a particular cost behaves, estimating the total cost is relatively simple.

Question 11

All costs are either fixed or variable.That is, a cost cannot have a fixed and a variable component.

Question 12

An example of a committed fixed cost is when a company signs a 10-year lease on an office building.

Question 13

With a fixed cost, the cost per unit varies proportionately with changes in the level of activity.

Question 14

Step costs are fixed over only a small range of activity.

Question 15

Three methods used for estimating the fixed and variable portions of a cost include: cost-cover graphs, the high-low method and regression analysis.

Question 16

A committed fixed cost is one that cannot be changed over the short run.

Question 17

Companies should reduce fixed costs whenever possible during times of falling profits.

Question 18

An example of a step cost is the electric bill you receive for heating your apartment.

Question 19

Unlike the scattergraph, the high-low method requires only two data points - the lowest point of activity and the highest point of activity.

Question 20

A fixed cost is a cost that does not change in total with the activity level.

Question 21

Contribution margin = Sales revenue - Total variable costs.

Question 22

GAAP-based income statements categorize expenses based on A.business function.
B)cost behavior.
C)dollar amount.
D)contribution margin.

Question 23

When production and sales are equal, a drawback of the contribution format income statement is that is does not produce the same operating income as the traditional functional income statement format.

Question 24

The relevant range is the normal level of operating activity.

Question 25

If the activity level increases, what happens to the unit fixed cost?

A)It decreases.
B)It increases.
C)It remains the same.
D)It depends on how much the activity level increases.

Question 26

If the activity level increases, what happens to the total fixed cost?

A)It decreases.
B)It increases.
C)It remains the same.
D)It depends on how much the activity level increases.

Question 27

If the activity level increases, what happens to the total variable cost?

A)It remains the same.
B)It decreases.
C)It increases.
D)It depends on how much the activity level increases.

Question 28

Operating income = Sales revenue - Variable cost per unit - Total fixed costs.

Question 29

A contribution format income statement just rearranges the individual cost components and produces the same operating income as the traditional functional income statement.

Question 30

The contribution format income statement presents costs by behavior.

Question 31

The contribution margin is the difference between sales and fixed costs.

Question 32

The contribution margin income statement allows managers to easily assess the impact of sales volume on operating income.

Question 33

GAAP-based income statements categorize expenses based on

A)product, contribution, selling, or administrative.
B)product, selling, or administrative.
C)contribution, product, administrative.
D)variable costs and fixed costs.

Question 34

Unlike the contribution margin in dollars, the contribution margin ratio cannot be used to determine the increase in profits from a given dollar increase in sales revenue.

Question 35

If the activity level decreases, what happens to the unit fixed cost?

A)It decreases.
B)It increases.
C)It remains the same.
D)It depends on how much the activity level increases.

Question 36

Cost behaviors and estimates are valid only within what is referred to as a precision range.

Question 37

If the activity level decreases, what happens to the total variable cost?

A)It decreases.
B)It increases.
C)It remains the same.
D)It depends on how much the activity level increases.

Question 38

A basic tool for making business decisions is the contribution margin.

Question 39

Contribution margin is the amount of revenue that remains to cover fixed costs and provide a profit.

Question 40

If the activity level decreases, what happens to the total fixed cost?

A)It remains the same.
B)It decreases.
C)It increases.
D)It depends on how much the activity level increases.

Question 41

Assume you are planning a spring break ski trip to Colorado.You are preparing a budget of your costs.You are staying at a lodge that has a special where the lodge charges you $25 for the first 30 ski lift rides and an additional charge of $5 for each ride in excess of 30.You believe you will ride the ski lift 40 times during the week, so you budget $75.The ski lift cost is an example of a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 42

When a manager talks about cost behavior, she is referring to

A)the way in which total costs change in response to changes in the level of activity.
B)the method used to determine whether a cost is accrued or expensed.
C)the classification of product or period costs.
D)the way in which costs are allocated.

Question 43

When managers talk about cost behavior, they are referring to

A)where a cost is reported on the income statement.
B)the way in which total costs change in response to changes in the level of activity.
C)the method used to determine whether a cost is accrued or expensed.
D)the way cost is reported within inventory on the balance sheet.

Question 44

A characteristic of a variable cost is that the

A)total cost varies in proportion to changes in the level of activity.
B)cost per unit increases as activity increases.
C)total cost varies indirectly with the level of activity.
D)the total cost remains constant, regardless of the level of activity.

Question 45

An example of a variable cost for a cell phone manufacturer is

A)units sold.
B)the total costs of all cell phone produced.
C)minutes talked.
D)touch screens used in production.

Question 46

Any cost that varies in proportion to a business activity is a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 47

Which of the following is a characteristic of a fixed cost?

A)The total cost remains constant, regardless of changes in the level of activity.
B)The cost per unit varies proportionately with changes in the level of activity.
C)The total cost varies when activity changes during the period.
D)The unit and total costs remain constant.

Question 48

Which of the following is an example of a variable cost for a bicycle manufacturer?

A)Rent
B)Insurance
C)Tires
D)Depreciation

Question 49

A 10 percent decrease in sales volume will result in a

A)10 percent decrease in total variable cost.
B)10 percent decrease in per unit variable cost.
C)10 percent increase in total variable cost.
D)10 percent increase in per unit variable cost.

Question 50

Four common cost behavior patterns that serve as the foundation for cost-volume-profit analysis are

A)variable cost, fixed cost, selling cost, and administrative cost.
B)variable cost, fixed cost, mixed cost, and step cost.
C)variable cost, fixed cost, period cost, and other cost.
D)selling cost, administrative cost, cost of goods sold, and depreciation.

Question 51

A 10 percent increase in sales volume will result in

A)a 10 percent decrease in per unit fixed cost.
B)a 10 percent increase in total fixed cost.
C)a 10 percent increase in per unit fixed cost.
D)no change in total fixed cost.

Question 52

A 10 percent increase in sales volume will result in a

A)10 percent decrease in total variable cost.
B)10 percent decrease in unit variable cost.
C)10 percent increase in total variable cost.
D)10 percent increase in unit variable cost.

Question 53

As the level of activity increases, the total variable cost

A)increases proportionally.
B)changes inversely.
C)changes conversely.
D)remains the same.

Question 54

If activity level increases, what happens to the unit variable cost?

A)It remains the same.
B)It decreases.
C)It increases.
D)It depends on how much the activity level increases.

Question 55

In contrast to a variable cost,

A)the total amount of a fixed cost does not change with activity level.
B)the total amount of a fixed cost increases as activity increases.
C)the per unit amount of a fixed cost does not change with activity level.
D)the per unit amount of a fixed cost increases as activity increases.

Question 56

Assume you are planning a spring break ski trip to Colorado.You are preparing a budget of your costs.You are staying at a lodge that has a special where the lodge charges you $2 for each ski lift ride.You believe you will ride the ski lift 40 times during the week, so you budget $80.The ski lift cost is an example of a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 57

You and two friends decide to rent an apartment off campus.You have found an apartment for $750 per month.You and your two friends will share the rent equally.This is an example of a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 58

Assume you are planning a spring break ski trip to Colorado.You plan to stay at a lodge that has a special where the lodge charges you a flat fee of $25 for each package of ten ski lift rides..You believe you will ride the ski lift 40 times during the week, so you budget $100.The ski lift charge is an example of a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 59

If activity level decreases, what happens to the unit variable cost?

A)It remains the same.
B)It decreases.
C)It increases.
D)It depends on how much the activity level increases.

Question 60

Assume you are planning a spring break ski trip to Colorado.You are preparing a budget of your costs.You are staying at a lodge that has a special where the lodge charges you $80 per week for the ski lift regardless of how many times you ride.You believe you will ride the ski lift 40 times during the week.The ski lift cost is an example of a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 61

Suppose your cell phone company offers a plan under which you buy time per minute.A one-minute call costs you $0.10.If you talk 100 minutes it costs you $10.This is an example of a

A)variable cost
B)mixed cost.
C)fixed cost.
D)step cost.

Question 62

A discretionary fixed cost

A)remains the same per unit regardless of the level of activity.
B)increases as the level of activity increases.
C)can be changed in the short run.
D)can be changed over the long run.

Question 63

Some costs have both a fixed and a variable component.These costs are referred to as

A)discretionary costs.
B)committed costs.
C)mixed costs.
D)step costs.

Question 64

Step costs are fixed over only a small range of activity.Once that level of activity has been exceeded, total cost

A)increases because the excess costs become variable.
B)increases and remains constant over another small range of activity.
C)remains the same regardless of activity.
D)decreases and remains constant over another small range of activity.

Question 65

You are considering moving off campus.You have found a one-bedroom apartment very near campus that is clean and safe.However, you do not want to live alone.A one-bedroom apartment is roomy enough to have one or two roommates.The manager discourages having more than one individual in an apartment and so charges rent per person.The relationship between the number of roommates, the total cost, and the cost per person is: This is an example of a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 66

Mike Mounts has a membership at the Marigold Men's Fitness Club.The membership costs $30 per month regardless of how many times the facility is used.The membership cost is classified as a

A)variable cost.
B)fixed cost.
C)step variable cost.
D)mixed cost.

Question 67

An example of a committed fixed cost is

A)advertising.
B)lease on warehouse space.
C)sales commissions.
D)number of bolts used.

Question 68

Which of the following is not an example of a variable cost for a manufacturer of bicycles?

A)Number of tires
B)Gallons of paint
C)Wages for factory workers
D)President of the company's salary

Question 69

The formula, Electricity cost = $10 + ($0.08 × kwh used) is the formula for a

A)mixed cost.
B)fixed cost.
C)step cost.
D)variable cost.

Question 70

Suppose you are charged a $10 per month base charge for your electrical service.You are also charged an additional $0.08 for every kwh of electricity you use.The cost is an example of a

A)variable cost.
B)fixed cost.
C)mixed cost.
D)step cost.

Question 71

An example of a discretionary fixed cost for a clothing manufacturer is

A)an annual contract for television advertising cost.
B)a 10-year lease on an office building.
C)yards of fabrics used.
D)thread used.

Question 72

You are living on campus and are considering moving off campus.You have found a two-bedroom apartment for $1,200 per month, but you cannot afford that much rent.You are considering inviting up to three of your friends to become your roommates.The relationship between the number of roommates, the total cost, and the cost per person is: This is an example of a

A)fixed cost.
B)variable cost.
C)mixed cost.
D)step cost.

Question 73

Since a mixed cost has both a fixed and a variable component,

A)neither total cost nor unit cost will vary with changes in the level of activity.
B)total cost will vary with changes in the level of activity, but unit cost will not.
C)unit cost will vary with changes in the level of activity, but total cost will not.
D)both the total cost and the unit cost will vary with changes in the level of activity.

Question 74

Suppose your cell phone company offers a plan under which you pay $15 for a 100-minute block.For each minute over 100 minutes you have to pay $0.10 per minute.This is an example of a

A)variable cost
B)mixed cost.
C)fixed cost.
D)step cost.

Question 75

Which of the following is a true statement relating to step costs?

A)Step costs remain constant over only a small range of activity.
B)Step costs do not contain a fixed component.
C)Step costs are also referred to as fixed costs.
D)Step costs do not vary proportionately over a small range of activity.

Question 76

An example of a committed fixed cost for a clothing manufacturer is

A)an annual contract for television advertising costs.
B)a 10-year lease on an office building.
C)yards of fabric used.
D)thread used.

Question 77

Mounce Corporation leases a color copier for a monthly fee of $75 plus a charge of $0.02 per copy.Mounce's copy cost is classified as a

A)variable cost.
B)fixed cost.
C)step variable cost.
D)mixed cost.

Question 78

Suppose you are charged a $10 per month base charge for your electrical service.You are also charged an additional $0.08 for every kwh of electricity you use.Which one of the following statements is not true?

A)The $10 base charge is a fixed cost.
B)The $0.08 charge per kwh is a variable cost.
C)The total cost is an example of a step cost.
D)The total cost is an example of a mixed cost.

Question 79

Which of the following is not an example of a fixed cost for manufacturer of bicycles?

A)Rent on factory warehouse
B)Insurance on factory equipment
C)Number of tires
D)Advertising costs

Question 80

Suppose your cell phone company offers a plan under which you can buy time in blocks of 100 minutes.Every 100-minute block costs $15.If you use 101 minutes you will pay $30.This is an example of a

A)variable cost
B)mixed cost.
C)fixed cost.
D)step cost.